<PAGE>
As filed with the Securities and Exchange Commission on
July 17, 1997.
1933 Act Registration No. 33-17619
1940 Act Registration No. 811-5349
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
____________
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 ( X )
Post-Effective Amendment No. 36 ( X )
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 ( X )
Amendment No. 38 ( X )
(Check appropriate box or boxes)
__________
GOLDMAN SACHS TRUST
(Exact name of registrant as specified in charter)
4900 Sears Tower
Chicago, Illinois 60606-6303
(Address of principal executive offices)
Registrant's Telephone Number,
including Area Code 312-993-4400
____________
Michael J. Richman, Esq. Copies to:
Goldman, Sachs & Co. Pamela J. Wilson, Esq.
85 Broad Street - 12th Floor Hale and Dorr LLP
New York, New York 10004 60 State Street
Boston, MA 02109
(Name and address of agent for service)
<PAGE>
It is proposed that this filing will become effective (check appropriate box)
( ) immediately upon filing pursuant to paragraph (b)
(X) on August 15, 1997 pursuant to paragraph (b)
( ) 60 days after filing pursuant to paragraph (a)(1)
( ) On May 1, 1997 pursuant to paragraph (a)(1)
( ) 75 days after filing pursuant to paragraph (a)(2)
( ) On (date) pursuant to paragraph (a)(2) of rule 485.
Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2. On December 20, 1996, Registrant
filed a Rule 24f-2 notice on behalf of its fixed-income funds for their fiscal
year ended October 31, 1997. On February 28, 1997, Registrant filed a Rule 24f-
2 notice on behalf of its money market funds for their fiscal year ended
December 31, 1996. On March 31, 1997, Registrant filed a Rule 24f-2 notice on
behalf of its equity funds for their fiscal year ended January 31, 1997.
<PAGE>
GOLDMAN SACHS TRUST
Institutional Shares of
GOLDMAN SACHS FIXED INCOME FUNDS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
PART A CAPTION
- -------- -------
1. Cover Page Cover Page
2. Synopsis Fund Highlights
3. Condensed Financial
Information Financial Highlights
4. General Description Cover Page; Fund Highlights;
of Registrant Investment Objective and PolIcies;
Description of Securities; Risk
Factors; Investment Techniques;
Investment Restrictions; Portfolio
Turn over; Reports to Shareholders;
Shares of the Trust; Additional
Information
5. Management of the Fund Management
6. Capital Stock and Dividends; Shares of
Other Securities the Trust; Taxa tion; Additional
Information
7. Purchase of Securities Purchase of Institutional
Being Offered Shares; Net Asset Value;
Additional Information
8. Redemption or Redemption of Institutional
Repurchase
Shares; Additional Information
9. Pending Legal Not Applicable
Proceedings
PART B CAPTION
- ------ -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
<PAGE>
PART B CAPTION
- ------ -------
12. General Information Not Applicable
and History
13. Investment Objectives Investment Objective and Poli
and Policies cies; Investment Restrictions
14. Management of the Management
Registrant
15. Control Persons and Shares of the Trust
Principal Holders of
Securities
16. Investment Advisory Management
and Other Services
17. Brokerage Allocation Portfolio Transactions
and Other Securities
18. Capital Stock and Shares of the Trust
Other Securities
19. Purchase, Redemption Management; Net Asset Value
and Pricing of
Securities Being
Offered
20. Tax Status Taxation
21. Underwriters Management-Distributor
22. Calculation of Performance Information
Performance Data
23. Financial Statements Financial Statements
<PAGE>
GOLDMAN SACHS TRUST
Service Shares of
GOLDMAN SACHS FIXED INCOME FUNDS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
PART A CAPTION
- ------ --------
1. Cover Page Cover Page
2. Synopsis Fund Highlights
3. Condensed Financial
Information Financial Highlights
4. General Description Cover Page; Fund Highlights;
of Registrant Investment Objective and Poli
cies; Description of Securi
ties; Risk Factors; Investment
Techniques; Investment
Restrictions; Portfolio Turn
over; Reports to Shareholders;
Shares of the Trust; Addi
tional Information
5. Management of the Management
Fund
6. Capital Stock and Dividends; Shares of the
Other Securities Trust; Taxation; Additional
Information
7. Purchase of Securities Purchase of Service
Being Offered Shares; Net Asset Value;
Additional Information
8. Redemption or Redemption of Service
Repurchase Shares; Additional Information
9. Pending Legal Not Applicable
Proceedings
PART B CAPTION
- ------ -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
<PAGE>
PART B CAPTION
- ------ -------
12. General Information Not Applicable
and History
13. Investment Objectives Investment Objective and Poli
and Policies cies; Investment Restrictions
14. Management of the Management
Registrant
15. Control Persons and Shares of the Trust
Principal Holders of
Securities
16. Investment Advisory Management
and Other Services
17. Brokerage Allocation Portfolio Transactions
and Other Securities
18. Capital Stock and Shares of the Trust
Other Securities
19. Purchase, Redemption Management; Net Asset Value
and Pricing of
Securities Being
Offered
20. Tax Status Taxation
21. Underwriters Management-Distributor
22. Calculation of Performance Information
Performance Data
23. Financial Statements Financial Statements
<PAGE>
GOLDMAN SACHS TRUST
Class A, Class B and Class C Shares
GOLDMAN SACHS FIXED INCOME FUNDS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
PART A CAPTION
- ------ --------
1. Cover Page Cover Page
2. Synopsis Fund Highlights
3. Condensed Financial
Information Financial Highlights
4. General Description Cover Page; Fund Highlights;
of Registrant Investment Objective and Poli
cies; Description of Securi-
ties; Risk Factors; Investment
Techniques; Investment Re-
strictions; Portfolio Turn
over; Reports to Shareholders;
Shares of the Trust; Addition
al Information
5. Management of the Management
Fund
6. Capital Stock and Dividends; Shares of the
Other Securities Trust; Taxation; Additional
Information
7. Purchase of Securities Purchase of Service Shares;
Being Offered Net Asset Value; Additional
Information
8. Redemption or Redemption of Service Shares;
Repurchase Additional Information
9. Pending Legal Not Applicable
Proceedings
PART B CAPTION
- ------ -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
<PAGE>
PART B CAPTION
- ------ -------
12. General Information Not Applicable
and History
13. Investment Objectives Investment Objective and Poli
and Policies cies; Investment Restrictions
14. Management of the Management
Registrant
15. Control Persons and Shares of the Trust
Principal Holders of
Securities
16. Investment Advisory Management
and Other Services
17. Brokerage Allocation Portfolio Transactions
and Other Securities
18. Capital Stock and Shares of the Trust
Other Securities
19. Purchase, Redemption Management; Net Asset Value
and Pricing of
Securities Being
Offered
20. Tax Status Taxation
21. Underwriters Management-Distributor
22. Calculation of Performance Information
Performance Data
23. Financial Statements Financial Statements
Part C
- ------
Information required to be included in Part C is set forth under the appropriate
Item, so numbered in Part C to this Registration Statement.
<PAGE>
- ------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION--JUNE 13, 1997
GOLDMAN SACHS FIXED INCOME FUNDS
, 1997 CLASS A, B AND C SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOLDMAN SACHS MUNICIPAL INCOME FUND
GOVERNMENT FUND
Seeks a high level of current income
Seeks a high level of current that is exempt from regular federal in-
income, consistent with low come tax, consistent with preservation
volatility of principal. The of capital. The Fund invests primarily
Fund invests primarily in in municipal securities.
adjustable rate mortgage
pass-through securities and
other mortgage securities
with periodic interest rate
resets, which are issued or
guaranteed by the U.S.
Government, its agencies,
instrumentalities or
sponsored enterprises.
GOLDMAN SACHS CORE FIXED INCOME FUND
Seeks a total return consisting of capi-
tal appreciation and income that exceeds
the total return of the Lehman Brothers
Aggregate Bond Index. The Fund invests
primarily in fixed-income securities,
including securities issued or
guaranteed by the U.S. government, its
agencies, instrumentalities or sponsored
enterprises, corporate securities, mort-
gage-backed securities and asset-backed
securities.
GOLDMAN SACHS SHORT DURATION
GOVERNMENT FUND
Seeks a high level of current
income and secondarily, in
seeking current income, may
also consider the potential
for capital appreciation. The
Fund invests primarily in
securities issued or
guaranteed by the U.S.
government, its agencies,
instrumentalities or
sponsored enterprises.
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS SHORT DURATION Seeks a high total return, emphasizing
TAX-FREE FUND current income and, to a lesser extent,
providing opportunities for capital ap-
Seeks a high level of current preciation. The Fund invests primarily
income, consistent with in a portfolio of high quality fixed-in-
relatively low volatility of come securities of U.S. and foreign is-
principal, that is exempt suers and foreign currencies.
from regular federal income
tax. The Fund invests
primarily in municipal
securities.
GOLDMAN SACHS HIGH YIELD FUND
GOLDMAN SACHS GOVERNMENT
INCOME FUND Seeks a high level of current income and
secondarily, capital appreciation. The
Seeks a high level of current Fund invests primarily in fixed income
income, consistent with securities rated below investment grade.
safety of principal. The Fund
invests primarily in
securities, including
mortgage-backed securities,
issued or guaranteed by the
U.S. Government, its
agencies, instrumentalities
or sponsored enterprises.
Goldman Sachs Funds Management, L.P. ("GSFM"), New York, New York, an
affiliate of Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment
adviser to the Adjustable Rate Government and Short Duration Government Funds.
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman Sachs, serves as investment adviser to the Short
Duration Tax-Free, Government Income, Municipal Income, Core Fixed Income and
High Yield Funds. Goldman Sachs Asset Management International ("GSAMI"),
London, England, an affiliate of Goldman Sachs, serves as investment adviser to
the Global Income Fund. GSAM, GSFM and GSAMI are each referred to in this
Prospectus as the "Investment Adviser." Goldman Sachs serves as each Fund's
distributor and transfer agent.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A FUND INVOLVES INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
(continued on next page)
<PAGE>
(cover continued)
THE ADJUSTABLE RATE GOVERNMENT, SHORT DURATION GOVERNMENT AND GOVERNMENT
INCOME FUNDS' NET ASSET VALUES AND YIELDS ARE NOT GUARANTEED BY THE U.S.
GOVERNMENT OR BY ITS AGENCIES, INSTRUMENTALITIES OR SPONSORED ENTERPRISES.
THE CORE FIXED INCOME, GLOBAL INCOME AND HIGH YIELD FUNDS MAY INVEST IN
SECURITIES OF FOREIGN ISSUERS AND FOREIGN CURRENCIES THAT ENTAIL CERTAIN RISKS
NOT CUSTOMARILY ASSOCIATED WITH INVESTING IN U.S. DOLLAR-DENOMINATED FIXED-
INCOME SECURITIES. IN PARTICULAR, THE SECURITIES MARKETS OF EMERGING MARKET
COUNTRIES ARE LESS LIQUID, ARE SUBJECT TO GREATER PRICE VOLATILITY, HAVE
SMALLER MARKET CAPITALIZATIONS, HAVE LESS GOVERNMENT REGULATION AND ARE NOT
SUBJECT TO AS EXTENSIVE AND FREQUENT ACCOUNTING, FINANCIAL AND OTHER REPORTING
REQUIREMENTS AS THE SECURITIES MARKETS OF MORE DEVELOPED COUNTRIES.
THE HIGH YIELD FUND INVESTS PRIMARILY IN HIGH YIELD, FIXED INCOME SECURITIES
RATED BELOW INVESTMENT GRADE THAT ARE CONSIDERED SPECULATIVE AND GENERALLY
INVOLVE GREATER PRICE VOLATILITY AND GREATER RISK OF LOSS OF PRINCIPAL AND
INTEREST THAN INVESTMENTS IN HIGHER RATED FIXED INCOME SECURITIES.
INVESTORS SHOULD CONSIDER THE RISKS ASSOCIATED WITH INVESTMENT IN A FUND
INVESTING IN FOREIGN AND/OR HIGH YIELD SECURITIES. THE FUNDS MAY NOT BE
SUITABLE FOR ALL INVESTORS. SEE "DESCRIPTION OF SECURITIES" AND "RISK
FACTORS."
This Prospectus provides information about Goldman Sachs Trust (the "Trust")
and the Funds that a prospective investor should understand before investing.
This Prospectus should be retained for future reference. A Statement of
Additional Information (the "Additional Statement"), dated , 1997,
containing further information about the Trust and the Funds which may be of
interest to investors, has been filed with the Securities and Exchange
Commission ("SEC"), is incorporated herein by reference in its entirety, and
may be obtained without charge from Goldman Sachs by calling the telephone
number, or writing to one of the addresses, listed on the back cover of this
Prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains
the Additional Statement and other information regarding the Trust.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights.................... 1
Fees and Expenses.................. 7
Financial Highlights............... 11
Investment Objectives and Policies. 15
Description of Securities.......... 22
Risk Factors....................... 29
Investment Techniques.............. 32
Investment Restrictions............ 36
Portfolio Turnover................. 36
Management......................... 37
Reports to Shareholders............ 41
How to Invest...................... 41
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Services Available to Shareholders. 48
Distribution and Authorized Dealer
Service Plans..................... 51
How to Sell Shares of the Funds.... 52
Dividends.......................... 54
Net Asset Value.................... 55
Performance Information............ 55
Shares of the Trust................ 56
Taxation........................... 57
Additional Information............. 58
Appendix........................... 59
Account Application
</TABLE>
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information contained in
this Prospectus and is qualified in its entirety by the more detailed
information contained herein.
WHAT IS THE GOLDMAN SACHS TRUST?
The Goldman Sachs Trust is an open-end management investment company that
offers its shares in several investment funds (mutual funds). Each Fund pools
the monies of investors by selling its shares to the public and investing
these monies in a portfolio of securities designed to achieve that Fund's
stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS?
Each Fund has distinct investment objectives and policies. There can be no
assurance that a Fund's objectives will be achieved. For a complete
description of each Fund's investment objectives and policies, see
"Investment Objectives and Policies," "Description of Securities" and
"Investment Techniques."
1
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
INVESTMENT INTEREST RATE
FUND NAME OBJECTIVES DURATION SENSITIVITY INVESTMENT SECTOR CREDIT QUALITY
- ------------- ------------------- ------------------ ------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C>
ADJUSTABLE A high level of Target = 6-month 9-month note At least 65% of U.S. Government
RATE current income, to 1-year total assets in Securities
GOVERNMENT consistent with U.S. Treasury securities issued or
FUND low volatility Security guaranteed by the
of principal. Maximum = 2 years U.S. government,
its agencies,
instrumentalities
or sponsored
enterprises
("U.S. Government
Securities'')
that are adjustable
rate mortgage
pass-through
securities and
other mortgage
securities with
periodic interest
rate resets.
SHORT DURATION A high level of Target = 2-year 2-year bond At least 65% of U.S. Government
GOVERNMENT current income, U.S. Treasury total assets in Securities
FUND and secondarily, Security plus U.S. Government
in seeking current or minus .5 years Securities
income, may Maximum = 3 years and repurchase
also consider the agreements
potential for collateralized
capital appreciation. by such securities.
SHORT DURATION A high level of Target = Lehman 3-year bond At least 80% of Minimum = BBB/Baa
TAX-FREE current income, Brothers net assets in
FUND consistent with 3-year Municipal municipal securities.
low volatility Bond Index
of principal, plus or minus
that is exempt .5 years
from regular Maximum = 4 years
federal
income tax.
GOVERNMENT A high level of Target = Lehman 5-year bond At least 65% of U.S. Government
INCOME current income, Brothers Mutual assets in U.S. Securities and
FUND consistent with Fund Government/ Government non-U.S.
safety of Mortgage Index Securities, including Government
principal. plus or minus mortgage-backed Securities rated
1 year U.S. Government AAA/Aaa
Securities.
Maximum =
6 years
<CAPTION>
FUND NAME OTHER INVESTMENTS BENCHMARK
- --------- ----------------- -----------------
<S> <C> <C>
ADJUSTABLE Fixed-rate 6-month and
RATE mortgage 1-Year U.S.
GOVERNMENT pass-through Treasury Security
FUND securities and
repurchase
agreements
collateralized by
U.S. Government
Securities.
SHORT DURATION Mortgage pass- 2-Year U.S.
GOVERNMENT through Treasury Security
FUND securities and
other securities
representing an
interest in or
collateralized
by mortgage loans.
SHORT DURATION U.S. Government Lehman Brothers
TAX-FREE Securities 3-Year Municipal
FUND and repurchase Bond Index
agreements
collateralized
by such securities.
GOVERNMENT Non-government Lehman Brothers
INCOME mortgage pass- Mutual Fund
FUND through securities, Government/
asset-backed Mortgage Index
securities,
corporate
fixed income
securities and
repurchase
agreements
collateralized by
U.S. Government
Securities.
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
APPROXIMATE
INTEREST
INVESTMENT RATE
FUND NAME OBJECTIVES DURATION SENSITIVITY INVESTMENT SECTOR CREDIT QUALITY OTHER INVESTMENTS
<S> <C> <C> <C> <C> <C> <C>
MUNICIPAL A high level of Target = Lehman 15-year bond At least 80% of Minimum = U.S. Government
INCOME current income Brothers 15-year net assets in BBB/Baa Securities and
FUND that is exempt Municipal Bond municipal securities. Average = AA/Aa repurchase
from regular Index plus agreements
federal income or minus 1 year collateralized by
tax, consistent Maximum = such securities.
with preservation 12 years
of capital.
CORE FIXED Total return Target = Lehman 5-year bond At least 65% of Minimum = BBB/Baa Foreign fixed-
INCOME FUND consisting of Brothers assets in fixed- Minimum for income,
capital Aggregate Bond income securities, non-dollar municipal and
appreciation and Index plus or including securities = AA/Aa convertible
income that minus 1 year U.S. Government securities,
exceeds the total Maximum = 6 years Securities, foreign currencies
return of the corporate, and repurchase
Lehman Brothers mortgage-backed agreements
Aggregate Bond and asset-backed collateralized
Index. securities. by U.S.
Government
Securities.
GLOBAL A high total return, Target = J.P. 6-year bond Securities of U.S. Minimum = Mortgage and asset
INCOME emphasizing Morgan Global and foreign AA/Aa or A if backed securities,
FUND current Government governments and sovereign issuer foreign currencies
income, and, to Bond Index corporations. At least 50% = and repurchase
a lesser extent, (hedged) plus AAA/Aaa agreements
providing or minus 2.5 years collateralized by
opportunities Maximum = U.S. Government
for capital 7.5 years Securities or
appreciation. certain foreign
government
securities.
HIGH YIELD A high level of Target = Lehman 6-year bond At least 65% of At least 65% = Mortgage-backed
FUND current income Brothers High assets in fixed- BB/Ba or below and asset-backed
and, secondarily, Yield Bond Index income securities securities, U.S.
capital appreciation. plus or minus rated below Government
2.5 years investment grade, Securities,
Maximum = including U.S. investment grade
7.5 years and non-U.S. dollar corporate fixed-
corporate debt, income securities,
foreign government structured
securities, securities,
convertible foreign currencies
securities and repurchase
and preferred stock. agreements
collateralized
U.S. Government
Securities.
<CAPTION>
FUND NAME BENCHMARK
<S> <C>
MUNICIPAL Lehman Brothers
INCOME 15- year
FUND Municipal
Bond Index
CORE FIXED Lehman Brothers
INCOME FUND Aggregate Bond
Index
GLOBAL J.P. Morgan
INCOME Global
FUND Government Bond
Index (hedged)
HIGH YIELD Lehman Brothers
FUND High Yield
Bond Index
</TABLE>
3
<PAGE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
Each Fund's share price will fluctuate with market, economic and, with
respect to the Core Fixed Income, Global Income and High Yield Funds,
foreign exchange conditions, so that an investment in any of the Funds may
be worth more or less when redeemed than when purchased. None of the Funds
should be relied upon as a complete investment program. There can be no
assurance that a Fund's investment objectives will be achieved. See "Risk
Factors."
Interest Rate Risk. When interest rates decline, the market value of
fixed-income securities tends to increase. Conversely, when interest rates
increase, the market value of fixed-income securities tends to decline.
Volatility of a security's market value will differ depending upon the
security's duration, the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed-income securities are
subject to the risk that the issuer could default on its obligations and a
Fund could sustain losses on such investments. A default could impact both
interest and principal payments.
Call Risk and Extension Risk. Fixed-income securities may be subject to
both call risk and extension risk. Call risk (i.e., where the issuer
exercises its right to pay principal on an obligation earlier than
scheduled) causes cash flow to be returned earlier than expected. This
typically results when interest rates have declined and a Fund will suffer
from having to reinvest in lower yielding securities. Extension risk (i.e.,
where the issuer exercises its right to pay principal on an obligation later
than scheduled) causes cash flows to be returned later than expected. This
typically results when interest rates have increased and a Fund will suffer
from the inability to invest in higher yielding securities. The investment
characteristics of Mortgage-Backed Securities (including adjustable rate
mortgage securities) and Asset-Backed Securities differ from those of
traditional fixed-income securities because they generally have both call
risk (also known as prepayment risk) and extension risk.
Tax Risk of Municipal Securities. Due to Municipal Securities' tax-exempt
status, their yields and market values may be more adversely impacted by
changes in tax rates and policies than taxable fixed-income securities.
Risks of investing in non-investment grade fixed-income securities. Non-
investment grade fixed-income securities (commonly referred to as "junk
bonds") are subject to greater volatility and risk of loss and are less
liquid than securities which are perceived to be of higher credit quality.
Such securities, also referred to as high yield securities, are considered
to be speculative by traditional investment standards. High yield securities
are subject to increased risk of an issuer's inability to meet principal and
interest payments. The High Yield Fund may invest in securities which are in
default at the time of investment. The market for non-investment grade
securities tends to be concentrated in a limited number of market makers,
which may affect liquidity. In addition, the market price of such securities
tends to reflect individual corporate developments to a greater extent than
that of higher rated securities which react primarily to the general level
of interest rates.
Foreign Risks. Investments in securities of foreign issuers and currencies
involve risks that are different from those associated with investments in
domestic securities. The risks associated with foreign investments and
currencies include changes in relative currency exchange rates, political
and economic developments, the imposition of exchange controls, confiscation
and other governmental restrictions. In addition, the securities markets of
foreign countries are generally less liquid and subject to greater price
volatility. To the extent that the Core Fixed Income, Global Income and High
Yield Funds invest in emerging markets and countries, these risks may be
heightened.
4
<PAGE>
Other. A Fund's use of certain investment techniques, including
derivatives, forward contracts, options, futures and swap transactions, will
subject the Fund to greater risk than funds that do not employ such
techniques.
Non-Diversification. Global Income Fund is a "non-diversified" fund as
defined under the Investment Company Act of 1940, as amended (the "Act"),
and is, therefore, subject only to certain federal tax diversification
requirements (to which the other Funds are also subject), in addition to the
policies adopted by the Investment Adviser. To the extent that the Fund is
not diversified under the Act, it will be more susceptible to adverse
developments affecting any single issuer of portfolio securities. See
"Investment Restrictions."
WHO MANAGES THE FUNDS?
Goldman Sachs Funds Management, L.P. serves as Investment Adviser to the
Adjustable Rate Government and Short Duration Government Funds. Goldman
Sachs Asset Management serves as Investment Adviser to the Short Duration
Tax-Free, Core Fixed Income, Government Income, Municipal Income and High
Yield Funds. Goldman Sachs Asset Management International serves as
Investment Adviser to the Global Income Fund. As of June 23, 1997, the
Investment Advisers, together with their affiliates, acted as investment
adviser, administrator or distributor for assets in excess of $120 billion.
WHO DISTRIBUTES THE FUNDS' SHARES?
Goldman Sachs acts as distributor of each Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
<TABLE>
<CAPTION>
MINIMUM
----------------------------
INITIAL PURCHASE ADDITIONAL
TYPE OF PURCHASE AMOUNT INVESTMENTS
---------------- ---------------- -----------
<S> <C> <C>
Regular Purchases............................. $1,000 $50
Tax-Sheltered Retirement Plans and UGMA/UTMA
purchases.................................... $ 250 $50
Automatic Investment Plan..................... $ 50 $50
</TABLE>
For further information, see "How to Invest--How to Buy Shares of the Funds"
on page 41.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Funds through Goldman Sachs and certain
investment dealers, including members of the National Association of
Securities Dealers, Inc. (the "NASD") and certain other financial service
firms that have sales agreements with Goldman Sachs ("Authorized Dealers").
See "How to Invest" on page 40.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Funds (other than the Adjustable Rate Government Fund which does not
offer Class B or Class C shares) offer three classes of shares through this
Prospectus. These shares may be purchased at the investor's choice, at a
price equal to their next determined net asset value ("NAV") (i) plus an
initial sales charge imposed at the time of purchase ("Class A shares"),
(ii) with a contingent deferred sales charge imposed on redemptions within
six years of purchase ("Class B shares") or (iii) without any initial or
contingent deferred sales charge, as long as shares are held for one year or
more ("Class C shares"). Except with respect to the Adjustable Rate
Government Fund, direct purchases of $1 million ($500,000 in the case of the
Short Duration Government and Short Duration Tax Free Funds) or more of
Class A shares will be sold without an initial sales charge and will be
subject to a contingent deferred sales charge at the time of certain
redemptions.
5
<PAGE>
<TABLE>
<CAPTION>
ADJUSTABLE RATE MAXIMUM FRONT MAXIMUM CONTINGENT
GOVERNMENT FUND END SALES CHARGE DEFERRED SALES CHARGE
--------------- ---------------- ---------------------
<S> <C> <C>
Class
A... 1.5% N/A
<CAPTION>
SHORT DURATION
GOVERNMENT FUND
SHORT DURATION
TAX-FREE FUND
-----------------
<S> <C> <C>
Class
A... 2.0% (See above)
Class
B... N/A 2% declining to 0% after three years
Class
C... N/A 1% if shares are redeemed within 12 months of purchase
<CAPTION>
GOVERNMENT INCOME FUND
MUNICIPAL INCOME FUND
CORE FIXED INCOME FUND
GLOBAL INCOME FUND
HIGH YIELD FUND
----------------------
<S> <C> <C>
Class
A... 4.5% (See above)
Class
B... N/A 5% declining to 0% after six years
Class
C... N/A 1% if shares are redeemed within 12 months of purchase
</TABLE>
Over time, the deferred sales charge and distribution fees attributable to
Class B or Class C shares will exceed the initial sales charge and
distribution fees attributable to Class A shares. Class B shares convert to
Class A shares, which are subject to lower distribution fees, eight years
after initial purchase. Class C shares, which are subject to the same
distribution fees as Class B shares, do not convert to Class A shares and
are subject to the higher distribution fees indefinitely. See "How to
Invest--Alternative Purchase Arrangements" on page 40.
HOW DO I SELL MY SHARES?
You may redeem shares upon request on any Business Day, as defined under
"Additional Information," at the net asset value next determined after
receipt of such request in proper form, subject to any applicable contingent
deferred sales charge. See "How to Sell Shares of the Funds."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME
DIVIDENDS
------------------ CAPITAL GAINS
FUND DECLARED PAID DISTRIBUTIONS
---- ------------------ -------------
<S> <C> <C> <C>
Adjustable Rate Government................... Daily Monthly Annually
Short Duration Government.................... Daily Monthly Annually
Short Duration Tax-Free...................... Daily Monthly Annually
Government Income............................ Daily Monthly Annually
Municipal Income............................. Daily Monthly Annually
Core Fixed Income............................ Daily Monthly Annually
Global Income................................ Monthly Monthly Annually
High Yield................................... Daily Monthly Annually
</TABLE>
You may receive dividends in additional shares of the same class of the
Fund in which you have invested or you may elect to receive cash, shares of
the same class of other mutual funds sponsored by Goldman Sachs (the
"Goldman Sachs Funds") or ILA Service Units of the Prime Obligations
Portfolio or the Tax-Exempt Diversified Portfolio, if you hold Class A
shares of a Fund, or ILA Class B or Class C Units of the Prime Obligations
Portfolio, if you hold Class B or Class C shares of a Fund (the "ILA
Portfolios"). For further information concerning dividends, see "Dividends."
6
<PAGE>
FEES AND EXPENSES
<TABLE>
<CAPTION>
ADJUSTABLE RATE SHORT DURATION SHORT DURATION GOVERNMENT
GOVERNMENT GOVERNMENT TAX-FREE INCOME
FUND/5/ FUND/5/ FUND/5/ FUND
--------------- --------------------------- --------------------------- ---------------------------
CLASS A CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
--------------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES:
Maximum Sales
Charge Imposed on
Purchases......... 1.5%/1/ 2.0%/1/ none none 2.0%/1/ none none 4.5%/1/ none none
Maximum Sales
Charge Imposed on
Reinvested
Dividends......... none none none none none none none none none none
Maximum Deferred
Sales Charge...... none/1/ none/1/ 2.0%/2/ 1.0%/3/ none/1/ 2.0%/2/ 1.0%/3/ none/1/ 5.0%/2/ 1.0%/3/
Redemption
Fees/4/........... none none none none none none none none none none
Exchange Fees/4/.. none none none none none none none none none none
ANNUAL FUND
OPERATING EXPENSES:
(as a percentage
of average daily
net assets)
Management Fees
(after applicable
limitations)/6/... 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.25% 0.25% 0.25%
Distribution
(Rule 12b-1) Fees
(after applicable
limitations)/7/... 0.00% 0.00% 0.60% 0.75% 0.00% 0.60% 0.75% 0.00% 0.75% 0.75%
Other Expenses:
Authorized
Dealer Service
Fees............ 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses
(after
applicable
limitations)/8/. 0.11% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.00% 0.00% 0.00%
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND
OPERATING
EXPENSES (AFTER
FEE AND EXPENSE
LIMITATIONS)/9/... 0.76% 0.70% 1.30% 1.30% 0.70% 1.30% 1.30% 0.50% 1.25% 1.25%
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
MUNICIPAL CORE FIXED GLOBAL
INCOME INCOME INCOME
FUND FUND/5/ FUND
----------------------------- ----------------------------- -----------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES:
Maximum Sales
Charge Imposed on
Purchases......... 4.5%/1/ none none 4.5%/1/ none none 4.5%/1/ none none
Maximum Sales
Charge Imposed on
Reinvested
Dividends......... none none none none none none none none none
Maximum Deferred
Sales Charge...... none/1/ 5.0%/2/ 1.0%/3/ none/1/ 5.0%/2/ 1.0%/3/ none/1/ 5.0%/2/ 1.0%/3/
Redemption
Fees/4/........... none none none none none none none none none
Exchange Fees/4/.. none none none none none none none none none
ANNUAL FUND
OPERATING EXPENSES:
(as a percentage
of average daily
net assets)
Management Fees
(after applicable
limitations)/6/... 0.55% 0.55% 0.55% 0.40% 0.40% 0.40% 0.59% 0.59% 0.59%
Distribution
(Rule 12b-1) Fees
(after applicable
limitations)/7/... 0.00% 0.75% 0.75% 0.00% 0.75% 0.75% 0.21% 0.75% 0.75%
Other Expenses:
Authorized
Dealer Service
Fees............ 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses
(after
applicable
limitations)/8/. 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.11% 0.11% 0.11%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL FUND
OPERATING
EXPENSES (AFTER
FEE AND EXPENSE
LIMITATIONS)/9/... 0.85% 1.60% 1.60% 0.70% 1.45% 1.45% 1.16% 1.70% 1.70%
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
HIGH
YIELD
FUND/5/
-----------------------------
CLASS A CLASS B CLASS C
--------- --------- ---------
<S> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES:
Maximum Sales
Charge Imposed on
Purchases......... 4.5%/1/ none none
Maximum Sales
Charge Imposed on
Reinvested
Dividends......... none none none
Maximum Deferred
Sales Charge...... none/1/ 5.0%/2/ 1.0%/3/
Redemption
Fees/4/........... none none none
Exchange Fees/4/.. none none none
ANNUAL FUND
OPERATING EXPENSES:
(as a percentage
of average daily
net assets)
Management Fees
(after applicable
limitations)/6/... 0.65% 0.65% 0.65%
Distribution
(Rule 12b-1) Fees
(after applicable
limitations)/7/... 0.00% 0.75% 0.75%
Other Expenses:
Authorized
Dealer Service
Fees............ 0.25% 0.25% 0.25%
Other Expenses
(after
applicable
limitations)/8/. 0.20% 0.20% 0.20%
--------- --------- ---------
TOTAL FUND
OPERATING
EXPENSES (AFTER
FEE AND EXPENSE
LIMITATIONS)/9/... 1.10% 1.85% 1.85%
========= ========= =========
</TABLE>
- ----
/1/ As a percentage of the offering price. No sales charge is imposed on
purchases of Class A shares by certain classes of investors. Except with
respect to direct purchases of the Adjustable Rate Government Fund, a
contingent deferred sales charge of 1.00% is imposed on certain redemptions
of Class A shares sold without an initial sales charge as part of an
investment of $1 million ($500,000 in the case of Short Duration Government
and Short Duration Tax Free Funds) or more. See "How to Invest--Offering
Price."
/2/ With the exception of the Short Duration Government Fund and the Short
Duration Tax-Free Fund, a contingent deferred sales charge is imposed upon
shares redeemed within six years of purchase at a rate of 5% in the first
year, declining to 1% in the sixth year, and eliminated thereafter. With
respect to Short Duration Government Fund and Short Duration Tax-Free Fund,
a contingent deferred sales charge is imposed on shares redeemed within
three years of purchase at a rate of 2.0% in the first year, declining to 1%
in the third year. See "How to Invest--Offering Price--Class B Shares."
/3/ A contingent deferred sales charge of 1.00% is imposed on shares redeemed
within 12 months of purchase. See "How to Invest--Offering Price--Class C
Shares."
/4/ A transaction fee of $7.50 may be charged for redemption proceeds paid by
wire. In addition to free reinvestments of dividends and distributions in
shares of other Goldman Sachs Funds or units of the ILA Portfolios and free
automatic exchanges pursuant to the Automatic Exchange Program, six free
exchanges are permitted in each twelve month period. A fee of $12.50 may be
charged for each subsequent exchange during such period. See "How to
Invest--Exchange Privilege."
/5/ Based on estimated amounts for the current fiscal year for the Adjustable
Rate Government, Short Duration Government, Short Duration Tax-Free, Core
Fixed Income and High Yield Funds.
7
<PAGE>
/6/ The Investment Advisers have voluntarily agreed that a portion of the
management fee would not be imposed on the Short Duration Government,
Government Income, Global Income and High Yield Funds equal to .10%, .40%,
.31% and .05%, respectively. Without such limitations, management fees would
be .50%, .65%, .90% and .70% of each Fund's average daily net assets
respectively.
/7/ Goldman Sachs voluntarily has agreed not to impose the entire distribution
fee attributable to Class A shares of each Fund, except Global Income Fund
where Goldman Sachs voluntarily has agreed not to impose .04% of the
distribution fee. Goldman Sachs has also voluntarily agreed not to impose
.15% of the distribution fee attributable to Class B shares of the Short
Duration Government and Short Duration Tax-Free Funds. Distribution fees for
Class A and Class B shares would otherwise be payable at the rate of .25%
and .75%, respectively, of average daily net assets.
/8/ The Investment Advisers voluntarily have agreed to reduce or limit certain
other expenses (excluding management, distribution and authorized dealer
service fees, taxes, interest and brokerage fees and litigation,
indemnification and other extraordinary expenses (and transfer agency fees
in the case of the Global Income and High Yield Funds)) to the extent such
expenses exceed .05%, .05%, .00%, .05%, .05%, .06% and .01% of the average
daily net assets of the Short Duration Government, Short Duration Tax-Free,
Government Income, Municipal Income, Core Fixed Income, Global Income and
High Yield Funds, respectively.
/9/ Without the limitations described above, "Other Expenses" and "Total
Operating Expenses" of the Funds would have been as set forth below.
Information for the Class A and Class B shares of the Government Income,
Municipal Income and Global Income Funds is shown for the fiscal year ended
October 31, 1996. Information for the Class A and Class B shares of the
Adjustable Rate Government, Short Duration Government, Short Duration Tax-
Free, Core Fixed Income and High Yield Funds and Class C shares of each Fund
are estimated for the current fiscal year:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Adjustable Rate Government
Class A................................................... .11% 1.01%
Short Duration Government
Class A................................................... .21% 1.21%
Class B................................................... .21% 1.71%
Class C................................................... .21% 1.71%
Short Duration Tax-Free
Class A................................................... .61% 1.51%
Class B................................................... .61% 2.01%
Class C................................................... .61% 2.01%
Government Income
Class A................................................... .74% 1.89%
Class B................................................... .74% 2.39%
Class C................................................... .74% 2.39%
Municipal Income
Class A................................................... .50% 1.55%
Class B................................................... .50% 2.05%
Class C................................................... .50% 2.05%
Core Fixed Income
Class A................................................... .43% 1.33%
Class B................................................... .43% 1.83%
Class C................................................... .43% 1.83%
Global Income
Class A................................................... .24% 1.64%
Class B................................................... .24% 2.14%
Class C................................................... .24% 2.14%
High Yield
Class A................................................... .75% 1.95%
Class B................................................... .75% 2.45%
Class C................................................... .75% 2.45%
</TABLE>
8
<PAGE>
EXAMPLE
You would pay the following expenses on a hypothetical $1,000 investment
(including the maximum sales charge) assuming (i) a 5% annual return and (ii)
redemption at the end of each time period.
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Adjustable Rate Government Fund
Class A Shares.............................. $23 $39 $57 $108
Short Duration Government Fund
Class A Shares............................... 27 42 58 105
Class B Shares
--Assuming complete redemption at end of pe-
riod....................................... 33 51 71 136
--Assuming no redemption.................... 13 41 71 136
Class C Shares
--Assuming complete redemption at end of pe-
riod....................................... 23 41 71 157
--Assuming no redemption.................... 13 41 71 157
Short Duration Tax-Free Fund
Class A Shares............................... 27 42 58 105
Class B Shares
--Assuming complete redemption at end of pe-
riod....................................... 33 51 71 136
--Assuming no redemption.................... 13 41 71 136
Class C Shares
--Assuming complete redemption at end of pe-
riod....................................... 23 41 71 157
--Assuming no redemption.................... 13 41 71 157
Government Income Fund
Class A Shares............................... 50 60 72 105
Class B Shares
--Assuming complete redemption at end of pe-
riod....................................... 63 70 89 126
--Assuming no redemption.................... 13 40 69 126
Class C Shares
--Assuming complete redemption at end of pe-
riod....................................... 23 40 69 151
--Assuming no redemption.................... 13 40 69 151
Municipal Income Fund
Class A Shares............................... 53 71 90 145
Class B Shares
--Assuming complete redemption at end of pe-
riod....................................... 66 80 107 165
--Assuming no redemption.................... 16 50 87 165
Class C Shares
--Assuming complete redemption at end of pe-
riod....................................... 26 50 87 190
--Assuming no redemption.................... 16 50 87 190
Core Fixed Income Fund
Class A Shares............................... 52 66 82 128
Class B Shares
--Assuming complete redemption at end of pe-
riod....................................... 65 76 99 149
--Assuming no redemption.................... 15 46 79 149
Class C Shares
--Assuming complete redemption at end of pe-
riod....................................... 25 46 79 174
--Assuming no redemption.................... 15 46 79 174
Global Income Fund
Class A Shares............................... 56 80 106 180
Class B Shares
--Assuming complete redemption at end of pe-
riod....................................... 67 84 112 179
--Assuming no redemption.................... 17 54 92 179
Class C Shares
--Assuming complete redemption at end of pe-
riod....................................... 27 54 92 201
--Assuming no redemption.................... 17 54 92 201
High Yield Fund
Class A Shares............................... 56 78 N/A N/A
Class B Shares
--Assuming complete redemption at end of pe-
riod....................................... 69 88 N/A N/A
--Assuming no redemption.................... 19 58 N/A N/A
Class C Shares
--Assuming complete redemption at end of pe-
riod....................................... 29 58 N/A N/A
--Assuming no redemption.................... 19 58 N/A N/A
</TABLE>
9
<PAGE>
The hypothetical example assumes that a contingent deferred sales charge
will not apply to redemptions of Class A shares within the first 18 months.
Class B shares convert to Class A shares eight years after purchase;
therefore, Class A expenses are used in the hypothetical example after year
eight.
The Investment Advisers and Goldman Sachs have no current intention of
modifying or discontinuing any of the limitations set forth above but may do
so in the future at their discretion. The information with respect to the
Adjustable Rate Government Fund set forth in the foregoing table and
hypothetical example relates only to its Class A shares (the Fund does not
offer Class B or Class C shares); such information with respect to the other
funds relates only to Class A, B and C shares. The Adjustable Rate Government,
Short Duration Government, Short Duration Tax-Free, Government Income,
Municipal Income, Core Fixed Income, Global Income and High Yield Funds, but
not the other Funds, also offer Institutional Shares and Service Shares and
the Adjustable Rate Government, Short Duration Government, Short Duration Tax-
Free and Core Fixed Income Funds, but not the other Funds, also offer
Administration Shares. Institutional, Administration and Service Shares are
subject to different fees and expenses (which affect performance), have
different minimum investment requirements and are entitled to different
services than Class A, Class B and Class C shares. Information regarding
Institutional, Administration and Service Shares may be obtained from your
sales representative or from Goldman Sachs by calling the number on the back
cover of this Prospectus. Because of the Distribution Plans, long-term
shareholders may pay more than the economic equivalent of the maximum front-
end sales charges permitted by the NASD's rules regarding investment
companies.
In addition to the compensation itemized above, certain institutions that
sell Fund shares and/or their salespersons may receive certain compensation
for the sale and distribution of Class A, Class B and Class C shares of the
Funds or for services to the Funds. For additional information regarding such
compensation, see "Management" and "Services Available to Shareholders" in the
Prospectus and "Other Information Regarding Purchases, Redemptions, Exchanges
and Dividends" in the Additional Statement.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of a Fund that an investor will bear directly or
indirectly. The information on the fees and expenses included in the table and
the hypothetical example above are based on each Fund's fees and expenses
(actual or estimated) and should not be considered as representative of past
or future expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, a Fund's
actual performance will vary and may result in an actual return greater or
less than 5%. See "Management--Investment Advisers."
10
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following data with respect to a share (of the Class specified) of the
Funds outstanding for the period ended April 30, 1997 is unaudited. The
remaining data has been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report incorporated by reference into the
Additional Statement from the Annual Report to shareholders for the Funds for
the year ended October 31, 1996 (the "Annual Report"). This information should
be read in conjunction with the financial statements and related notes
incorporated by reference and attached to the Additional Statement. The Annual
Report also contains performance information and is available upon request and
without charge by calling the telephone number or writing to one of the
addresses on the back cover of this Prospectus. During the periods shown, the
Trust did not offer Class A and B shares of the Short Duration Government,
Short Duration Tax-Free, Core Fixed Income and High Yield Funds or Class C
shares of any Fund. Accordingly, there are no financial highlights for these
Funds or Classes.
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
------------------------------------------------
NET
REALIZED NET
AND REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED
ON GAIN (LOSS) TOTAL
NET INVESTMENT, ON FOREIGN INCOME
ASSET NET OPTION CURRENCY (LOSS)
VALUE AT INVEST- AND RELATED FROM
BEGINNING MENT FUTURES TRANS- INVESTMENT
OF PERIOD INCOME TRANSACTIONS ACTIONS OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ----------------------------
1997-Institu-
tional Shares... $9.83 $0.2971(a) $0.0216(a) -- $0.3187
1997-Administra-
tion Shares..... 9.83 0.2844(a) 0.0221(a) -- 0.3065
1997-Service
Shares(m)....... 9.84 0.0527(a) 0.0200(a) -- 0.0727
1997-Class A
Shares.......... 9.83 0.2766(a) 0.0300(a) -- 0.3066
FOR THE YEAR ENDED OCTOBER 31,
- ----------------------------
1996-Institu-
tional Shares... 9.77 0.5759(a) 0.0772(a) -- 0.6531
1996-Administra-
tion Shares..... 9.77 0.5489(a) 0.0797(a) -- 0.6286
1996-Class A
Shares.......... 9.77 0.5481(a) 0.0806(a) -- 0.6287
1995-Institu-
tional Shares... 9.74 0.5630(a) 0.0717(a) -- 0.6347
1995-Administra-
tion Shares..... 9.74 0.5366(a) 0.0737(a) -- 0.6103
1995-Class A
Shares(c)....... 9.79 0.2721(a) (0.0090)(a) -- 0.2631
1994-Institu-
tional Shares... 10.00 0.4341(a) (0.2455)(a) -- 0.1886
1994-Administra-
tion Shares..... 10.00 0.4211(a) (0.2572)(a) -- 0.1639
1993-Institu-
tional Shares... 10.04 0.4397 (0.0376)(d) -- 0.4021
1993-Administra-
tion Shares(e).. 10.02 0.2146 (0.0173)(d) -- 0.1973
1992-Institu-
tional Shares... 10.03 0.5599 (0.0029)(d) -- 0.5570
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
- ----------------------------
1991-Institu-
tional Shares... 10.00 0.1531 0.0322(d) -- 0.1853
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
------------------------------------------------------------------
IN EXCESS
FROM NET OF NET
REALIZED REALIZED
GAIN ON IN GAIN ON
FROM INVESTMENT, EXCESS INVESTMENT,
NET OPTION OF NET OPTION FROM TOTAL
INVEST- AND INVEST- AND PAID DISTRIBUTIONS
MENT FUTURES MENT FUTURES IN TO
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ----------------------------
1997-Institu-
tional Shares... $(0.2867) -- -- -- -- $(0.2887)
1997-Administra-
tion Shares..... (0.2765) -- -- -- -- 0.2765
1997-Service
Shares(m)....... (0.0527) -- -- -- -- (0.0527)
1997-Class A
Shares.......... (0.2766) -- -- -- -- (0.2766)
FOR THE YEAR ENDED OCTOBER 31,
- ----------------------------
1996-Institu-
tional Shares... (0.5725) -- (0.0206) -- -- (0.5931)
1996-Administra-
tion Shares..... (0.5489) -- (0.0198) -- -- (0.5687)
1996-Class A
Shares.......... (0.5489) -- (0.0198) -- -- (0.5687)
1995-Institu-
tional Shares... (0.5759) -- (0.0287) -- -- (0.6046)
1995-Administra-
tion Shares..... (0.5528) -- (0.0275) -- -- (0.5803)
1995-Class A
Shares(c)....... (0.2697) -- (0.0134) -- -- (0.2831)
1994-Institu-
tional Shares... (0.4486) -- -- -- -- (0.4486)
1994-Administra-
tion Shares..... (0.4239) -- -- -- -- (0.4239)
1993-Institu-
tional Shares... (0.4397) -- (0.0024) -- -- (0.4421)
1993-Administra-
tion Shares(e).. (0.2146) -- (0.0027) -- -- (0.2173)
1992-Institu-
tional Shares... (0.5470) -- -- -- -- (0.5470)
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
- ----------------------------
1991-Institu-
tional Shares... (0.1553) -- -- -- -- (0.1553)
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY
WAIVER OF FEES OR
EXPENSE LIMITATIONS
RATIO OF -----------------------
NET RATIO OF
INVEST- NET
NET MENT NET INVEST-
INCREASE NET RATIO OF INCOME ASSETS MENT
(DECREASE) ASSET NET (LOSS) TO AT END RATIO OF INCOME
IN NET VALUE AT EXPENSES AVERAGE PORTFOLIO OF EXPENSES (LOSS) TO
ASSET END OF TOTAL TO AVERAGE NET TURNOVER PERIOD TO AVERAGE AVERAGE
VALUE PERIOD RETURN(K) NET ASSETS ASSETS RATE(D) (IN 000S) NET ASSETS NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ----------------------------
1997-Institu-
tional Shares... $0.0300 $9.86 3.28(f) 0.45(b) 6.08%(b) 25.64% $ 549,611 0.51%(b) 6.02%(b)
1997-Administra-
tion Shares..... 0.0300 9.86 3.16(f) 0.70(b) 5.83(b) 25.64 4,182 0.76(b) 5.77(b)
1997-Service
Shares(m)....... 0.0200 9.86 0.74(f) 0.95(b) 5.64(b) 25.64 22 1.01(b) 5.58(b)
1997-Class A
Shares.......... 0.0300 9.86 3.16(f) 0.70(b) 5.61(b) 25.64 39,063 1.01(b) 5.30(b)
FOR THE YEAR ENDED OCTOBER 31,
- ----------------------------
1996-Institu-
tional Shares... 0.0600 9.83 6.86 0.45 5.85 52.36 613,149 0.51 5.79
1996-Administra-
tion Shares..... 0.0600 9.83 6.60 0.70 5.59 52.36 3,792 0.76 5.53
1996-Class A
Shares.......... 0.0600 9.83 6.60 0.70 5.59 52.36 10,728 1.01 5.28
1995-Institu-
tional Shares... 0.0301 9.77 6.75 0.46 5.77 24.12 657,358 0.53 5.70
1995-Administra-
tion Shares..... 0.0300 9.77 6.48 0.71 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares(c)....... (0.0200) 9.77 2.74(f) 0.69(b) 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institu-
tional Shares... (0.2600) 9.74 1.88 0.46 4.38 37.81 942,523 0.49 4.35
1994-Administra-
tion Shares..... (0.2600) 9.74 1.63 0.71 4.27 37.81 6,960 0.74 4.24
1993-Institu-
tional Shares... (0.0400) 10.00 4.13 0.45 4.36 103.74 2,760,871 0.48 4.33
1993-Administra-
tion Shares(e).. (0.0200) 10.00 2.01(f) 0.70(b) 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institu-
tional Shares... 0.0100 10.04 6.12 0.42 5.61 286.40 2,145,064 0.55 5.48
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
- ----------------------------
1991-Institu-
tional Shares... 0.0300 10.03 2.14(f) 0.20(b) 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS(N)
---------------------------------------------------
NET REALIZED
AND NET REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
SHORT DURATION GOVERNMENT FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Institutional
Shares................. $ 9.83 $0.3287(a) $(0.0700)(a) -- $0.2587
1997-Administration
Shares................. 9.85 0.3175(a) (0.0700)(a) -- 0.2475
1997-Service Shares..... 9.82 0.3043(a) (0.0700)(a) -- 0.2343
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institutional
Shares ................ 9.82 0.6290(a) 0.0136 (a) -- 0.6426
1996-Administration
Shares(h).............. 9.86 0.3837(a) 0.0003 (a) -- 0.3840
1996-Service Shares(i).. 9.72 0.3134(a) 0.1018 (a) -- 0.4152
1995-Institutional
Shares................. 9.64 0.6652(a) 0.1666 (a) -- 0.8318
1995-Administration
Shares................. 9.64 0.2384(a) (0.0433)(a) -- 0.1951
1994-Institutional
Shares................. 10.14 0.5628(a) (0.4592)(a) -- 0.1036
1994-Administration
Shares................. 10.14 0.5329(a) (0.4539)(a) -- 0.0790
1993-Institutional
Shares................. 10.16 0.5627 (0.0135)(d) -- 0.5492
1993-Administration
Shares(e).............. 10.23 0.2725 (0.0900)(d) -- 0.1825
1992-Institutional
Shares................. 10.22 0.6703 (0.0600)(d) -- 0.6103
1991-Institutional
Shares................. 10.00 0.8020 0.2200 (d) -- 1.0220
1990-Institutional
Shares................. 10.07 0.8300 (0.0700)(d) -- 0.7600
1989-Institutional
Shares................. 10.10 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
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
----------------------------------------------------------------------
FROM NET IN EXCESS OF
REALIZED NET REALIZED
GAIN ON GAIN ON
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS
INVESTMENT FUTURES INVESTMENT FUTURES IN TO
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS
---------- ------------ ---------- ------------ -------- -------------
SHORT DURATION GOVERNMENT FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Institutional
Shares................. $(0.3287) -- -- -- -- $(0.3287)
1997-Administration
Shares................. (0.3175) -- -- -- -- (0.3175)
1997-Service Shares..... (0.3043) -- -- -- -- (0.3043)
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institutional
Shares ................ (0.6326) -- -- -- -- (0.6326)
1996-Administration
Shares(h).............. (0.3940) -- -- -- -- (0.3940)
1996-Service Shares(i).. (0.3152) -- -- -- -- (0.3152)
1995-Institutional
Shares................. (0.6518) -- -- -- -- (0.6518)
1995-Administration
Shares................. (0.2051) -- -- -- -- (0.2051)
1994-Institutional
Shares................. (0.5598) (0.0438) -- -- -- (0.6036)
1994-Administration
Shares................. (0.5352) (0.0438) -- -- -- (0.5790)
1993-Institutional
Shares................. (0.5627) -- (0.0065) -- -- (0.5692)
1993-Administration
Shares(e).............. (0.2725) -- -- -- -- (0.2725)
1992-Institutional
Shares................. (0.6703) -- -- -- -- (0.6703)
1991-Institutional
Shares................. (0.8020) -- -- -- -- (0.8020)
1990-Institutional
Shares................. (0.8300) -- -- -- -- (0.8300)
1989-Institutional
Shares................. (0.8800) -- -- -- (0.0300) (0.9100)
FOR THE PERIOD AUGUST 15, 1988(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1988-Institutional
Shares................. (0.1800) -- -- -- -- (0.1800)
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
----------------------
RATIO OF RATIO OF
NET NET NET NET
INCREASE RATIO OF INVESTMENT ASSETS INVESTMENT
(DECREASE) NET ASSET NET INCOME AT END RATIO OF INCOME
IN NET VALUE AT EXPENSES (LOSS) PORTFOLIO OF EXPENSES (LOSS)
ASSET END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD TO AVERAGE TO AVERAGE
VALUE PERIOD RETURN(K) NET ASSETS NET ASSETS RATE(D) (IN 000'S) NET ASSETS NET ASSETS
---------- --------- --------- ---------- ---------- --------- ---------- ---------- ----------
SHORT DURATION GOVERNMENT FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Institutional
Shares................ $(0.0700) $9.76 2.67%(f) 0.45%(b) 6.44%(b) 43.72%(f) $ 99,824 0.73%(b) 6.16%(b)
1997-Administration
Shares................ (0.0700) 9.78 2.55(f) 0.70(b) 6.22(b) 43.72(f) 1,504 0.98(b) 5.94(b)
1997-Service Shares.... (0.0700) 9.75 2.42(f) 0.95(b) 5.94(b) 43.72(f) 2,522 1.23(b) 5.66(b)
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institutional
Shares ............... 0.0100 9.83 6.75 0.45 6.44 115.45 99,944 0.71 6.18
1996-Administration
Shares(h)............. (0.0100) 9.85 4.00(f) 0.70(b) 5.97(b) 115.45 252 0.96(b) 5.71(b)
1996-Service
Shares(i)............. 0.1000 9.82 4.35(f) 0.95(b) 6.05(b) 115.45 1,822 1.21(b) 5.79(b)
1995-Institutional
Shares................ 0.1800 9.82 8.97 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares................ (0.0100) 9.63(h) 2.10 0.70(b) 7.91(b) 292.56 -- 0.90(b) 7.71(b)
1994-Institutional
Shares................ (0.5000) 9.64 0.99 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares................ (0.5000) 9.64 0.73 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares................ (0.0200) 10.14 5.55 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares(e)............. (0.0900) 10.14 1.74 0.70(b) 4.84(b) 411.66 16,490 0.80(b) 4.74(b)
1992-Institutional
Shares................ (0.0600) 10.16 6.24 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares................ 0.2200 10.22 10.93 0.45 8.25 155.44 158,848 0.79 7.91
1990-Institutional
Shares................ (0.0700) 10.00 8.23 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares................ (0.0300) 10.07 9.08 0.46 8.71 137.37 31,015 1.39 7.78
FOR THE PERIOD AUGUST 15, 1988(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1988-Institutional
Shares................ 0.1000 10.10 3.30(f) 0.55(b) 8.55(b) 167.00(b) 39,052 1.42(b) 7.68(b)
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS(N)
---------------------------------------------------
NET REALIZED
AND NET REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Institu-
tional Shares.. $ 9.96 $0.2097(a) $(0.0200)(a) -- $0.1897
1997-Administra-
tion Shares.... 9.96 0.1976(a) (0.0200)(a) -- 0.1776
1997-Service
Shares......... 9.97 0.1852(a) (0.0300)(a) -- 0.1552
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares.. 9.94 0.4192(a) 0.0200 (a) -- 0.4392
1996-Administra-
tion Shares.... 9.94 0.3944(a) 0.0200 (a) -- 0.4144
1996-Service
Shares......... 9.95 0.3697(a) 0.0200 (a) -- 0.3897
1995-Institu-
tional Shares.. 9.79 0.4235(a) 0.1500 (a) -- 0.5735
1995-Administra-
tion Shares.... 9.79 0.3989(a) 0.1500 (a) -- 0.5489
1995-Service
Shares......... 9.79 0.3744(a) 0.1600 (a) -- 0.5344
1994-Institu-
tional Shares.. 10.23 0.3787(a) (0.3575)(a) -- 0.0212
1994-Administra-
tion Shares.... 10.23 0.3537(a) (0.3575)(a) -- (0.0038)
1994-Service
Shares(j)...... 9.86 0.0475(a) (0.0700)(a) (0.0225)
1993-Institu-
tional Shares.. 9.93 0.3834 0.3000(d) -- 0.6834
1993-Administra-
tion
Shares(j)...... 10.16 0.1555 0.0720(d) -- 0.2275
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1992-Institu-
tional Shares.. 10.00 0.0341 (0.0700)(d) -- (0.0359)
<CAPTION>
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Class A
Shares.......... $14.36 $ 0.46 $ (0.20) -- $ 0.26
1997-Class B
Shares.......... 14.37 0.40 (0.19) -- 0.21
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... 14.47 0.92 (0.11) -- 0.81
1996-Class B
shares(m)....... 14.11 0.41 0.26 -- 0.67
1995-Class A
shares.......... 13.47 0.94 1.00 -- 1.94
1994-Class A
shares.......... 14.90 0.85 (1.28) -- (0.43)
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
- -------------------------------------------------------
1993-Class A
shares.......... 14.32 0.56 0.58 -- 1.14
<CAPTION>
CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-
Institutional
Shares.......... $ 9.85 $0.3236 $(0.1403) $(0.0003) $0.1830
1997-
Administrative
Shares.......... 9.84 0.3108 (0.1398) (0.0003) 0.1707
1997-Service
Shares.......... 9.86 0.2991 (0.1399) (0.0003) 0.1589
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institutional Shares.. 10.00 0.6448 (0.0704) -- 0.5744
1996-Administration
Shares(1)....... 9.91 0.4083 (0.0703) -- 0.3380
1996-Service
Shares(1)....... 9.77 0.3756 0.0898 -- 0.4654
1995-Institutional Shares.. 9.24 0.6423 0.7610 -- 1.4033
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1994-Institutional Shares. 10.00 0.4648 (0.7617) -- (0.2969)
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
----------------------------------------------------------------------
FROM NET IN EXCESS OF
REALIZED NET REALIZED
GAIN ON GAIN ON
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS
INVESTMENT FUTURES INVESTMENT FUTURES IN TO
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS
---------- ------------ ---------- ------------ -------- -------------
SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Institu-
tional Shares.. $(0.2097) -- -- -- -- $(0.2097)
1997-Administra-
tion Shares.... (0.1976) -- -- -- -- (0.1976)
1997-Service
Shares......... (0.1852) -- -- -- -- (0.1852)
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares.. (0.4192) -- -- -- -- (0.4192)
1996-Administra-
tion Shares.... (0.3944) -- -- -- -- (0.3944)
1996-Service
Shares......... (0.3697) -- -- -- -- (0.3697)
1995-Institu-
tional Shares.. (0.4235) -- -- -- -- (0.4235)
1995-Administra-
tion Shares.... (0.3989) -- -- -- -- (0.3989)
1995-Service
Shares......... (0.3744) -- -- -- -- (0.3744)
1994-Institu-
tional Shares.. (0.3787) (0.0825) -- -- -- (0.4612)
1994-Administra-
tion Shares.... (0.3537) (0.0825) -- -- -- (0.4362)
1994-Service
Shares(j)...... (0.0475) -- (0.0475)
1993-Institu-
tional Shares.. (0.3834) -- -- -- -- (0.3834)
1993-Administra-
tion
Shares(j)...... (0.1555) -- -- -- -- (0.1555)
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1992-Institu-
tional Shares.. (0.0341) -- -- -- -- (0.0341)
<CAPTION>
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Class A
Shares.......... $ (0.45) $ (0.07) -- -- -- $ (0.52)
1997-Class B
Shares.......... (0.40) (0.07) -- -- -- (0.47)
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... (0.92) -- -- -- -- (0.92)
1996-Class B
shares(m)....... (0.41) -- -- -- -- (0.41)
1995-Class A
shares.......... (0.94) -- -- -- -- (0.94)
1994-Class A
shares.......... (0.85) (0.12) (0.02) (0.01) -- (1.00)
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
- -------------------------------------------------------
1993-Class A
shares.......... (0.56) -- -- -- -- (0.56)
<CAPTION>
CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-
Institutional
Shares.......... $(0.3230) -- -- -- -- $(0.3230)
1997-
Administrative
Shares.......... (0.3107) -- -- -- -- (0.3107)
1997-Service
Shares.......... (0.2989) -- -- -- -- (0.2989)
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institutional Shares.. (0.6438) (0.0806) -- -- -- (0.7244)
1996-Administration
Shares(1)....... (0.4080) -- -- -- -- (0.4080)
1996-Service
Shares(1)....... (0.3754) -- -- -- -- (0.3754)
1995-Institutional Shares.. (0.6433) -- -- -- -- (0.6433)
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1994-Institutional Shares. (0.4648) -- -- -- -- (0.4648)
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
----------------------
RATIO OF RATIO OF
NET NET NET NET
INCREASE RATIO OF INVESTMENT ASSETS INVESTMENT
(DECREASE) NET ASSET NET INCOME AT END RATIO OF INCOME
IN NET VALUE AT EXPENSES (LOSS) PORTFOLIO OF EXPENSES (LOSS)
ASSET END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD TO AVERAGE TO AVERAGE
VALUE PERIOD RETURN(K) NET ASSETS NET ASSETS RATE(D) (IN 000'S) NET ASSETS NET ASSETS
---------- --------- --------- ---------- ---------- --------- ---------- ---------- ----------
SHORT DURATION TAX-FREE FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Institu-
tional Shares.. $(0.0200) $ 9.94 1.91%(f) 0.45%(b) 4.24%(b) 99.59%(f) $37,159 1.05%(b) 3.64%(b)
1997-Administra-
tion Shares.... (0.0200) 9.94 1.79(f) 0.70(b) 4.03(b) 99.59(f) 113 1.30(b) 3.43(b)
1997-Service
Shares......... (0.0300) 9.94 1.56(f) 0.95(b) 3.77(b) 99.59(f) 1,045 1.55(b) 3.17(b)
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares.. 0.0300 9.96 4.50 0.45 4.21 231.65 $34,814 1.01 3.65
1996-Administra-
tion Shares.... 0.0300 9.96 4.24 0.70 3.96 231.65 48 1.26 3.40
1996-Service
Shares......... 0.0200 9.97 3.98 0.95 3.74 231.65 695 1.51 3.18
1995-Institu-
tional Shares.. 0.1500 9.94 5.98 0.45 4.31 259.52 58,389 0.77 3.99
1995-Administra-
tion Shares.... 0.1500 9.94 5.76 0.70 4.14 259.52 46 1.02 3.82
1995-Service
Shares......... 0.1600 9.95 5.59 0.95 3.87 259.52 454 1.27 3.55
1994-Institu-
tional Shares.. (0.4400) 9.79 0.17 0.45 3.74 354.00 83,704 0.61 3.58
1994-Administra-
tion Shares.... (0.4400) 9.79 (0.11) 0.70 3.51 354.00 3,866 0.86 3.35
1994-Service
Shares(j)...... (0.0700) 9.79 (0.32)(f) 0.95(b) 4.30(b) 354.00 440 1.11(b) 4.14(b)
1993-Institu-
tional Shares.. 0.3000 10.23 7.03 0.41 3.70 404.60 115,803 1.06 3.05
1993-Administra-
tion
Shares(j)...... 0.0720 10.23 2.28(f) 0.70(b) 3.32(b) 404.60 911 1.07(b) 2.95(b)
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1992-Institu-
tional Shares.. (0.0700) 9.93 (0.34)(f) 0.05(b) 4.58(b) 31.19(f) 14,601 2.68(b) 1.95(b)
<CAPTION>
GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Class A
Shares.......... $ (0.26) $ 14.10 1.83%(f) 0.50%(b) 6.34%(b) 182.25%(f) $52,946 1.83%(b) 5.01%(b)
1997-Class B
Shares.......... (0.26) 14.11 1.43(f) 1.25(b) 5.37(b) 182.25%(f) 2,937 2.33(b) 4.29(b)
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... (0.11) 14.36 5.80 0.50 6.42 485.09 30,603 1.89 5.03
1996-Class B
shares(m)....... 0.26 14.37 4.85(f) 1.25(b) 5.65(b) 485.09 234 2.39(b) 4.51(b)
1995-Class A
shares.......... 1.00 14.47 14.90 0.47 6.67 449.53 29,503 2.34 4.80
1994-Class A
shares.......... (1.43) 13.47 (2.98) 0.11 6.06 654.90 14,452 2.86 3.31
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
- -------------------------------------------------------
1993-Class A
shares.......... 0.58 14.90 8.03(f) 0.00(b) 4.87(b) 725.41(f) 12,860 4.00(b) 0.87(b)
<CAPTION>
CORE FIXED INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-
Institutional
Shares.......... $(0.1400) $ 9.71 1.87%(f) 0.45%(b) 6.66%(b) 174.52%(f) $73,483 0.76%(b) 6.35%(b)
1997-
Administrative
Shares.......... (0.1400) 9.70 1.75(f) 0.70(b) 6.49(b) 174.52(f) 6,194 1.01(b) 6.18(b)
1997-Service
Shares.......... (0.1400) 9.72 1.63(f) 0.95(b) 6.22(b) 174.52(f) 1,108 1.26(b) 5.91(b)
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institutional Shares.. (0.1500) 9.85 5.98 0.45 6.51 414.20 72,061 0.83 6.13
1996-Administration
Shares(1)....... (0.0700) 9.84 3.56(f) 0.70(b) 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service
Shares(1)....... 0.0900 9.86 4.90(f) 0.95(b) 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional Shares.. 0.7600 10.00 15.72 0.45 6.56 383.26 55,502 0.96 6.05
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1994-Institutional Shares. (0.7617) 9.24 (3.00) 0.45(b) 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS(N)
-----------------------------------------------
NET REALIZED
AND NET REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
GLOBAL INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Class A
Shares.......... $14.53 $0.25 $(0.07) $0.28 $ 0.46
1997-Class B
Shares.......... 14.53 0.36 (0.02) 0.08 0.42
1997-Institu-
tional Shares... 14.52 0.42 (0.02) 0.10 0.50
1997-Service
shares(o)....... 14.69 0.10 0.02 (0.09) 0.03
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... 14.45 0.71 0.62 0.18 1.51
1996-Class B
shares(m)....... 14.03 0.34 0.41 0.11 0.86
1996-
Institutional
shares.......... 14.45 1.15 0.32 0.10 1.57
1995-Class A
shares.......... 13.43 0.89 0.92 0.15 1.96
1995-
Institutional
shares(m)....... 14.09 0.22 0.34 0.06 0.62
1994-Class A
shares.......... 15.07 0.84 (1.37) (0.12) (0.65)
1993-Class A
shares.......... 14.69 0.85 1.07 (0.42) 1.50
1992-Class A
shares.......... 14.60 1.14 0.45 (0.36) 1.23
FOR THE PERIOD AUGUST 2, 1991(G) THROUGH OCTOBER 31,
- ----------------------------------------------------
1991-Class A
shares.......... 14.55 0.25 0.23 (0.19) 0.29
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MUNICIPAL INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Class A
Shares.......... $14.37 $0.34 $ 0.03 -- $ 0.37
1997-Class B
Shares.......... 14.37 0.28 0.03 -- 0.31
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... 14.17 0.65 0.20 -- 0.85
1996-Class B
shares(m)....... 14.03 0.27 0.34 -- 0.61
1995-Class A
shares.......... 13.08 0.67 1.09 -- 1.76
1994-Class A
shares.......... 14.64 0.73 (1.51) -- (0.78)
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
- ---------------------------------------------------
1993-Class A
shares.......... 14.32 0.22 0.32 -- 0.54
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
---------------------------------------------------------------------
FROM NET IN EXCESS OF
REALIZED NET REALIZED
GAIN ON GAIN ON
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS
INVESTMENT FUTURES INVESTMENT FUTURES IN TO
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS
---------- ------------ ---------- ------------ ------- -------------
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Class A
Shares.......... $(0.40) -- -- -- -- $(0.40)
1997-Class B
Shares.......... (0.37) -- -- -- -- (0.37)
1997-Institu-
tional Shares... (0.44) -- -- -- -- (0.44)
1997-Service
shares(o)....... (0.13) -- -- -- -- (0.13)
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... (1.43) -- -- -- -- (1.43)
1996-Class B
shares(m)....... (0.36) -- -- -- -- (0.36)
1996-
Institutional
shares.......... (1.50) -- -- -- -- (1.50)
1995-Class A
shares.......... (0.94) -- -- -- -- (0.94)
1995-
Institutional
shares(m)....... (0.26) -- -- -- -- (0.26)
1994-Class A
shares.......... (0.22) (0.16) -- -- (0.61) (0.99)
1993-Class A
shares.......... (0.85) (0.27) -- -- -- (1.12)
1992-Class A
shares.......... (1.14) -- -- -- -- (1.14)
FOR THE PERIOD AUGUST 2, 1991(G) THROUGH OCTOBER 31,
- ----------------------------------------------------
1991-Class A
shares.......... (0.24) -- -- -- -- (0.24)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MUNICIPAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Class A
Shares.......... $(0.34) -- -- -- -- $(0.34)
1997-Class B
Shares.......... (0.28) -- -- -- -- (0.28)
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... (0.65) -- -- -- -- (0.65)
1996-Class B
shares(m)....... (0.27) -- -- -- -- (0.27)
1995-Class A
shares.......... (0.67) -- -- -- -- (0.67)
1994-Class A
shares.......... (0.73) (0.05) -- -- -- (0.78)
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
- ---------------------------------------------------
1993-Class A
shares.......... (0.22) -- -- -- -- (0.22)
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
----------------------
RATIO OF RATIO OF
NET NET NET NET
INCREASE RATIO OF INVESTMENT ASSETS INVESTMENT
(DECREASE) NET ASSET NET INCOME AT END RATIO OF INCOME
IN NET VALUE AT EXPENSES (LOSS) PORTFOLIO OF EXPENSES (LOSS)
ASSET END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD TO AVERAGE TO AVERAGE
VALUE PERIOD RETURN(K) NET ASSETS NET ASSETS RATE(D) (IN 000'S) NET ASSETS NET ASSETS
---------- --------- --------- ---------- ---------- --------- ---------- ---------- ----------
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Class A
Shares.......... $ 0.06 $14.59 3.22%(f) 1.17%(b) 5.12%(b) 136.72%(f) $171,668 1.60%(b) 4.69%(b)
1997-Class B
Shares.......... 0.05 14.58 2.94(f) 1.71(b) 4.73(b) 136.72(f) 1,095 2.10(b) 4.34(b)
1997-Institu-
tional Shares... 0.06 14.58 3.50(f) 0.65(b) 5.64(b) 136.72(f) 56,431 1.04(b) 5.25(b)
1997-Service
shares(o)....... (0.10) 14.59 0.21(f) 1.15(b) 5.85(b) 136.72(f) 94 1.54(b) 5.46(b)
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... 0.08 14.53 11.05 1.16 5.81 232.15 198,665 1.64 5.33
1996-Class B
shares(m)....... 0.50 14.53 6.24(f) 1.70(b) 5.16(b) 232.15 256 2.14(b) 4.72(b)
1996-
Institutional
shares.......... 0.07 14.52 11.55 0.65 6.35 232.15 54,254 1.11 5.89
1995-Class A
shares.......... 1.02 14.45 15.08 1.29 6.23 265.86 245,835 1.58 5.94
1995-
Institutional
shares(m)....... 0.36 14.45 4.42(f) 0.65(b) 6.01(b) 265.86 31,619 1.08(b) 5.58(b)
1994-Class A
shares.......... (1.64) 13.43 (4.49) 1.28 5.73 343.74 396,584 1.53 5.48
1993-Class A
shares.......... 0.38 15.07 10.75 1.30 5.78 313.88 675,662 1.55 5.53
1992-Class A
shares.......... 0.09 14.69 8.77 1.37 7.85 270.75 588,893 1.62 7.60
FOR THE PERIOD AUGUST 2, 1991(G) THROUGH OCTOBER 31,
- ----------------------------------------------------
1991-Class A
shares.......... 0.05 14.60 2.00 0.38(f) 1.72(f) 34.22(f) 388,744 0.44(f) 1.66(f)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MUNICIPAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Class A
Shares.......... $ 0.03 $14.40 2.57%(f) 0.85%(b) 4.70%(b) 90.46%(f) $ 58,033 1.51%(b) 4.04%(b)
1997-Class B
Shares.......... 0.03 14.40 2.18(f) 1.60(b) 3.92(b) 90.46(f) 617 2.01(b) 3.51(b)
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... 0.20 14.37 6.13 0.85 4.58 344.13 52,267 1.55 3.88
1996-Class B
shares(m)....... 0.34 14.37 4.40(f) 1.60(b) 3.55(b) 344.13 255 2.05(b) 3.10(b)
1995-Class A
shares.......... 1.09 14.17 13.79 0.76 4.93 335.55 53,797 1.49 4.20
1994-Class A
shares.......... (1.56) 13.08 (5.51) 0.45 5.28 357.54 47,373 1.55 4.18
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
- ---------------------------------------------------
1993-Class A
shares.......... 0.32 14.64 3.73(f) 0.00(b) 5.15(b) 99.99(f) 30,166 2.42(b) 2.73(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 except for the
Global Income and Municipal Income Funds.
(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 no 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.
(m) Institutional and Class B shares commenced operations on June 1, 1995 and
May 1, 1996, respectively.
(n) Includes balancing effect of calculating per share amounts.
(o) Service class shares commenced operations on March 12, 1997.
14
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of each Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that a Fund's
investment objectives will be achieved.
A Fund's duration approximates its price sensitivity to changes in interest
rates. Maturity measures the time until final payment is due; it takes no
account of the pattern of a security's cash flows over time. In computing
portfolio duration, a Fund will estimate the duration of obligations that are
subject to prepayment or redemption by the issuer taking into account the
influence of interest rates on prepayments and coupon flows. This method of
computing duration is known as "option-adjusted" duration. A Fund will not be
limited as to its maximum weighted average portfolio maturity or the maximum
stated maturity with respect to individual securities unless otherwise noted.
A Fund will deem a security to have met its minimum credit rating
requirement if the security receives the minimum required long-term rating (or
the equivalent short-term credit rating) at the time of purchase from at least
one rating organization (including, but not limited to, Standard & Poor's
Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's")) even
though it has been rated below the minimum rating by one or more other rating
organizations, or, if unrated by a rating organization, is determined by the
Investment Adviser to be of comparable quality. If a security satisfies a
Fund's minimum rating criteria at the time of purchase and is subsequently
downgraded below such rating, the Fund will not be required to dispose of such
security. If a downgrade occurs, the Investment Adviser will consider what
action, including the sale of such security, is in the best interest of a Fund
and its shareholders.
The Investment Adviser will have access to the research of, and proprietary
technical models developed by Goldman Sachs and will apply quantitative and
qualitative analysis in determining the appropriate allocations among the
categories of issuers and types of securities.
ADJUSTABLE RATE GOVERNMENT FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with low volatility of principal.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be in a range approximately equal to that of a six-month to one-
year U.S. Treasury security. In addition, under normal interest rate
conditions, the Fund's maximum duration will not exceed two years. The
approximate interest rate sensitivity of the Fund is comparable to a nine-
month note.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in U.S. Government Securities that are adjustable rate
mortgage pass-through securities and other U.S. Government Securities. The
remainder of the Fund's assets (up to 35%) may be invested in other U.S.
Government Securities, including mortgage pass-through securities, other
securities representing an interest in or collateralized by adjustable rate
and fixed rate mortgage loans ("Mortgage-Backed Securities") and repurchase
agreements collateralized by U.S. Government Securities. Substantially all of
the Fund's assets will be invested in U.S. Government Securities. 100% of the
Fund's portfolio will be invested in U.S. dollar-denominated securities.
15
<PAGE>
CREDIT QUALITY. The Fund invests in U.S. Government Securities and
repurchase agreements collateralized by such securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
SHORT DURATION GOVERNMENT FUND
OBJECTIVE. The Fund's investment objective is to provide a high level of
current income. Secondarily, the Fund may, in seeking current income, also
consider the potential for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the 2-year U.S. Treasury
security, plus or minus .5 years. In addition, under normal interest rate
conditions, the Fund's maximum duration will not exceed three years. The
approximate interest rate sensitivity of the Fund is comparable to a two-year
bond.
INVESTMENT SECTOR. The Fund invests, under normal market conditions, at
least 65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. Substantially all of the Fund's
assets will be invested in U.S. Government Securities. 100% of the Fund's
portfolio will be invested in U.S. dollar-denominated securities.
CREDIT QUALITY. The Fund invests in U.S. Government Securities and
repurchase agreements collateralized by such securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
SHORT DURATION TAX-FREE FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with relatively low volatility of
principal, that is exempt from regular federal income tax.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
three-year Municipal Bond Index, plus or minus .5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
four years. The approximate interest rate sensitivity of the Fund is
comparable to a three-year bond.
INVESTMENT SECTOR. The Fund invests, under normal conditions, at least 80%
of its net assets in fixed- income securities issued by or on behalf of
states, territories and possessions of the United States (including the
16
<PAGE>
District of Columbia) and the political subdivisions, agencies and
instrumentalities thereof ("Municipal Securities"), the interest on which is
exempt from regular federal income tax (i.e., excluded from gross income for
federal income tax purposes) and is not a tax preference item under the
federal alternative minimum tax. Under normal circumstances, the Fund's
investments in private activity bonds and taxable investments will not exceed,
in the aggregate, 20% of the Fund's net assets. The interest from certain
private activity bonds (including the Fund's distributions of such interest)
may be a preference item for purposes of the federal alternative minimum tax.
100% of the Fund's portfolio will be invested in U.S. dollar-denominated
securities.
CREDIT QUALITY. The Municipal Securities in which the Fund invests will be
rated, at the time of investment, at least BBB by S&P or Baa by Moody's.
Municipal Securities rated BBB or Baa are considered medium-grade obligations
with speculative characteristics and adverse economic conditions or changing
circumstances may weaken their issuers' capability to pay interest and repay
principal. The credit rating assigned to Municipal Securities by these rating
organizations or by the Investment Adviser may reflect the existence of
guarantees, letters of credit or other credit enhancement features available
to the issuers or holders of such Municipal Securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), interest rate
swaps, floors, caps and collars. The Fund may also employ other investment
techniques to seek to enhance returns, such as lending portfolio securities
and entering into repurchase agreements and other investment practices
described under "Investment Techniques."
While the Fund, under normal market conditions, invests substantially all of
its assets in Municipal Securities, the recognition of certain accrued market
discount income (if the Fund acquires Municipal Securities or other
obligations at a market discount), income from investments other than
Municipal Securities and any capital gains generated from the disposition of
investments, will result in taxable income. In addition to federal income tax,
shareholders may be subject to state, local or foreign taxes on distributions
of such income received from the Fund. See "Description of Securities."
GOVERNMENT INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with safety of principal.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
Mutual Fund Government/Mortgage Index, plus or minus one year. In addition,
under normal interest rate conditions, the Fund's maximum duration will not
exceed six years. The approximate interest rate sensitivity of the Fund is
comparable to a five-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. The remainder of the Fund's
assets may be invested in non-government securities such as privately issued
Mortgage-Backed Securities, Asset-Backed Securities and corporate securities.
100% of the Fund's portfolio will be invested in U.S. dollar-denominated
securities.
CREDIT QUALITY. The Fund's non-U.S. Government Securities will be rated, at
the time of investment, AAA by S&P or Aaa by Moody's.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of
17
<PAGE>
financial futures contracts, option contracts (including options on futures),
mortgage and interest rate swaps and interest rate floors, caps and collars.
The Fund may also employ other investment techniques to seek to enhance
returns, such as lending portfolio securities and entering into mortgage
dollar rolls, repurchase agreements and other investment practices described
under "Investment Techniques."
MUNICIPAL INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income that is exempt from regular federal income tax,
consistent with preservation of capital.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
fifteen-year Municipal Bond Index, plus or minus one year. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
twelve years. The approximate interest rate sensitivity of the Fund is
comparable to a fifteen-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
80% of its net assets in Municipal Securities, the interest on which is exempt
from regular federal income tax (i.e., excluded from gross income for federal
income tax purposes). The Fund may invest up to 100% of its net assets in
private activity bonds, the interest from certain of which (including the
Fund's distributions of such interest) may be a preference item for purposes
of the federal alternative minimum tax. 100% of the Fund's portfolio will be
invested in U.S. dollar-denominated securities.
CREDIT QUALITY. Under normal market conditions, the weighted average credit
quality of the Fund's portfolio will be equivalent to that of securities rated
AA by S&P or Aa by Moody's. All securities purchased by the Fund will be
rated, at the time of investment, at least BBB by S&P or Baa by Moody's.
Fixed-income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions
or changing circumstances may weaken their issuers' capability to pay interest
and repay principal. The credit rating assigned to Municipal Securities by
these rating organizations or by the Investment Adviser may reflect the
existence of guarantees, letters of credit or other credit enhancement
features available to the issuers or holders of such Municipal Securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), interest rate
swaps, interest rate floors, caps and collars. The Fund may also employ other
investment techniques to seek to enhance returns, such as lending portfolio
securities and entering into repurchase agreements and other investment
practices described under "Investment Techniques."
While the Fund, under normal market conditions, invests substantially all of
its assets in Municipal Securities, the recognition of certain accrued market
discount income (if the Fund acquires Municipal Securities or other
obligations at a market discount), income from investments other than
Municipal Securities and any capital gains generated from the disposition of
investments, will result in taxable income. In addition to federal income tax,
shareholders may be subject to state, local or foreign taxes on distributions
of such income received from the Fund. See "Description of Securities."
18
<PAGE>
CORE FIXED INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
total return consisting of capital appreciation and income that exceeds the
total return of the Lehman Brothers Aggregate Bond Index (the "Index").
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
Aggregate Bond Index, plus or minus one year. In addition, under normal
interest rate conditions, the Fund's maximum duration will not exceed six
years. The approximate interest rate sensitivity of the Fund is comparable to
a five-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in fixed-income securities, including U.S. Government
Securities, corporate debt securities, Mortgage-Backed Securities, and Asset-
Backed Securities. The Fund may invest up to 25% of its total assets in
obligations of domestic and foreign issuers which are denominated in
currencies other than the U.S. dollar, 10% of which may be invested in issuers
in countries with emerging markets and economies. A number of investment
strategies will be used to achieve the Fund's investment objective, including
market sector selection, determination of yield curve exposure, and issuer
selection. In addition, the Investment Adviser will attempt to take advantage
of pricing inefficiencies in the fixed-income markets.
The Index currently includes U.S. Government Securities and fixed-rate,
publicly issued, U.S. dollar-denominated fixed-income securities rated at
least BBB or Baa or in their equivalent ratings category by S&P or Moody's.
The securities currently included in the Index have at least one year
remaining to maturity; have an outstanding principal amount of at least $100
million; and are issued by the following types of issuers, with each category
receiving a different weighting in the Index: U.S. Treasury; agencies,
authorities or instrumentalities of the U.S. government; issuers of Mortgage-
Backed Securities; utilities; industrial issuers; financial institutions;
foreign issuers; and issuers of Asset-Backed Securities. The Index is a
trademark of Lehman Brothers. Inclusion of a security in the Index does not
imply an opinion by Lehman Brothers as to its attractiveness or
appropriateness for investment. Although Lehman Brothers obtains factual
information used in connection with the Index from sources which it considers
reliable, Lehman Brothers claims no responsibility for the accuracy,
completeness or timeliness of such information and has no liability to any
person for any loss arising from results obtained from the use of the Index
data.
CREDIT QUALITY. All U.S. dollar-denominated fixed-income securities
purchased by the Fund will be rated, at the time of investment, at least BBB
by S&P or Baa by Moody's. The non-U.S. dollar-denominated fixed-income
securities in which the Fund may invest will be rated, at the time of
investment, at least AA by S&P or Aa by Moody's. Fixed-income securities rated
BBB or Baa are considered medium-grade obligations with speculative
characteristics, and adverse economic conditions or changing circumstances may
weaken their issuers' capability to pay interest and repay principal.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign securities and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to
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hedge against currency exchange rate fluctuations or to seek to increase total
return. The Fund may invest in custodial receipts, Municipal Securities and
convertible securities. The Fund may also employ other investment techniques
to seek to enhance returns, such as lending portfolio securities and entering
into mortgage dollar rolls, repurchase agreements and other investment
practices, described under "Investment Techniques."
GLOBAL INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high total return, emphasizing current income and, to a lesser extent,
providing opportunities for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the J.P. Morgan Global
Government Bond Index (hedged), plus or minus 2.5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
7.5 years. The approximate interest rate sensitivity of the Fund is comparable
to a six-year bond.
INVESTMENT SECTOR. The Fund invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and enters into
transactions in foreign currencies. Under normal market conditions, the Fund
will (i) have at least 30% of its total assets, after considering the effect
of currency positions, denominated in U.S. dollars and (ii) invest in
securities of issuers in at least three countries. The Fund may also invest up
to 10% of its total assets in issuers in countries with emerging markets and
economies. The Fund seeks to meet its investment objective by pursuing
investment opportunities in foreign and domestic fixed-income securities
markets and by engaging in currency transactions to seek to enhance returns
and to seek to hedge its portfolio against currency exchange rate
fluctuations.
The fixed-income securities in which the Fund may invest include: (i) U.S.
Government Securities and custodial receipts therefor; (ii) securities issued
or guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, instrumentalities or by supranational entities (i.e.,
international organizations designated or supported by governmental entities
to promote economic reconstruction or development, such as the World Bank);
(iii) corporate debt securities; (iv) certificates of deposit and bankers'
acceptances issued or guaranteed by, or time deposits maintained at, U.S. and
foreign banks (and their branches wherever located) having total assets of
more than $1 billion; (v) commercial paper and (vi) Mortgage- and Asset-Backed
Securities.
CREDIT QUALITY. All securities purchased by the Fund will be rated, at the
time of investment, at least AA by S&P or Aa by Moody's. However, the Fund may
also invest in obligations of a sovereign issuer, denominated in the issuer's
own currency, rated at least A by S&P or Moody's. The Fund will invest at
least 50% of its total assets in securities rated, at the time of investment,
AAA by S&P or Aaa by Moody's.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign currencies and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to hedge against currency exchange rate fluctuations or to seek to
increase total return. While the Fund will have both long and short currency
positions, its net long and short foreign currency exposure will not exceed
the value
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of the Fund's total assets. To the extent that the Fund is fully invested in
foreign securities while also maintaining currency positions, it may be
exposed to greater combined risk. The Fund's net currency positions may expose
it to risks independent of its securities positions. The Fund may also employ
other investment techniques to seek to enhance returns, such as lending
portfolio securities and entering into mortgage dollar rolls, repurchase
agreements and other investment practices described under "Investment
Techniques."
The Fund may invest more than 25% of its total assets in the securities of
corporate and governmental issuers located in each of Canada, Germany, Japan,
and the United Kingdom as well as in the securities of U.S. issuers.
Concentration of the Fund's investments in such issuers will subject the Fund,
to a greater extent than if investment was more limited, to the risks of
adverse securities markets, exchange rates and social, political or economic
events which may occur in those countries. With respect to other countries,
not more than 25% of the Fund's total assets will be invested in the
securities of issuers in any other foreign country.
HIGH YIELD FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income. Secondarily, the Fund may, in seeking current
income, also consider the potential for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers High
Yield Bond Index, plus or minus 2.5 years. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed 7.5 years. The
approximate interest rate sensitivity of the Fund is comparable to a 6-year
bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in high yield, fixed income securities rated, at the
time of investment, below investment grade. Non-investment grade securities
are securities rated BB or below by S&P, Ba or below by Moody's, an equivalent
rating by another rating organization, or if unrated by a rating organization,
determined by the Investment Adviser to be of comparable quality. The Fund may
invest in all types of fixed income securities, including senior and
subordinated corporate debt obligations (such as bonds, debentures, notes and
commercial paper), convertible and non-convertible corporate debt obligations,
and preferred stock. The Fund may invest up to 25% of its total assets in
obligations of domestic and foreign issuers (including securities of issuers
located in countries with emerging markets and economies) which are
denominated in currencies other than the U.S. dollar. Under normal market
conditions, the Fund may invest up to 35% of its total assets in investment
grade fixed income securities, including U.S. Government Securities, Asset-
Backed and Mortgage-Backed Securities and corporate securities. The Fund may
also invest in common stocks, warrants, rights and other equity securities,
but will generally hold such equity investments only when debt or preferred
stock of the issuer of such equity securities is held by the Fund. A number of
investment strategies are used to seek to achieve the Fund's investment
objective, including market sector selection, determination of yield curve
exposure, and issuer selection. In addition, the Investment Adviser will
attempt to take advantage of pricing inefficiencies in the fixed-income
markets.
CREDIT QUALITY. The Fund invests primarily in high yield, fixed income
securities rated below investment grade. Non-investment grade securities
(commonly known as "junk bonds") tend to offer higher yields than higher rated
securities with similar maturities. Non-investment grade securities are,
however, considered speculative and generally involve greater price volatility
and greater risk of loss of principal and interest than higher rated
securities. See "Description of Securities." A description of the corporate
bond and preferred stock ratings is contained in Appendix B to the Additional
Statement.
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OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign securities and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps, and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to hedge against currency exchange rate fluctuations or to seek to
increase total return. The Fund may also employ other investment techniques to
seek to enhance returns, such as lending portfolio securities, and entering
into repurchase agreements and other investment practices described under
"Investment Techniques."
DESCRIPTION OF SECURITIES
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. Government Securities. Generally, these
securities include U.S. Treasury obligations and obligations issued or
guaranteed by U.S. government agencies, instrumentalities or sponsored
enterprises which are supported by (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie
Mae")), (b) the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Student Loan Marketing Association), (c) the discretionary
authority of the U.S. government to purchase certain obligations of the issuer
(such as the Federal National Mortgage Association ("Fannie Mae") and Federal
Home Loan Mortgage Corporation ("Freddie Mac")), or (d) only the credit of the
issuer. No assurance can be given that the U.S. government will provide
financial support to U.S. government agencies, instrumentalities or sponsored
enterprises in the future.
U.S. Government Securities also include Treasury receipts, zero coupon bonds
and other stripped U.S. Government Securities, where the interest and
principal components of stripped U.S. Government Securities are traded
independently. The most widely recognized program is the Separate Trading of
Registered Interest and Principal of Securities Program.
MORTGAGE-BACKED SECURITIES
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities
represent direct or indirect participations in, or are collateralized by and
payable from, mortgage loans secured by real property. Mortgagors can
generally prepay interest or principal on their mortgage whenever they choose.
Therefore, Mortgage-Backed Securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of
principal prepayments on the underlying loans. This can result in
significantly greater price and yield volatility than is the case with
traditional fixed-income securities. During periods of declining interest
rates, prepayments can be expected to accelerate, and thus impair a Fund's
ability to reinvest the returns of principal at comparable yields. Conversely,
in a rising interest rate environment, a declining prepayment rate will extend
the average life of many Mortgage-Backed Securities and prevent a Fund from
taking advantage of such higher yields.
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FIXED RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans pay interest
at fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed rate mortgage loans typically provide for monthly payments of
principal and interest in substantially equal installments for the term of the
mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain fixed-rate mortgage loans provide for a large final "balloon"
payment upon maturity.
ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). The Adjustable Rate Government Fund
will primarily, and the Short Duration Government, Government Income, Core
Fixed Income, Global Income and High Yield Funds may, invest in ARMs, which
are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed coupon rates. ARMs generally provide for a fixed
initial mortgage interest rate for a set period. Thereafter, the interest
rates are subject to periodic adjustments based on changes to a designated
benchmark index.
ARMs allow a Fund to participate in increases in interest rates through
periodic increases in the securities' coupon rates. During periods of
declining interest rates, coupon rates may readjust downward resulting in
lower yields to a Fund. Therefore, the value of an ARM is unlikely to rise
during periods of declining interest rates to the same extent as fixed-rate
securities. Interest rate declines may result in accelerated prepayment of
mortgages with the result that proceeds from prepayments will be reinvested at
lower interest rates. During periods of rising interest rates, changes in the
coupon rate will lag behind changes in the market rate. ARMs are also
typically subject to maximum increases and decreases in the interest rate
adjustment which can be made on any one adjustment date, in any one year, or
during the life of the security. In the event of dramatic increases or
decreases in prevailing market interest rates, the value of a Fund's
investments in ARMs may fluctuate more substantially since these limits may
prevent the security from fully adjusting its interest rate to the prevailing
market rates.
U.S. GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. Certain Mortgage-
Backed Securities are issued or guaranteed by the U.S. government, its
agencies, instrumentalities or sponsored enterprises. Such issuers include,
but are not limited to, Ginnie Mae, Fannie Mae and Freddie Mac. See "U.S.
Government Securities."
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES. The Government Income, Core
Fixed Income, Global Income and High Yield Funds may invest in Mortgage-Backed
Securities issued or sponsored by non-governmental entities. Privately issued
Mortgage-Backed Securities are generally backed by pools of conventional
(i.e., non-government guaranteed or insured) mortgage loans. Since such
Mortgage-Backed Securities normally are not guaranteed by an entity having the
credit standing of Ginnie Mae, Fannie Mae or Freddie Mac, in order to receive
a high quality rating from the rating organizations (i.e., S&P or Moody's),
they normally are structured with one or more types of "credit enhancement."
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. The Adjustable Rate Government, Short Duration Government,
Government Income, Core Fixed Income, Global Income and High Yield Funds may
also invest in multiple class securities, including collateralized mortgage
obligations ("CMOs") and Real Estate Mortgage Investment Conduit ("REMIC")
pass-through or participation certificates. CMOs provide an investor with a
specified interest in the cash flow from a pool of underlying mortgages or of
other Mortgage-Backed Securities. CMOs are issued in multiple classes, each
with a specified fixed or floating interest rate and a final scheduled
distribution date. In most cases, payments of principal are applied to the CMO
classes in the order of their respective stated maturities, so that no
principal payments will be made on a CMO class until all other classes having
an earlier stated maturity date are paid in full. A REMIC is a CMO that
qualifies for special tax treatment under the Internal Revenue Code of 1986,
as amended (the "Code"), and invests in certain mortgages principally secured
by interests in real property and other permitted investments. The Funds do
not intend to purchase residual interests in REMICs.
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STRIPPED MORTGAGE-BACKED SECURITIES. The Adjustable Rate Government, Short
Duration Government, Government Income, Core Fixed Income, Global Income and
High Yield Funds may invest in Stripped Mortgage-Backed Securities ("SMBS"),
which are derivative multiple class Mortgage-Backed Securities. SMBS are
usually structured with two different classes; one that receives 100% of the
interest payments and the other that receives 100% of the principal payments
from a pool of mortgage loans. If the underlying mortgage loans experience
different than anticipated prepayments of principal, a Fund may fail to fully
recoup its initial investment in these securities. The market value of the
class consisting entirely of principal payments generally is unusually
volatile in response to changes in interest rates. The yields on a class of
SMBS that receives all or most of the interest from mortgage loans are
generally higher than prevailing market yields on other Mortgage-Backed
Securities because their cash flow patterns are more volatile and there is a
greater risk that the initial investment will not be fully recouped.
ASSET-BACKED SECURITIES
The Government Income, Core Fixed Income, Global Income and High Yield Funds
may invest in Asset-Backed Securities. The principal and interest payments on
Asset-Backed Securities are collateralized by pools of assets such as auto
loans, credit card receivables, leases, installment contracts and personal
property. Such asset pools are securitized through the use of special purpose
trusts or corporations. Principal and interest payments may be credit enhanced
by a letter of credit, a pool insurance policy or a senior/subordinated
structure.
MUNICIPAL SECURITIES
GENERAL. Municipal Securities in which the Short Duration Tax-Free and
Municipal Income Funds and, to a limited extent, the Core Fixed Income and
High Yield Funds, invest consist of bonds, notes, commercial paper and other
instruments (including participation interests in such securities) issued by
or on behalf of states, territories and possessions of the United States
(including the District of Columbia) and their political subdivisions,
agencies or instrumentalities, the interest on which, in the opinion of bond
counsel for the issuers or counsel selected by the Investment Adviser, is
exempt from regular federal income tax (i.e., excluded from gross income for
federal income tax purposes but not necessarily exempt from federal
alternative minimum tax or from state or local taxes). Such securities may pay
fixed, variable or floating rates of interest. Municipal Securities are often
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities such as bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works.
Other public purposes for which Municipal Securities may be issued include
refunding outstanding obligations, obtaining funds for general operating
expenses, and obtaining funds to lend to other public institutions and
facilities.
PRIVATE ACTIVITY BONDS. Municipal Securities also include "private activity
bonds" or industrial development bonds, which are issued by or on behalf of
public authorities to obtain funds for such projects as privately-operated
housing facilities, airport, mass transit or port facilities and sewage
disposal. In addition, proceeds of certain industrial development bonds are
used for constructing, equipping, repairing or improving privately operated
industrial or commercial facilities. The Short Duration Tax-Free and Municipal
Income Funds' distributions attributable to the interest income from private
activity bonds may subject certain investors to the federal alternative
minimum tax.
MUNICIPAL LEASES AND CERTIFICATES OF PARTICIPATION. A municipal lease is an
obligation in the form of a lease or installment purchase which is issued by a
state or local government to acquire equipment and facilities. Certificates of
participation represent undivided interests in municipal leases, installment
purchase agreements or
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other instruments. The primary risk associated with municipal lease
obligations and certificates of participation is that the governmental lessee
will fail to appropriate funds to enable it to meet its payment obligations
under the lease. Although the obligations may be secured by the leased
equipment or facilities, the disposition of the property in the event of non-
appropriation or foreclosure might prove difficult, time consuming and costly,
and result in a delay in recovering or the failure to fully recover a Fund's
original investment. To the extent that a Fund invests in unrated municipal
leases or participates in such leases, the Trustees will monitor on an ongoing
basis the credit quality rating and risk of cancellation of such unrated
leases. Certain municipal lease obligations and certificates of participation
may be deemed illiquid for the purpose of a Fund's limitation on investments
in illiquid securities.
PRE-REFUNDED MUNICIPAL SECURITIES. The interest and principal payments on
pre-refunded Municipal Securities are typically paid from the cash flow
generated from an escrow fund consisting of U.S. Government Securities. These
payments have been "pre-refunded" using the escrow fund.
INSURED SECURITIES. "Insured" Municipal Securities are those for which
scheduled payments of interest and principal are guaranteed by a private (non-
governmental) insurance company. The insurance entitles a Fund to receive only
the face or par value of the securities held by the Fund. The insurance does
not guarantee the market value of the Municipal Securities or the net asset
value of a Fund's shares.
AUCTION RATE SECURITIES. Auction rate Municipal Securities permit the holder
to sell the securities in an auction at par value at specified intervals. The
dividend or interest is typically reset by "Dutch" auction in which bids are
made by broker-dealers and other institutions for a certain amount of
securities at a specified minimum yield. The rate set by the auction is the
lowest interest or dividend rate that covers all securities offered for sale.
While this process is designed to permit auction rate securities to be traded
at par value, there is the risk that an auction will fail due to insufficient
demand for the securities. A Fund will take the time remaining until the next
scheduled auction date into account for purposes of determining the
securities' duration.
CORPORATE DEBT OBLIGATIONS
The Government Income, Core Fixed Income, Global Income and High Yield Funds
may invest in corporate debt obligations. In addition to obligations of
corporations, corporate debt obligations include securities issued by banks
and other financial institutions. Corporate debt obligations are subject to
the risk of an issuer's inability to meet principal and interest payments on
the obligations.
CONVERTIBLE SECURITIES
The Core Fixed Income and High Yield Funds may invest in convertible
securities, including debt obligations, and for High Yield Fund preferred
stock, of an issuer convertible at a stated exchange rate into common stock of
the issuer. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. As with all debt
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates
decline. However, when the market price of the common stock underlying a
convertible security exceeds the conversion price, the price of the
convertible security tends to reflect the market price of the underlying
common stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus
may not depreciate to the same extent as the underlying common stock.
Convertible securities in which a Fund invests are subject to the same rating
criteria as its other investments in fixed-income securities.
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PREFERRED STOCK, WARRANTS AND RIGHTS
The High Yield Fund may invest in preferred stock, warrants and rights.
Preferred stocks are securities that represent an ownership interest providing
the holder with claims on the issuer's earnings and assets before common stock
owners but after bond owners. Unlike debt securities, the obligations of an
issuer of preferred stock, including dividend and other payment obligations,
may not typically be accelerated by the holders of such preferred stock on the
occurrence of an event of default (such as a covenant default or filing of a
bankruptcy petition) or other non-compliance by the issuer with the terms of
the preferred stock. Often, however, on the occurrence of any such event of
default or non-compliance by the issuer, preferred stockholders will be
entitled to gain representation on the issuer's board of directors or increase
their existing board representation. In addition, preferred stockholders may
be granted voting rights with respect to certain issues on the occurrence of
any event of default.
Warrants and other rights are options to buy a stated number of shares of
common stock at a specified price at any time during the life of the warrant.
The holders of warrants and rights have no voting rights, receive no dividends
and have no rights with respect to the assets of the issuer.
FOREIGN INVESTMENTS
FOREIGN SECURITIES. The Global Income Fund will, and the Core Fixed Income
and High Yield Funds may, invest in fixed-income securities of foreign issuers
denominated in any currency. However, the Core Fixed Income and High Yield
Funds will limit their investments in non-U.S. dollar-denominated fixed-income
securities to 25% of their total assets. This may offer potential benefits
that are not available from investing exclusively in U.S. dollar-denominated
domestic issues. Foreign countries may have economic policies or business
cycles different from those of the U.S. and markets for foreign fixed-income
securities do not necessarily move in a manner parallel to U.S. markets.
Investing in the securities of foreign issuers involves risks that are not
typically associated with investing in fixed-income securities of domestic
issuers quoted in U.S. dollars. Such investments may be affected by changes in
currency rates, changes in foreign or U.S. laws or restrictions applicable to
such investments and in exchange control regulations (e.g., currency
blockage). A decline in the exchange rate of the currency (i.e., weakening of
the currency against the U.S. dollar) in which a portfolio security is quoted
or denominated relative to the U.S. dollar would reduce the value of the
portfolio security. In addition, if the currency in which a Fund receives
dividends, interest or other payments declines in value against the U.S.
dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends. In addition, clearance and
settlement procedures may be different in foreign countries and, in certain
markets, such procedures have on occasion been unable to keep pace with the
volume of securities transactions, making it more difficult to conduct such
transactions.
The Core Fixed Income, Global Income and High Yield Funds may invest in an
issuer domiciled in one country yet issuing the security in the currency of
another country. The Funds may also invest in debt securities denominated in
the European Currency Unit ("ECU"), which is a "basket" consisting of
specified amounts in the currencies of certain of the twelve member states of
the European Community. The specific amounts of currencies comprising the ECU
may be adjusted by the Council of Ministers of the European Community from
time to time to reflect changes in relative values of the underlying
currencies. In addition, the Funds may invest in securities denominated in
other currency "baskets."
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
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issuer than about a U.S. issuer. In addition, there is generally less
government regulation of foreign markets, companies and securities dealers
than in the U.S. Foreign securities markets may have substantially less volume
than U.S. securities markets and securities of many foreign issuers may be
less liquid and more volatile than securities of comparable domestic issuers.
Furthermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation or confiscatory taxation, imposition of
withholding or other taxes on dividend or interest payments (or, in some
cases, capital gains), limitations on the removal of funds or other assets of
a Fund, political or social instability or diplomatic developments which could
affect investments in those countries.
FOREIGN GOVERNMENT SECURITIES. The Core Fixed Income, Global Income and High
Yield Funds may invest in debt obligations of foreign governments and
governmental agencies, including those of emerging countries. Investment in
sovereign debt obligations involves special risks not present in debt
obligations of corporate issuers. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling
to repay principal or interest when due in accordance with the terms of such
debt, and a Fund may have limited recourse in the event of a default. Periods
of economic uncertainty may result in the volatility of market prices of
sovereign debt, and in turn a Fund's net asset value, to a greater extent than
the volatility inherent in debt obligations of U.S. issuers. A sovereign
debtor's willingness or ability to repay principal and pay interest in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's
policy toward international lenders and the political constraints to which a
sovereign debtor may be subject.
EMERGING MARKETS. The Core Fixed Income and Global Income Funds may invest
up to 10% and the High Yield Fund may invest up to 25% of their total assets
in securities of issuers located in countries with emerging economies or
securities markets ("emerging markets"). Political and economic structures in
many emerging markets may be undergoing significant evolution and rapid
development, and emerging markets may lack the social, political and economic
stability characteristics of more developed countries. As a result, the risks
relating to investments in foreign securities described above, including the
possibility of nationalization, expropriation and confiscatory taxation, may
be heightened. In addition, unanticipated political and social developments
may affect the value of the Fund's investments in emerging markets and the
availability to the Fund of additional investments in such countries. The
small size and inexperience of the securities markets in certain emerging
markets and the limited volume of trading in securities in those countries may
make the Fund's investments in such countries less liquid and more volatile
than investments in countries with more developed securities markets (such as
the U.S., Japan and most Western European countries). See the Additional
Statement for further information regarding a Fund's investments in emerging
markets.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers by the
Core Fixed Income, Global Income and High Yield Funds will usually involve
currencies of foreign countries, and because the Funds may have currency
exposure independent of their securities positions, the value of the assets of
a Fund as measured in U.S. dollars will be affected by changes in foreign
currency exchange rates. A Fund may, to the extent it invests in foreign
securities, purchase or sell forward foreign currency exchange contracts for
hedging purposes and to seek to protect against anticipated changes in future
foreign currency exchange rates. A Fund also may enter into such contracts to
seek to increase total return when the Investment Adviser anticipates that the
foreign currency will appreciate or depreciate in value, but securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio. When entered into to
seek to increase total return, forward foreign currency exchange contracts are
considered speculative. The Funds may also engage in cross-hedging by using
forward contracts in a currency different from that in which the hedged
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security is denominated or quoted if the Investment Advisers determine that
there is a pattern of correlation between the two currencies. If a Fund enters
into a forward foreign currency exchange contract to buy foreign currency for
any purpose or sell foreign currency to seek to increase total return, the
Fund will be required to place cash or liquid assets in a segregated account
with the Fund's custodian in an amount equal to the value of the Fund's total
assets committed to the consummation of the forward contract. A Fund will
incur costs in connection with conversions between various currencies. A Fund
may hold foreign currency received in connection with investments in foreign
securities when, in the judgment of the Investment Adviser, it would be
beneficial to convert such currency into U.S. dollars at a later date, based
on anticipated changes in the relevant exchange rate.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's net asset value to fluctuate.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by the intervention of U.S.
or foreign governments or central banks, or the failure to intervene, or by
currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of a Fund's total assets, adjusted to
reflect the Fund's net position after giving effect to currency transactions,
is denominated or quoted in the currencies of foreign countries, the Fund will
be more susceptible to the risk of adverse economic and political developments
within those countries.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available for
currency instruments traded on an exchange. Such contracts are subject to the
risk that the counterparty to the contract will default on its obligations.
Since these contracts are not guaranteed by an exchange or clearinghouse, a
default on a contract would deprive a Fund of unrealized profits, transaction
costs or the benefits of a currency hedge or force a Fund to cover its
purchase or sale commitments, if any, at the current market price. A Fund will
not enter into forward foreign currency exchange contracts, currency swaps or
other privately negotiated currency instruments unless the credit quality of
the unsecured senior debt or the claims-paying ability of the counterparty is
considered to be investment grade by the Investment Adviser.
The Core Fixed Income, Global Income and High Yield Fund's use of foreign
currency management techniques in emerging markets may be limited. Due to the
limited market for these instruments in emerging markets, the Investment
Adviser does not currently anticipate that a significant portion of the Fund's
currency exposure in emerging markets, if any, will be covered by such
instruments. For a discussion of such instruments and the risks associated
with their use, see "Investment Objective and Policies" in the Additional
Statement.
STRUCTURED SECURITIES
The Core Fixed Income, Global Income and High Yield Funds may invest in
structured securities. The value of the principal of and/or interest on such
securities is determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The
interest rate or the principal amount payable upon maturity or redemption may
be increased or decreased depending upon changes in the applicable Reference.
The terms of the structured securities may provide that in certain
circumstances no principal is due at maturity and, therefore, result in the
loss of a Fund's investment. Structured securities may be positively or
negatively indexed, so that appreciation of the Reference may produce an
increase or decrease in the interest rate or value of the security at
maturity. In
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addition, changes in the interest rates or the value of the security at
maturity may be a multiple of changes in the value of the Reference.
Consequently, structured securities may entail a greater degree of market risk
than other types of fixed-income securities. Structured securities may also be
more volatile, less liquid and more difficult to accurately price than less
complex securities.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon, deferred interest and capital
appreciation bonds. These are securities issued at a discount from their face
value because interest payments are typically postponed until maturity. The
amount of the discount rate varies depending on factors including the time
remaining until maturity, prevailing interest rates, the security's liquidity
and the issuer's credit quality. These securities also may take the form of
debt securities that have been stripped of their interest payments. Each Fund
may also invest in pay-in-kind securities which are securities that have
interest payable by the delivery of additional securities. A portion of the
discount with respect to stripped tax-exempt securities or their coupons may
be taxable. The market prices of zero coupon, deferred interest, pay-in-kind
and capital appreciation bonds generally are more volatile than the market
prices of interest-bearing securities and are likely to respond to a greater
degree to changes in interest rates than interest-bearing securities having
similar maturities and credit quality. A Fund's investments in zero coupon,
deferred interest, pay-in-kind and capital appreciation bonds or stripped
securities may require the Fund to sell certain of its portfolio securities to
generate sufficient cash to satisfy certain income distribution requirements.
See "Taxation" in the Additional Statement.
RISK FACTORS
INTEREST RATE RISK. When interest rates decline, the market value of fixed
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed-income securities tends to decline. Volatility of a
security's market value will differ depending upon the security's duration,
the issuer and the type of instrument.
DEFAULT RISK/CREDIT RISK. Investments in fixed-income securities are subject
to the risk that the issuer could default on its obligations and a Fund could
sustain losses on such investments. A default could impact both interest and
principal payments.
CALL RISK AND EXTENSION RISK. Fixed-income securities may be subject to both
call risk and extension risk. Call risk (i.e., where the issuer exercises its
right to pay principal on an obligation earlier than scheduled) causes cash
flow to be returned earlier than expected. This typically results when
interest rates have declined and a Fund will suffer from having to reinvest in
lower yielding securities. Extension risk (i.e., where the issuer exercises
its right to pay principal on an obligation later than scheduled) causes cash
flows to be returned later than expected. This typically results when interest
rates have increased and a Fund will suffer from the inability to invest in
higher yielding securities. Certain types of U.S. Government, Asset-Backed,
corporate, foreign, Mortgage-Backed and Municipal Securities have call and/or
extension risk.
The investment characteristics of Mortgage-Backed Securities and Asset-
Backed Securities differ from those of traditional fixed-income securities
because they generally have both call risk (also known as prepayment risk) and
extension risk. Homeowners have the option to prepay their mortgage.
Therefore, the duration of a security backed by home mortgages can either
shorten (call risk) or lengthen (extension risk). Investors are
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exposed to the fluctuating principal and interest payments associated with
such securities. In general, if interest rates on new mortgage loans fall
sufficiently below the interest rates on existing outstanding mortgage loans,
the rate of prepayment would be expected to increase. Conversely, if mortgage
loan interest rates rise above the interest rates on existing outstanding
mortgage loans, the rate of prepayment would be expected to decrease.
ARMs also have the risk of prepayments, which will have a greater impact on
the Adjustable Rate Government Fund. The rate of principal prepayments with
respect to ARMs has fluctuated in recent years. As with fixed rate mortgage
loans, ARMs may be subject to a greater rate of principal repayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, ARMs could be subject to higher prepayment rates (than if
prevailing interest rates remain constant or increase) because the
availability of low fixed rate mortgages may encourage mortgagors to refinance
their ARMs to "lock-in" a fixed-rate mortgage. Conversely, if prevailing
interest rates rise significantly, ARMs may prepay slower. As with fixed-rate
mortgages, ARM prepayment rates vary in both stable and changing interest rate
environments. There are certain ARMs where the homeowner's payments do not
fully cover interest, so the principal balance increases over time. These
"negative amortizing" ARMs may be subject to greater default risk.
DERIVATIVE MORTGAGE-BACKED SECURITIES. Because derivative Mortgage-Backed
Securities (such as principal-only (POs), interest-only (IOs) or inverse
floating-rate securities) are more exposed to mortgage prepayments, they
generally involve a greater amount of risk. Small changes in prepayments can
significantly impact the cash flow and the market value of these securities.
The risk of faster than anticipated prepayments generally adversely affects
IOs, super floaters and premium priced Mortgage-Backed Securities. The risk of
slower than anticipated prepayments generally adversely affects POs, floating-
rate securities subject to interest rate caps, support tranches and discount
priced Mortgage-Backed Securities. In addition, particular derivative
securities may be leveraged such that their exposure (i.e., price sensitivity)
to interest rate and/or prepayment risk is magnified.
TAX RISK OF MUNICIPAL SECURITIES. Due to Municipal Securities' tax-exempt
status, their yields and market values may be more adversely impacted by
changes in tax rates and policies than taxable fixed-income securities.
Because interest income from Municipal Securities is not subject to regular
federal income taxation, the attractiveness of Municipal Securities in
relation to other investment alternatives is affected by changes in federal
income tax rates applicable to, or the continuing federal income tax-exempt
status of, such interest income. Any proposed or actual changes in such rates
or exempt status, therefore, can significantly affect the demand for and
supply, liquidity and marketability of Municipal Securities, which could in
turn affect a Fund's ability to acquire and dispose of Municipal Securities at
desirable yield and price levels.
RISKS OF INVESTING IN NON-INVESTMENT GRADE FIXED-INCOME SECURITIES. Non-
investment grade fixed- income securities are considered predominantly
speculative by traditional investment standards. In some cases, these
obligations may be highly speculative and have poor prospects for reaching
investment grade standing. Non-investment grade fixed-income securities and
unrated securities of comparable credit quality (commonly known as "junk
bonds") are subject to the increased risk of an issuer's inability to meet
principal and interest obligations. These securities, also referred to as high
yield securities, may be subject to greater price volatility due to such
factors as specific corporate developments, interest rate sensitivity,
negative perceptions of the junk bond markets generally and less secondary
market liquidity.
Non-investment grade fixed-income securities are often issued in connection
with a corporate reorganization or restructuring or as part of a merger,
acquisition, takeover or similar event. They are also issued by less
established companies seeking to expand. Such issuers are often highly
leveraged and generally less able than
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more established or less leveraged entities to make scheduled payments of
principal and interest in the event of adverse developments or business
conditions.
The market value of non-investment grade fixed-income securities tends to
reflect individual corporate developments to a greater extent than that of
higher rated securities which react primarily to fluctuations in the general
level of interest rates. As a result, a Fund's ability to achieve its
investment objectives may depend to a greater extent on the Investment
Adviser's judgment concerning the creditworthiness of issuers than funds which
invest in higher-rated securities. Issuers of non-investment grade fixed-
income securities may not be able to make use of more traditional methods of
financing and their ability to service debt obligations may be more adversely
affected than issuers of higher-rated securities by economic downturns,
specific corporate developments or the issuer's inability to meet specific
projected business forecasts. Negative publicity about the junk bond market
and investor perceptions regarding lower rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
A holder's risk of loss from default is significantly greater for non-
investment grade fixed-income securities than is the case for holders of other
debt securities because such non-investment grade securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by a Fund in defaulted securities poses
additional risk of loss should nonpayment of principal and interest continue
in respect of such securities. Even if such securities are held to maturity,
recovery by a Fund of its initial investment and any anticipated income or
appreciation is uncertain.
The secondary market for non-investment grade fixed-income securities is
concentrated in relatively few market makers and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as, and is more volatile than, the secondary market for higher-rated
securities. In addition, market trading volume for high yield fixed-income
securities is generally lower and the secondary market for such securities
could contract under adverse market or economic conditions, independent of any
specific adverse changes in the condition of a particular issuer. These
factors may have an adverse effect on the market price and a Fund's ability to
dispose of particular portfolio investments. A less liquid secondary market
also may make it more difficult for a Fund to obtain precise valuations of the
high yield securities in its portfolio.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities
and, therefore, may not fully reflect the true risks of an investment. In
addition, credit rating agencies may or may not make timely changes in a
rating to reflect changes in the economy or in the conditions of the issuer
that affect the market value of the security. Consequently, credit ratings are
used only as a preliminary indicator of investment quality. Investments in
non-investment grade and comparable unrated obligations will be more dependent
on the Investment Adviser's credit analysis than would be the case with
investments in investment-grade debt obligations. The Investment Adviser
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic conditions, its operating
history and the current trend of earnings. The Investment Adviser continually
monitors the investments in a Fund's portfolio and evaluates whether to
dispose of or to retain non-investment grade and comparable unrated securities
whose credit ratings or credit quality may have changed.
OTHER RISKS. Floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced below market rates if a designated
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interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to lower prices in the event of an
unfavorable change in the spread between two designated interest rates.
Asset-Backed Securities present certain credit risks that are not presented
by Mortgage-Backed Securities because Asset-Backed Securities generally do not
have the benefit of a security interest in collateral that is comparable to
mortgage assets. There is the possibility that, in some cases, recoveries on
repossessed collateral may not be available to support payments on these
securities.
FOREIGN RISKS. See "Foreign Securities" for a description of the risks of
investing in foreign securities and currencies.
INVESTMENT TECHNIQUES
MORTGAGE DOLLAR ROLLS. The Adjustable Rate Government, Short Duration
Government, Government Income, Core Fixed Income and Global Income Funds may
enter into mortgage "dollar rolls" in which a Fund sells securities for
delivery in the current month and simultaneously contracts with the same
counterparty to repurchase substantially similar (same type, coupon and
maturity) but not identical securities on a specified future date. During the
roll period, the Fund loses the right to receive principal and interest paid
on the securities sold. However, the Fund would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase or fee income plus the interest earned
on the cash proceeds of the securities sold until the settlement date for the
forward purchase. Unless such benefits exceed the income, capital appreciation
and gain or loss due to mortgage prepayments that would have been realized on
the securities sold as part of the mortgage dollar roll, the use of this
technique will diminish the investment performance of the Fund . Successful
use of mortgage dollar rolls depends upon the Investment Adviser's ability to
predict correctly interest rates and mortgage prepayments. There is no
assurance that mortgage dollar rolls can be successfully employed. The Fund
will hold and maintain in a segregated account until the settlement date cash
or liquid assets in an amount equal to the forward purchase price. For
financial reporting and tax purposes, each Fund treats mortgage dollar rolls
as two separate transactions; one involving the purchase of a security and a
separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
OPTIONS ON SECURITIES AND SECURITIES INDICES. Each Fund may write (sell)
covered call and put options and purchase put and call options on any
securities in which it may invest or on any securities index composed of
securities in which it may invest. The writing and purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities
transactions. The use of options to seek to increase total return involves the
risk of loss if the Investment Adviser is incorrect in its expectation of
fluctuations in securities prices or interest rates. The successful use of
options for hedging purposes also depends in part on the ability of the
Investment Adviser to manage future price fluctuations and the degree of
correlation between the options and securities markets. If the Investment
Adviser is incorrect in its expectation of changes in securities prices or
determination of the correlation between the securities indices on which
options are written and purchased and the securities in a Fund's investment
portfolio, the investment performance of the Fund will be less favorable than
it would have been in the absence of such options transactions. The writing of
options could increase a Fund's portfolio turnover rate and, therefore,
associated brokerage commissions or spreads.
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OPTIONS ON FOREIGN CURRENCIES. The Core Fixed Income, Global Income and High
Yield Funds may, to the extent they invest in foreign securities, purchase and
sell (write) put and call options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of foreign portfolio
securities and against increases in the U.S. dollar cost of foreign securities
to be acquired. In addition, the Core Fixed Income, Global Income and High
Yield Funds may use options on currency to cross-hedge, which involves writing
or purchasing options on one currency to hedge against changes in exchange
rates for a different currency, if there is a pattern of correlation between
the two currencies. As with other kinds of option transactions, however, the
writing of an option on foreign currency will constitute only a partial hedge,
up to the amount of the premium received. If an option that a Fund has written
is exercised, the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of exchange rate
movements adverse to a Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs. In addition to purchasing put
and call options for hedging purposes, a Fund may purchase call or put options
on currency to seek to increase total return when the Investment Adviser
anticipates that the currency will appreciate or depreciate in value, but the
securities quoted or denominated in that currency do not present attractive
investment opportunities and are not held in the Fund's portfolio. When
purchased or sold to seek to increase total return, options on currencies are
considered speculative. Options on foreign currencies to be written or
purchased by the Funds will be traded on U.S. and foreign exchanges or over-
the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To seek to increase
total return or to hedge against changes in interest rates or securities
prices, or in the case of the Core Fixed Income, Global Income and High Yield
Funds, currency exchange rates, a Fund may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. Each Fund may also enter into closing purchase and sale
transactions with respect to any such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), foreign currencies, in the case of the Core Fixed Income, Global
Income and High Yield Funds, securities indices and other financial
instruments and indices. A Fund will engage in futures and related options
transactions only for bona fide hedging purposes as defined in regulations of
the Commodity Futures Trading Commission or to seek to increase total return
to the extent permitted by such regulations. A Fund may not purchase or sell
futures contracts or purchase or sell related options to seek to increase
total return, except for closing purchase or sale transactions, if immediately
thereafter the sum of the amount of initial margin deposits and premiums paid
on a Fund's outstanding positions in futures and related options entered into
for the purpose of seeking to increase total return would exceed 5% of the
market value of a Fund's net assets. These transactions involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
segregate and maintain cash or liquid assets with a value equal to the amount
of the Fund's obligations.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Techniques--Futures Contracts and Options on Futures Contracts" in
the Additional Statement. Thus, while a Fund may benefit from the use of
futures and options on futures, unanticipated changes in interest rates,
securities prices or currency exchange rates may result in a poorer overall
performance than if the Fund had not entered into any futures contracts or
options transactions. Because perfect correlation between a futures position
and portfolio position that is intended to be protected is impossible to
achieve, the desired protection may not be obtained and a Fund may be exposed
to risk of loss. The loss incurred by a Fund in entering into futures
contracts and in writing call options on futures is potentially unlimited and
may exceed the amount of the premium received. Futures markets are highly
volatile and the use of futures may increase the volatility of a Fund's net
asset value. The profitability of a Fund's trading in futures to seek to
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increase total return depends upon the ability of the Investment Adviser to
correctly analyze the futures markets. In addition, because of the low margin
deposits normally required in futures trading, a relatively small price
movement in a futures contract may result in substantial losses to a Fund.
Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single
day.
CURRENCY SWAPS. The Core Fixed Income, Global Income and High Yield Funds
may enter into currency swaps for hedging purposes or to seek to increase
total return. Currency swaps involve the exchange by a Fund with another party
of their respective rights to make or receive payments in specified
currencies. Currency swaps usually involve the delivery of a gross payment
stream in one designated currency in exchange for the gross payment stream in
another designated currency. Therefore, the entire payment stream under a
currency swap is subject to the risk that the other party to the swap will
default on its contractual delivery obligations. A Fund will not enter into
swap transactions unless the unsecured commercial paper, senior debt or
claims-paying ability of the other party thereto is rated either AA or A-1 or
better by S&P or Aa or P-1 or better by Moody's, or, if unrated by such rating
organizations, determined to be of comparable quality by the Investment
Adviser. The use of currency swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Investment Adviser is
incorrect in its forecasts of currency exchange rates, the investment
performance of a Fund would be less favorable than it would have been if this
investment technique were not used. The staff of the SEC currently take the
position that swaps are illiquid and thus subject to a Fund's limitation on
investments in illiquid securities.
RISKS OF DERIVATIVE TRANSACTIONS. A Fund's transactions, if any, in options,
futures, options on futures, swap transactions, interest rate caps, floors and
collars, structured securities, inverse floating-rate securities and currency
forward contracts involve certain risks, including a possible lack of
correlation between changes in the value of hedging instruments and the
portfolio assets being hedged, the potential illiquidity of the markets for
derivative instruments, the risks arising from the margin requirements and
related leverage factors associated with such transactions. The use of these
management techniques to seek to increase total return may be regarded as a
speculative practice and involves the risk of loss if the Investment Adviser
is incorrect in its expectation of fluctuations in securities prices, interest
rates or currency prices. A Fund's use of certain derivative transactions may
be limited by the requirements of the Code for qualification as a regulated
investment company.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. Each Fund may purchase when-
issued securities. When-issued transactions arise when securities are
purchased by a Fund with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous price and yield to
the Fund at the time of entering into the transaction. Each Fund may also
purchase securities on a forward commitment basis; that is, make contracts to
purchase securities for a fixed price at a future date beyond the customary
three-day settlement. A Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to settlement date,
cash or liquid assets in an amount sufficient to meet the purchase price.
Alternatively, each Fund may enter into offsetting contracts for the forward
sale of other securities that it owns. The purchase of securities on a when-
issued or forward commitment basis involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date. Although a
Fund would generally purchase securities on a when-issued or forward
commitment basis with the intention of acquiring securities for its portfolio,
a Fund may dispose of when-issued securities or forward commitments prior to
settlement if the Investment Adviser deems it appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES. A Fund may not invest more than 15% of
its net assets in illiquid investments, which includes securities (both
foreign and domestic) that are not readily marketable, swap transactions,
certain SMBS, certain municipal leases and participation interests, repurchase
agreements maturing
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in more than seven days, time deposits with a notice or demand period of more
than seven days and certain restricted securities, unless it is determined,
based upon the continuing review of the trading markets for a specific
restricted security, that such restricted security is eligible for resale
under Rule 144A under the Securities Act of 1933 and, therefore, is liquid.
The Trustees have adopted guidelines and delegated to the Investment Adviser
the daily function of determining and monitoring the liquidity of portfolio
securities. The Trustees, however, retain oversight focusing on factors such
as valuation, liquidity and availability of information and are ultimately
responsible for each determination. Investing in restricted securities
eligible for resale pursuant to Rule 144A may decrease the liquidity in a Fund
to the extent that qualified institutional buyers become for a time
uninterested in purchasing these restricted securities. The purchase price and
subsequent valuation of restricted and illiquid securities normally reflect a
discount, which may be significant, from the market price of comparable
securities for which a liquid market exists.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with
dealers in U.S. Government Securities and member banks of the Federal Reserve
System which furnish collateral at least equal in value or market price to the
amount of their repurchase obligation. The Core Fixed Income, Global Income
and High Yield Funds may also enter into repurchase agreements involving
certain foreign government securities. If the other party or "seller"
defaults, a Fund might suffer a loss to the extent that the proceeds from the
sale of the underlying securities and other collateral held by the Fund in
connection with the related repurchase agreement are less than the repurchase
price. In addition, in the event of bankruptcy of the seller or failure of the
seller to repurchase the securities as agreed, a Fund could suffer losses,
including loss of interest on or principal of the security and costs
associated with delay and enforcement of the repurchase agreement. The
Trustees have reviewed and approved certain counterparties whom they believe
to be creditworthy and have authorized the Funds to enter into repurchase
agreements with such counterparties. In addition, each Fund, together with
other registered investment companies having management agreements with the
Investment Adviser, may transfer uninvested cash balances into a single joint
account, the daily aggregate balance of which will be invested in one or more
repurchase agreements.
TEMPORARY INVESTMENTS. Each Fund may, for temporary defensive purposes,
invest up to 100% of its total assets in (a) U. S. Government Securities or
(b) repurchase agreements collateralized by U.S. Government Securities. The
Short Duration Tax-Free and Municipal Income Funds may for temporary defensive
purposes depart from their stated investment objectives and invest more than
20% of their respective net assets in taxable investments. The High Yield Fund
may for temporary defensive purposes invest in investment grade securities.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, each Fund
may, with respect to no more than 5% of its net assets, engage in the
following techniques and investments: (i) portfolio securities lending, (ii)
mortgage swaps (other than Short Duration Tax-Free and Municipal Income Funds)
and interest rate swaps, caps, floors and collars, (iii) inverse floating rate
securities, (iv) yield curve options, (v) other investment companies, (vi)
custodial receipts and (vii) with respect to the Short Duration Tax-Free and
Municipal Income Funds, tender option bonds and standby commitments. For more
information see the Additional Statement.
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INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions that are described
in detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of a Fund cannot be changed without
approval of a majority of the outstanding shares of that Fund. Each Fund's
investment objectives and all policies not specifically designated as
fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in a Fund's investment objectives, shareholders
should consider whether that Fund still remains an appropriate investment in
light of their then current financial positions and needs.
The Short Duration Tax-Free and Municipal Income Funds' policies to invest,
under normal market conditions, at least 80% of their respective net assets in
Municipal Securities, the interest on which is exempt from regular federal
income tax, is fundamental and may not be changed without shareholder
approval. For more information on a Fund's investment restrictions, an
investor should obtain the Additional Statement.
NON-DIVERSIFICATION STATUS. Since the Global Income Fund is "non-
diversified" under the Act, it is subject only to certain federal tax
diversification requirements. Under federal tax laws, the Global Income Fund
may, with respect to 50% of its total assets, invest up to 25% of its total
assets in the securities of any issuer (except that this limitation does not
apply to U.S. Government Securities). With respect to the remaining 50% of the
Fund's total assets, (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer (other than the U.S. Government),
and (2) the Fund may not acquire more than 10% of the outstanding voting
securities of any one issuer. These tests apply at the end of each quarter of
its taxable year and are subject to certain conditions and limitations under
the Code. Since the Global Income Fund is not diversified under the Act, it
will be more susceptible to adverse developments affecting any single issuer.
The Adjustable Rate Government, Short Duration Government, Short Duration Tax-
Free, Government Income, Municipal Income, Core Fixed Income and High Yield
Funds are, in addition to these tax diversification requirements, also subject
to the diversification requirements arising out of their diversified status
under the Act.
PORTFOLIO TURNOVER
Each Fund may engage in active short-term trading to benefit from yield
disparities among different issues of securities or among the markets for
fixed-income securities, or for other reasons. It is anticipated that the
portfolio turnover rate of each Fund will vary from year to year. It is
anticipated that the annual portfolio turnover rate for the High Yield Fund
will generally not exceed 150%. The portfolio turnover rate is computed by
dividing the lesser of the dollar amount of securities purchased or securities
sold (excluding all securities whose maturities at acquisition are one year or
less) by the average monthly value of such securities owned during the year. A
100% turnover rate would occur for example, if all of the securities held by a
Fund were sold and replaced within one year. The Investment Adviser will not
consider the portfolio turnover rate a limiting factor in making investment
decisions for a Fund consistent with the Fund's investment objectives and
portfolio management policies. A high rate of portfolio turnover results in
increased transaction costs to a Fund. The portfolio turnover rate includes
the effect of entering into mortgage dollar rolls. See "Financial Highlights"
for a statement of each Fund's historical portfolio turnover rates.
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MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Advisers, distributor and transfer
agent. The officers of the Trust conduct and supervise each Fund's daily
business operations. The Additional Statement contains information as to the
identity of, and other information about, the Trustees and officers of the
Trust.
INVESTMENT ADVISERS
INVESTMENT ADVISERS. Goldman Sachs Funds Management, L.P., One New York
Plaza, New York, New York 10004, a Delaware limited partnership which is an
affiliate of Goldman Sachs, serves as the investment adviser to the Adjustable
Rate Government and Short Duration Government Funds. Goldman Sachs Funds
Management, L.P. registered as an investment adviser in 1990. Goldman Sachs
Asset Management, One New York Plaza, New York, New York 10004, a separate
operating division of Goldman Sachs, serves as investment adviser to the Short
Duration Tax-Free, Government Income, Municipal Income, Core Fixed Income and
High Yield Funds. Goldman Sachs registered as an investment adviser in 1981.
Goldman Sachs Asset Management International, 133 Peterborough Court, London
EC4A 2BB, England, an affiliate of Goldman Sachs, serves as investment adviser
to the Global Income Fund. Goldman Sachs Asset Management International became
a member of the Investment Management Regulatory Organization Limited in 1990
and registered as an investment adviser in 1991. As of June 23, 1997, GSAM,
GSFM and GSAMI, together with their affiliates, acted as investment adviser,
administrator or distributor for assets in excess of $120 billion.
Under a Management Agreement with each Fund, the applicable Investment
Adviser, subject to the general supervision of the Trustees, provides day-to-
day advice as to the Fund's portfolio transactions. Goldman Sachs has agreed
to permit the Trust to use the name "Goldman Sachs" or a derivative thereof as
part of each Fund's name for as long as a Fund's Management Agreement is in
effect.
In performing its investment advisory services, each Investment Adviser,
while remaining ultimately responsible for the management of the Funds, is
able to draw upon the research and expertise of its affiliate offices for
portfolio decisions and management with respect to certain portfolio
securities. In addition, the Investment Advisers will have access to the
research of, and proprietary technical models developed by, Goldman Sachs and
may apply quantitative and qualitative analysis in determining the appropriate
allocations among the categories of issuers and types of securities.
Under the Management Agreement, each Investment Adviser also: (i) supervises
all non-advisory operations of each Fund that it advises; (ii) provides
personnel to perform such executive, administrative and clerical services as
are reasonably necessary to provide effective administration of each Fund;
(iii) arranges for at each Fund's expense (a) the preparation of all required
tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and statements of
additional information and (d) the preparation of reports to be filed with the
SEC and other regulatory authorities; (iv) maintains each Fund's records; and
(v) provides office space and all necessary office equipment and services.
ADJUSTABLE RATE GOVERNMENT AND SHORT DURATION GOVERNMENT FUNDS. The Fund's
portfolio manager is Jonathan A. Beinner. Mr. Beinner is a Vice President of
Goldman Sachs and Co-Head of GSAM's U.S. Fixed Income Department. Mr. Beinner
joined the Investment Adviser in 1990 after working in the trading and
arbitrage group of Franklin Savings Association.
37
<PAGE>
GOVERNMENT INCOME AND CORE FIXED INCOME FUNDS. The Fund's portfolio managers
are Jonathan A. Beinner and Richard C. Lucy. See above for information about
Mr. Beinner. Messrs. Beinner and Lucy each specialize in investing in a
particular type of security the Fund may hold. Mr. Lucy is a Vice President of
Goldman Sachs and Co-Head of GSAM's U.S. Fixed Income Department. Mr. Lucy
joined the Investment Adviser in 1992 after spending nine years managing fixed
income assets at Brown Brothers Harriman & Co.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS. The Fund's portfolio
managers are Benjamin S. Thompson and Elisabeth Schupf Lonsdale. Mr. Thompson
and Ms. Lonsdale each specialize in municipal securities. Mr. Thompson's
responsibilities include developing investment strategy and structuring
portfolios.
Ms. Lonsdale is also responsible for GSAM's municipal credit research. Mr.
Thompson worked in the institutional sales and marketing group at GSAM until
he joined the fixed-income team in 1993. Prior to joining GSAM in early 1992,
Mr. Thompson worked in the Structured Finance Group of the Chase Manhattan
Bank. Before rejoining Goldman Sachs in 1995, Ms. Lonsdale was a Director of
Fitch Investors Service evaluating the credit ratings of tax-backed issues.
Prior to that, she worked for ten years in the Goldman Sachs Municipal Finance
Department.
GLOBAL INCOME FUND. The Fund's portfolio managers are Stephen Fitzgerald and
Andrew Wilson. Mr. Fitzgerald joined GSAMI in 1992 and is an Executive
Director and Chief Investment Officer for international fixed income. Prior to
1992, he spent two years managing multi-currency fixed income and balanced
portfolios at Invesco MIM Limited, where he was a senior member of the
derivative products group. Mr. Wilson joined GSAMI in 1995 and is Executive
Director and Portfolio Manager for international fixed income. Prior to
joining GSAMI, he spent three years as an Assistant Director at Rothschild
Asset Management where he was responsible for managing global and
international bond portfolios, with specific focus on the U.S., Canadian,
Australian and Japanese economies. Prior to his employment at Rothschild, Mr.
Wilson spent seven years at the Reserve Bank of New Zealand, his most recent
position as Trading Manager of foreign reserves management. Mr. Wilson's
employment at the Reserve Bank at New Zealand also included a two year
assignment to the foreign investment unit at the Bank of England in London.
It is the responsibility of the Investment Adviser to make investment
decisions for a Fund and to place the purchase and sale orders for the Fund's
portfolio transactions in U.S. and foreign securities and currency markets.
Such orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Goldman Sachs or its affiliates. In
effecting purchases and sales of portfolio securities for the Funds, the
Investment Advisers will seek the best price and execution of a Fund's orders.
In doing so, where two or more brokers or dealers offer comparable prices and
execution for a particular trade, consideration may be given to whether the
broker or dealer provides investment research or brokerage services or sells
shares of any Goldman Sachs Fund. See the Additional Statement for a further
description of the Investment Advisers' brokerage allocation practices.
38
<PAGE>
As compensation for its services rendered and assumption of certain expenses
pursuant to separate Management Agreements, GSAM, GSFM and GSAMI are entitled
to the following fees, computed daily and payable monthly at the annual rates
listed below:
<TABLE>
<CAPTION>
FOR THE FISCAL
CONTRACTUAL YEAR ENDED
RATE* OCTOBER 31, 1996*
----------- -----------------
GSAM
- ----
<S> <C> <C>
Government Income................................. 0.65% 0.25%
Municipal Income.................................. 0.55% 0.55%
Short Duration Tax-Free........................... 0.40% 0.40%
Core Fixed Income................................. 0.40% 0.40%
High Yield........................................ 0.70% N/A
<CAPTION>
GSFM
- ----
<S> <C> <C>
Adjustable Rate Government........................ 0.40% 0.40%
Short Duration Government......................... 0.50% 0.40%
<CAPTION>
GSAMI
- -----
<S> <C> <C>
Global Income..................................... 0.90% 0.59%
</TABLE>
- --------
* With respect to the Government Income, Municipal Income and Global Income
Funds, a Management Agreement combining both advisory and administrative
services was adopted effective April 30, 1997. The Management Agreements for
the other funds previously combined such services. The contractual rate set
forth in the table is the rate payable under the Management Agreements and
is identical to the aggregate advisory and administration fees payable by
each Fund under the previously separate investment advisory (including
subadvisory in the case of the Global Income Fund) and administration
agreements. For the fiscal year ended October 31, 1996, the annual rate
expressed is the combined advisory and administration fees paid (after
voluntary fee limitations). The difference, if any, between the stated fees
and the actual fees paid by the Funds reflects that the applicable
Investment Adviser did not charge the full amount of the fees to which it
would have been entitled. The Investment Advisers may discontinue or modify
such limitations in the future at their discretion, although they have no
current intention to do so.
The Investment Advisers to the Short Duration Government, Short Duration
Tax-Free, Core Fixed Income, Government Income, Municipal Income, Global
Income and High Yield Funds have voluntarily agreed to reduce or limit certain
"Other Expenses" of such Funds (excluding management, distribution and
authorized dealer service fees, taxes, interest and brokerage fees and
litigation, indemnification and other extraordinary expenses and transfer
agency fees in the case of the Global Income and High Yield Funds) to the
extent such expenses exceed 0.05%, 0.05%, 0.05%, 0.00%, 0.05%, 0.06% and 0.01%
per annum of such Funds' average daily net assets, respectively. Such
reductions or limits, if any, are calculated monthly on a cumulative basis and
may be discontinued or modified by the applicable Investment Adviser in its
discretion at any time.
Goldman Sachs may from time to time, at its own expense, provide
compensation to certain Authorized Dealers and other persons for performing
administrative services to their customers. These services include maintaining
account records, processing orders to purchase, redeem and exchange Fund
shares and responding to certain customer inquiries. In addition, these
services may also include responding to certain inquiries from and providing
written materials to depository institutions about a Fund; furnishing advice
about and assisting depository institutions in obtaining from state regulatory
agencies any rulings, exemptions or other authorizations
39
<PAGE>
that may be required to conduct a mutual fund sales program; acting as liaison
between depository institutions and national regulatory organizations;
assisting with the preparation of sales material; and providing general
assistance and advice in establishing and maintaining mutual fund sales
programs on the premises of depository institutions.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Advisers, Goldman Sachs and
their affiliates in the management of, or their interest in, other accounts
and other activities of Goldman Sachs may present conflicts of interest with
respect to a Fund or limit a Fund's investment activities. Goldman Sachs and
its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Funds and/or which
engage in and compete for transactions in the same types of securities,
currencies and instruments as the Funds. Goldman Sachs and its affiliates will
not have any obligation to make available any information regarding their
proprietary activities or strategies, or the activities or strategies used for
other accounts managed by them, for the benefit of the management of the Funds
and in general it is not anticipated that the Investment Advisers will have
access to proprietary information for the purpose of managing a Fund. The
results of a Fund's investment activities, therefore, may differ from those of
Goldman Sachs and its affiliates and it is possible that a Fund could sustain
losses during periods in which Goldman Sachs and its affiliates and other
accounts achieve significant profits on their trading for proprietary or other
accounts. From time to time, a Fund's activities may be limited because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. See
"Management--Activities of Goldman Sachs and its Affiliates and Other Accounts
Managed by Goldman Sachs" in the Additional Statement for further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Shares may
also be sold by Authorized Dealers. Authorized Dealers include investment
dealers that are members of the NASD and certain other financial service
firms. To become an Authorized Dealer, a dealer or financial service firm must
enter into a sales agreement with Goldman Sachs. The minimum investment
requirements, services, programs and purchase and redemption options for
shares purchased through a particular Authorized Dealer may be different from
those available to investors purchasing through other Authorized Dealers.
Goldman Sachs, 4900 Sears Tower, Chicago, Illinois 60606 also serves as each
Fund's transfer agent (the "Transfer Agent") and as such performs various
shareholder servicing functions. As compensation for the services rendered to
the Government Income, Municipal Income, Global Income and High Yield Funds by
Goldman Sachs (as Transfer Agent) and the assumption by Goldman Sachs of the
expenses related thereto, Goldman Sachs is entitled to receive a fee from each
such Fund, with respect to Class A, Class B and Class C shares of $12,000 per
year plus $7.50 per account, together with out-of-pocket and transaction-
related expenses (including those out-of-pocket expenses payable to servicing
and/or sub-transfer agents). Goldman Sachs is entitled to receive a fee from
the Adjustable Rate Government Fund, Short Duration Government, Short Duration
Tax-Free and Core Fixed Income Funds with respect to Class A, Class B and
Class C shares, where applicable, equal to its proportionate share of the
total transfer agency fees borne by the Fund. Such fees are equal to the fixed
charges set forth above applicable to Class A, Class B and Class C shares plus
0.04% of the average daily net assets of the other classes of the Fund.
Shareholders with inquiries regarding any Fund should contact Goldman Sachs
(as Transfer Agent) at the address or the telephone number set forth on the
back cover page of this Prospectus.
40
<PAGE>
REPORTS TO SHAREHOLDERS
Shareholders will receive an annual report containing audited financial
statements and a semi-annual report. Each shareholder will also be provided
with a printed confirmation for each transaction in the shareholder's account
and an individual quarterly account statement. A year-to-date statement for
any account will be provided upon request made to Goldman Sachs. The Funds do
not generally provide sub-accounting services.
HOW TO INVEST
ALTERNATIVE PURCHASE ARRANGEMENTS
Each Fund continuously offers through this Prospectus Class A, Class B and
Class C shares (except that the Adjustable Rate Government Fund does not
currently offer Class B and Class C shares), as described more fully in "How
to Buy Shares of the Funds." If you do not specify in your instructions to the
Funds which class of shares you wish to purchase, the Funds will assume that
your instructions apply to Class A shares.
CLASS A SHARES. If you invest less than $1 million ($500,000 in the case of
Short Duration Government and Short Duration Tax Free Funds) in Class A shares
you will pay an initial sales charge. Certain purchases may qualify for
reduced initial sales charges. If you initially invest $1 million ($500,000 in
the case of Short Duration Government and Short Duration Tax Free Funds) or
more in Class A shares of a Fund, no sales charge will be imposed at the time
of purchase, but you will incur a deferred sales charge equal to 1.00% if you
redeem your shares within 18 months of purchase. Direct purchases (as opposed
to exchanges) of $1 million or more of Class A shares of the Adjustable Rate
Government Fund will not be subject to a deferred sales charge when redeemed.
Class A shares are subject to distribution fees of 0.25% (which currently are
being waived in the case of Adjustable Rate Government, Short Duration
Government, Short Duration Tax-Free, Core Fixed Income, Municipal Income,
Government Income and High Yield Funds and are limited to 0.21% for the Global
Income Fund) and authorized dealer service fees of 0.25%, respectively, of
each Fund's average daily net assets attributable to Class A shares.
CLASS B SHARES. Class B shares are sold without an initial sales charge, but
are subject to a contingent deferred sales charge ("CDSC") of up to 2% in the
case of the Short Duration Government and Short Duration Tax-Free Funds if
redeemed within three years of purchase and up to 5% in the case of the
Government Income, Municipal Income, Core Fixed Income, Global Income and High
Yield Funds if redeemed within six years of purchase. Class B shares are
subject to distribution and authorized dealer service fees of 0.75% (which is
currently being limited to 0.60%) and 0.25%, respectively, of each of Short
Duration Government and Short Duration Tax-Free Fund's average daily net
assets attributable to Class B shares and of 0.75% and 0.25%, respectively, of
each of Government Income, Municipal Income, Core Fixed Income, Global Fixed
Income and High Yield Fund's average daily net assets attributable to Class B
shares. See "Distribution and Authorized Dealer Service Plans." Class B shares
will automatically convert to Class A shares, based on their relative net
asset values, eight years after the initial purchase. Your entire investment
in Class B shares is available to work for you from the time you make your
initial investment, but the distribution fee paid by Class B shares will cause
your Class B shares (until conversion to Class A shares) to have a higher
expense ratio and to pay lower dividends, to the extent dividends are paid,
than Class A shares.
41
<PAGE>
CLASS C SHARES. Class C shares are sold without an initial sales charge, but
are subject to a CDSC of 1% if redeemed within 12 months of purchase. Class C
shares are subject to distribution and authorized dealer
service fees of 0.75% and 0.25%, respectively, of each of Short Duration
Government and Short Duration Tax-Free Fund's average daily net assets
attributable to Class C shares and] of 0.75% and 0.25%, respectively, of each
[of Government Income, Municipal Income, Core Fixed Income, Global Fixed
Income and High Yield] Fund's average daily net assets attributable to Class C
shares. See "Distribution and Authorized Dealer Service Plans." Class C shares
have no conversion feature, and accordingly, an investor that purchases Class
C shares will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period, subject to annual approval by the Fund's
Trustees and certain regulatory limitations. Your entire investment in Class C
shares is available to work for you from the time you make your initial
investment, but the distribution fee paid by Class C shares will cause your
Class C shares to have a higher expense ratio and to pay lower dividends, to
the extent dividends are paid, a Class A shares (or Class B shares after
conversion to Class A shares).
FACTORS TO CONSIDER IN CHOOSING CLASS A, CLASS B OR CLASS C SHARES. The
decision as to which class to purchase depends on the amount you invest, the
intended length of the investment and your personal situation. For example, if
you are making an investment of $100,000 or more that qualifies for a reduced
sales charge, you should consider purchasing Class A shares. A brief
description of when the initial sales charge may be reduced or eliminated is
set forth below under "Right of Accumulation" and "Statement of Intention." If
you prefer not to pay an initial sales charge on an investment and plan to
hold your investment for at least six years (three in the case of the Short
Duration Government and Short Duration Tax-Free Funds), you might consider
purchasing Class B shares. If you prefer not to pay an initial sales charge
and are unsure of the length of your investment or plan to hold your
investment for less than eight years, you may prefer Class C shares. There is
no size limit on the purchase of Class A shares. There is a maximum purchase
limitation of $250,000 and $1,000,000 ($500,000 in the case of Short Duration
Government and Short Duration Tax Free) in the aggregate on purchases of Class
B shares and Class C shares, respectively. Although Class C shares are subject
to a CDSC for only twelve months at a lower rate than Class B shares, Class C
shares do not have the conversion feature applicable to Class B shares, making
them subject to higher distribution fees for an indefinite period. Authorized
Dealers may receive different compensation for selling Class A, Class B or
Class C shares.
HOW TO BUY SHARES OF THE FUNDS -- CLASS A, CLASS B AND CLASS C SHARES
You may purchase shares of the Funds through any Authorized Dealer
(including Goldman Sachs) or directly from a Fund, c/o National Financial Data
Services, Inc. ("NFDS"), P.O. Box 419711, Kansas City, MO 64141-6711 on any
Business Day (as defined under "Additional Information") at the net asset
value next determined after receipt of an order, plus, in the case of Class A
shares, any applicable sales charge. If, by the close of regular trading on
the New York Stock Exchange (normally 4:00 p.m. New York time), a purchase
order is received by a Fund, Goldman Sachs or an Authorized Dealer, the price
per share will be based on the net asset value computed on the day the
purchase order is received. If a purchase order for shares of the Adjustable
Rate Government, Short Duration Government, Short Duration Tax-Free, Core
Fixed Income or High Yield Funds is received by an Authorized Dealer by
4:00 p.m., New York time and payment is made by (a) wire transfer or ACH
transfer, shares will be issued and dividends declared with respect to such
shares will begin to accrue on the later of (i) the Business Day after receipt
by the Authorized Dealer of the purchase order or (ii) the date of receipt of
payment for the shares or (b) check, Federal Reserve draft or bank wire,
shares will be issued and dividends declared with respect to such shares will
begin to accrue on the Business Day after the date payment is received.
Dividends with respect to the Government Income and Municipal Income Funds
declared with respect to such shares will begin to accrue on the Business Day
after receipt of payment. Shares of the Global Income Fund will begin to be
eligible for dividends paid on or after the day the shares are purchased.
42
<PAGE>
The minimum initial investment in each Fund is $1,000. An initial investment
minimum of $250 applies to purchases in connection with Individual Retirement
Account Plans or accounts established under the Uniform Gift to Minors Act
("UGMA"). For purchases through the Automatic Investment Plan, the minimum
investment is $50. The minimum subsequent investment is $50. These
requirements may be waived at the discretion of the Trust's officers.
You may pay for purchases of shares by check (except that the Trust will not
accept a check drawn on a foreign bank or a third party check), Federal
Reserve draft, federal funds wire, ACH transfer or bank wire. Purchases of
shares by check or Federal Reserve draft should be made payable as follows:
(i) to an investor's Authorized Dealer, if purchased through such Authorized
Dealer, or (ii) to Goldman Sachs Fixed Income Funds -- (Name of Fund and Class
of shares) and sent to NFDS, P.O. Box 419711, Kansas City, MO 64141-6711.
Federal funds wires, ACH transfers and bank wires should be sent to State
Street Bank and Trust Company ("State Street"). Payment must be received
within three Business Days after receipt of the purchase order. An investor's
Authorized Dealer is responsible for forwarding payment promptly to the Fund.
In order to make an initial investment in a Fund, an investor must establish
an account with the Fund by furnishing to the Fund, Goldman Sachs or the
investor's Authorized Dealer the information in the Account Application
attached to this Prospectus. The Funds may refuse to open an account for any
investor who fails to (1) provide a social security number or other taxpayer
identification number, or (2) certify that such number is correct (if required
to do so under applicable law).
The Funds reserve the right to redeem shares of any shareholder whose
account balance is less than $50 as a result of earlier redemptions. Such
redemptions will not be implemented if the value of a shareholder's account
falls below the minimum account balance solely as a result of market
conditions. A Fund will give sixty (60) days' prior written notice to
shareholders whose shares are being redeemed to allow them to purchase
sufficient additional shares of the Fund to avoid such redemption. In
addition, the Funds and Goldman Sachs reserve the right to modify the minimum
investment, the manner in which shares are offered and the sales charge rates
applicable to future purchases of shares.
OFFERING PRICE -- CLASS A SHARES
The offering price of Class A shares of the Government Income, Municipal
Income, Core Fixed Income, Global Income and High Yield Funds is the next
determined net asset value per share plus a sales charge, if any, paid to
Goldman Sachs at the time of purchase of shares as shown in the following
table:
<TABLE>
<CAPTION>
SALES CHARGE MAXIMUM DEALER
SALES CHARGE AS AS PERCENTAGE ALLOWANCE AS
AMOUNT OF PURCHASE PERCENTAGE OF OF NET AMOUNT PERCENTAGE OF
(INCLUDING SALES CHARGE, IF ANY) OFFERING PRICE INVESTED OFFERING PRICE***
- -------------------------------- --------------- ------------- -----------------
<S> <C> <C> <C>
Less Than $100,000............. 4.50% 4.71% 4.00%
$100,000 up to (but less than)
$250,000...................... 3.00 3.09 2.50
$250,000 up to (but less than)
$500,000...................... 2.50 2.56 2.00
$500,000 up to (but less than)
$1 million.................... 2.00 2.04 1.75
$1 million or more............. 0.00* 0.00* **
The offering price of Class A shares of the Short Duration Government and
Short Duration Tax-Free Funds is the next determined net asset value per share
plus a sales charge, if any, paid to Goldman Sachs at the time of purchase of
shares as shown in the following table:
<CAPTION>
SALES CHARGE MAXIMUM DEALER
SALES CHARGE AS AS PERCENTAGE ALLOWANCE AS
AMOUNT OF PURCHASE PERCENTAGE OF OF NET AMOUNT PERCENTAGE OF
(INCLUDING SALES CHARGE, IF ANY) OFFERING PRICE INVESTED OFFERING PRICE***
- -------------------------------- --------------- ------------- -----------------
<S> <C> <C> <C>
Less than $250,000............. 2.00% 2.04% 1.75%
$250,000 up to (but less than)
$500,000...................... 1.50 1.52 1.25
$500,000 or more............... 0.00%* 0.00 1.00**
</TABLE>
43
<PAGE>
The offering price of Class A shares of the Adjustable Rate Government Fund
is the next determined net asset value per share plus a sales charge, if any,
paid to Goldman Sachs at the time of purchase of shares as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE MAXIMUM DEALER
SALES CHARGE AS AS PERCENTAGE ALLOWANCE AS
AMOUNT OF PURCHASE PERCENTAGE OF OF NET AMOUNT PERCENTAGE OF
(INCLUDING SALES CHARGE, IF ANY) OFFERING PRICE INVESTED OFFERING PRICE***
- -------------------------------- --------------- ------------- -----------------
<S> <C> <C> <C>
Less Than $500,000............. 1.50% 1.52% 1.25%
$500,000 up to (but less than)
$1 million.................... 1.00 1.01 0.75
$1 million or more............. 0.00 0.00 0.00
</TABLE>
- --------
* No sales charge is payable at the time of purchase of Class A shares of $1
million ($500,000 in the case of Short Duration Government and Short
Duration Tax Free Funds) or more, but a CDSC may be imposed in the event
of certain redemption transactions made within 18 months of purchase.
** Goldman Sachs pays a one-time commission to Authorized Dealers who
initiate or are responsible for purchases of $1 million or more of shares
of each Fund (except the Short Duration Government and Short Duration Tax
Free Funds) equal to 1.00% of the amount under $3 million, 0.50% of the
next $2 million, and 0.25% thereafter. With respect to the Short Duration
Government and Short Duration Tax Free Funds, Goldman Sachs pays a one-
time commission to Authorized Dealers who initiate or are responsible for
purchases of $500,000 or more of Shares of the Funds equal to 1.00% of the
purchase price. Goldman Sachs may also pay, with respect to all or a
portion of the amount purchased, a commission in accordance with the
foregoing schedule to Authorized Dealers who initiate or are responsible
for purchases of $500,000 or more by plans or $1 million or more by "wrap"
accounts satisfying the criteria set forth in (h) or (j) below. Purchases
by such plans will be made at net asset value with no initial sales
charge, but if all of the shares held are redeemed within 18 months after
the end of the calendar month in which such purchase was made, a
contingent deferred sales charge (CDSC), as described below, of 1.00% will
be imposed upon the plan sponsor or the third party administrator. In
addition, Authorized Dealers shall remit to Goldman Sachs such payments
received in connection with "wrap" accounts in the event that shares are
redeemed within 18 months after the end of the calendar month in which the
purchase was made.
*** During special promotions, the entire sales charge may be reallowed to
Authorized Dealers. Authorized Dealers to whom substantially the entire
sales charge is reallowed may be deemed to be "underwriters" under the
Securities Act of 1933.
Purchases of $1 million ($500,000 in the case of Short Duration Government
and Short Duration Tax Free Funds) or more of Class A shares of each Fund
(other than Adjustable Rate Government Fund, will be made at net asset value
with no initial sales charge, but if the shares are redeemed within 18 months
after the end of the calendar month in which the purchase was made, excluding
any period of time in which the shares were exchanged into and remained
invested in an ILA Portfolio (the contingent deferred sales charge period), a
CDSC of 1.00% will be imposed. Any applicable CDSC will be assessed on an
amount equal to the lesser of the current market value or the original
purchase cost of the redeemed Class A shares. Accordingly, no CDSC will be
imposed on increases in account value above the initial purchase price,
including any dividends which have been reinvested in additional Class A
shares. In determining whether a CDSC applies to a redemption, the calculation
will be determined in a manner that results in the lowest possible rate being
charged. Therefore, it will be assumed that the redemption is first made from
any Class A shares in your account that are not subject to the CDSC. The CDSC
is waived on redemptions in certain circumstances. See "Waiver or Reduction of
Contingent Deferred Sales Charges" below.
44
<PAGE>
Class A shares of the Funds may be sold at net asset value without payment
of any sales charge to (a) Goldman Sachs, its affiliates or their respective
officers, partners, directors or employees (including retired employees and
former partners), any partnership of which Goldman Sachs is a general partner,
any Trustee or officer of the Trust and designated family members of any of
the above individuals; (b) qualified retirement plans of Goldman Sachs; (c)
trustees or directors of investment companies for which Goldman Sachs or an
affiliate acts as sponsor; (d) any employee or registered representative of
any Authorized Dealer or their respective spouses and children; (e) banks,
trust companies or other types of depository institutions investing for their
own account or investing for accounts for which they have investment
discretion; (f) banks, trust companies or other types of depository
institutions investing for accounts for which they do not have investment
discretion; (g) any state, county or city, or any instrumentality, department,
authority or agency thereof, which is prohibited by applicable investment laws
from paying a sales charge or commission in connection with the purchase of
shares of a Fund; (h) pension and profit sharing plans, pension funds and
other company-sponsored benefit plans that (1) buy shares costing $500,000 or
more, or (2) have at the time of purchase, 100 or more eligible participants,
or (3) certify that they project to have annual plan purchases of $200,000 or
more, or (4) are provided administrative services by a third-party
administrator that in the aggregate satisfies (1) or (3) above;
(i) shareholders whose purchase is attributable to redemption proceeds
(subject to appropriate documentation) from a registered open-end management
investment company not distributed or managed by Goldman Sachs or its
affiliates, if such redemption has occurred no more than 60 days prior to the
purchase of shares of the Funds and the shareholder either (a) paid an initial
sales charge or (b) was at some time subject to a deferred sales charge with
respect to the redemption proceeds; (j) "wrap" accounts for the benefit of
clients of broker-dealers, financial institutions or financial planners,
provided that they have entered into an agreement with GSAM specifying
aggregate minimums and certain operating policies and standards;
(k) registered investment advisers investing for accounts for which they
receive asset-based fees; (l) accounts over which GSAM or its advisory
affiliates have investment discretion; and (m) shareholders receiving
distributions from a qualified retirement plan invested in the Goldman Sachs
Funds and reinvesting such proceeds in a Goldman Sachs IRA. Purchasers must
certify eligibility for an exemption on the Account Application and notify
Goldman Sachs if the shareholder is no longer eligible for an exemption.
Exemptions will be granted subject to confirmation of a purchaser's
entitlement. Investors purchasing shares of the Funds at net asset value
without payment of any initial sales charge may be charged a fee if they
effect transactions in shares through a broker or agent. In addition, under
certain circumstances, dividends and distributions from any of the Goldman
Sachs Funds may be reinvested in shares of each Fund at net asset value, as
described under "Cross-Reinvestment of Dividends and Distributions and
Automatic Exchange Program."
REINVESTMENT OF REDEMPTION PROCEEDS -- CLASS A SHARES
A shareholder who redeems Class A shares of a Fund may reinvest at net asset
value any portion or all of his redemption proceeds (plus that amount
necessary to acquire a fractional share to round off his purchase to the
nearest full share) in Class A shares of a Fund or of any other Goldman Sachs
Fund. Shareholders should obtain and read the applicable prospectuses of such
other funds and consider their objectives, policies and applicable fees before
investing in any of such funds. This reinvestment privilege is subject to the
condition that the shares redeemed have been held for at least thirty (30)
days before the redemption and that the reinvestment is effected within ninety
(90) days after such redemption. If you paid a CDSC upon a redemption and
reinvest in Class A shares subject to the conditions set forth above, your
account will be credited with the amount of the CDSC previously charged, and
the reinvested shares will continue to be subject to a CDSC. The holding
period of the Class A shares acquired through reinvestment for purposes of
computing the CDSC payable upon a subsequent redemption, will include the
holding period of the redeemed shares. Shares are sold to a reinvesting
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shareholder at the net asset value next determined following timely receipt by
Goldman Sachs or an Authorized Dealer of a written purchase order indicating
that the shares are eligible for reinvestment at net asset value.
A reinvesting shareholder may be subject to tax as a result of such
redemption. If the redemption occurs within ninety (90) days after the
original purchase of the Class A shares, any sales charge paid on the original
purchase cannot be taken into account by a reinvesting shareholder to the
extent an otherwise applicable sales charge is not imposed pursuant to the
reinvestment privilege for purposes of determining gain or loss, if any,
realized on the redemption, but instead will be added to the tax basis of the
Class A shares received in the reinvestment. To the extent that any loss is
realized and shares of the same Fund are purchased within thirty (30) days
before or after the redemption, some or all of the loss may not be allowed as
a deduction depending upon the number of shares purchased. Shareholders should
consult their own tax advisers concerning the tax consequences of a redemption
and reinvestment. Upon receipt of a written request, the reinvestment
privilege may be exercised once annually by a shareholder, except that there
is no such time limit as to the availability of this privilege in connection
with transactions the sole purpose of which is to reinvest the proceeds at net
asset value in a tax-sheltered retirement plan.
RIGHT OF ACCUMULATION -- CLASS A SHARES
Class A purchasers may qualify for reduced sales charges when the current
market value of holdings (shares at current offering price), plus new
purchases, reaches $100,000 or more in the case of Government Income,
Municipal Income, Core Fixed Income, Global Income and High Yield Funds,
$250,000 or more in the case of Short Duration Government and Short Duration
Tax-Free Funds and $500,000 or more in the case of Adjustable Rate Government
Fund. Class A shares of the Goldman Sachs Funds may be combined under the
Right of Accumulation. See Additional Statement for more information about the
Right of Accumulation.
STATEMENT OF INTENTION -- CLASS A SHARES
Purchases of $100,000 or more in the case of Government Income, Municipal
Income, Core Fixed Income, Global Income and High Yield Funds, $250,000 or
more in the case of Short Duration Government and Short Duration Tax-Free
Funds and $500,000 in the case of the Adjustable Rate Government Fund made
over a 13-month period are eligible for reduced sales charges. Class A shares
of the Goldman Sachs Funds may be combined under the Statement of Intention.
See the Additional Statement for more information about the Statement of
Intention.
OFFERING PRICE -- CLASS B SHARES
Investors may purchase Class B shares of each Fund (other than Adjustable
Rate Government Fund) at the next determined net asset value without the
imposition of an initial sales charge. However, Class B shares redeemed within
six years (three years in the case of the Short Duration Government and Short
Duration Tax-Free Funds) of purchase will be subject to a CDSC at the
applicable rates shown in the tables that follow. At redemption, the charge
will be assessed on the amount equal to the lesser of the current market value
or the original purchase cost of the shares being redeemed. No CDSC will be
imposed on increases in account value above the initial purchase price,
including shares derived from the reinvestment of dividends or capital gains
distributions.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of purchase until the time of redemption of Class B shares. For
the purpose of determining the number of years from the time of any purchase,
all payments during a month will be aggregated and deemed to have been made on
the first day of that month. In processing redemptions of Class B shares, the
Funds will first redeem shares not
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subject to any CDSC, and then shares held longest during the eight-year
period. As a result, a redeeming shareholder will pay the lowest possible
CDSC.
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE OF
DOLLAR AMOUNTS SUBJECT TO CDSC
-----------------------------------------
GOVERNMENT INCOME,
MUNICIPAL INCOME, SHORT DURATION
GLOBAL INCOME, GOVERNMENT AND SHORT
YEAR SINCE CORE FIXED INCOME DURATION TAX-
PURCHASE AND HIGH YIELD FUNDS FREE FUNDS
---------- -------------------- --------------------
<S> <C> <C>
First.......................... 5.0% 2.0%
Second......................... 4.0% 1.0%
Third.......................... 3.0% 1.0%
Fourth......................... 3.0% 0.0%
Fifth.......................... 2.0% none
Sixth.......................... 1.0% none
Seventh and thereafter......... none none
</TABLE>
Proceeds from the CDSC are payable to the Distributor and may be used in
whole or part to defray the Distributor's expenses related to providing
distribution-related services to the Funds in connection with the sale of
Class B shares, including the payment of compensation to Authorized Dealers. A
commission equal to 4.0% in the case of Government Income, Municipal Income,
Core Fixed Income, Global Income and High Yield Funds and 2.0% in the case of
Short Duration Government and Short Duration Tax-Free Funds of the amount
invested is paid to Authorized Dealers.
Class B shares of a Fund will automatically convert into Class A shares of
the same Fund at the end of the calendar quarter that is eight years after the
purchase date, except as noted below. Class B shares of a Fund acquired by
exchange from Class B shares of another Fund will convert into Class A shares
of such Fund based on the date of the initial purchase. Class B shares
acquired through reinvestment of distributions will convert into Class A
shares based on the date of the initial purchase of the shares on which the
distribution was paid. The conversion of Class B shares to Class A shares will
not occur at any time the Funds are advised that such conversions may
constitute taxable events for federal tax purposes, which the Funds believe is
unlikely. If conversions do not occur as a result of possible taxability,
Class B shares would continue to be subject to higher expenses than Class A
shares for an indeterminate period.
OFFERING PRICE -- CLASS C SHARES
Investors may purchase Class C shares of the Funds at the next determined
net asset value without the imposition of an initial sales charge. However, if
Class C shares are redeemed within 12 months of purchase a CDSC of 1% will be
deducted from the redemption proceeds. At redemption, the charge will be
assessed on the amount equal to the lesser of the current market value or the
original purchase cost of the shares being redeemed. No CDSC will be imposed
on increases in account value above the initial purchase price, including
shares derived from the reinvestment of dividends or capital gains
distributions.
For the purpose of determining the number of months from the time of any
purchase, all payments during a month will be aggregated and deemed to have
been made on the first day of that month. In processing redemptions of Class C
shares, the Funds will first redeem shares held for longer than 12 months, and
then shares held for the shortest period during the 12 month period. As a
result, a redeeming shareholder will pay the lowest possible CDSC. Proceeds
from the CDSC are payable to the Distributor and may be used in whole or in
part to defray the Distributor's expenses related to providing distribution-
related services to the Funds in connection
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<PAGE>
with the sale of Class C shares, including the payment of compensation to
Authorized Dealers. A commission equal to 1.00% of the amount invested is paid
to Authorized Dealers.
WAIVER OR REDUCTION OF CONTINGENT DEFERRED SALES CHARGE--CLASS A, B AND C
SHARES
The CDSC on Class B shares, Class C shares and Class A shares that are
subject to a CDSC may be waived or reduced if the redemption relates to (a)
retirement distributions or loans to participants or beneficiaries from
pension and profit sharing plans, pension funds and other company sponsored
benefit plans (each a "Plan"); (b) the death or disability (as defined in
section 72 of the Code) of a participant or beneficiary in a Plan; (c)
hardship withdrawals by a participant or beneficiary in a Plan; (d) satisfying
the minimum distribution requirements of the Code; (e) the establishment of
"substantially equal periodic payments" as described in Section 72(t) of the
Code; (f) the separation from service by a participant or beneficiary in a
Plan; (g) the death or disability (as defined in section 72 of the Code) of a
shareholder if the redemption is made within one year of such event; (h)
excess contributions being returned to a Plan; (i) distributions from a
qualified retirement plan invested in the Goldman Sachs Funds which are being
reinvested into a Goldman Sachs IRA; and (j) redemption proceeds which are to
be reinvested in accounts or non-registered products over which GSAM or its
advisory affiliates have investment discretion. In addition, Class A, Class B
and Class C shares subject to a Systematic Withdrawal Plan may be redeemed
without a CDSC. However, Goldman Sachs reserves the right to limit such
redemptions, on an annual basis, to 12% of the value of [each of] your Class B
[and Class C] shares and 10% of the value of your Class A shares.
SERVICES AVAILABLE TO SHAREHOLDERS
AUTOMATIC INVESTMENT PLAN
Systematic cash investments may be made through a shareholder's bank via the
Automated Clearing House Network or a shareholder's checking account via bank
draft each month. Required forms are available from Goldman Sachs or any
Authorized Dealer.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS AND AUTOMATIC EXCHANGE
PROGRAM
A shareholder may elect to cross-reinvest dividends and capital gain
distributions paid by a Fund in shares of the same class or an equivalent
class of any other Goldman Sachs Fund or ILA Portfolio. See "Fund Highlights."
Shareholders may also elect to exchange automatically a specified dollar
amount of shares of a Fund for shares of the same class or an equivalent class
of any other Goldman Sachs Fund or ILA Portfolio. Shares acquired through
cross-reinvestment of dividends or the automatic exchange program will be
purchased at net asset value and will not be subject to any initial or
contingent deferred sales charge as a result of the cross- reinvestment or
exchange, but shares subject to a CDSC acquired under the automatic exchange
program may be subject to a CDSC at the time of redemption from the fund into
which the exchange is made determined on the basis of the date and value of
the investor's initial purchase of the fund from which the exchange (or any
prior exchange) is made. Automatic exchanges are made monthly on the fifteenth
day of each month or the first Business Day thereafter. The minimum dollar
amount for automatic exchanges must be at least $50 per month. Cross-
reinvestments and automatic exchanges are subject to the following conditions:
(i) the value of the shareholder's account(s) in the fund which is paying the
dividend or from which the automatic exchange is being made must equal or
exceed $5,000 and (ii) the value of the account in the acquired fund must
equal or exceed the acquired fund's minimum initial investment requirement or
the shareholder must elect to continue cross- reinvestment or automatic
exchanges until the value of acquired fund shares in the shareholder's account
equals
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<PAGE>
or exceeds the acquired fund's minimum initial investment requirement. A Fund
shareholder may elect cross-reinvestment into an identical account or an
account registered in a different name or with a different address, social
security or other taxpayer identification number, provided that the account in
the acquired fund has been established, appropriate signatures have been
obtained and the minimum initial investment requirement has been satisfied. A
Fund shareholder should obtain and read the prospectus of the fund into which
dividends are invested or automatic exchanges are made.
TAX-SHELTERED RETIREMENT PLANS
The Funds (other than the Short Duration Tax-Free and Municipal Income
Funds) offer their shares for purchase by retirement plans, including IRA
plans for individuals and their non-employed spouses, IRA plans for employees
in connection with employer sponsored SEP, SAR-SEP and SIMPLE IRA plans, and
defined contribution plans such as 401(k) Salary Reduction Plans. Detailed
information concerning these plans may be obtained from the Transfer Agent.
This information should be read carefully, and consultation with an attorney
or tax adviser may be advisable. The information sets forth the service fee
charged for retirement plans and describes the federal income tax consequences
of establishing a plan.
EXCHANGE PRIVILEGE
Shares of a Fund may be exchanged at net asset value without the imposition
of an initial sales charge or CDSC at the time of exchange for shares of the
same class or an equivalent class of any other Fund, Goldman Sachs Fund or ILA
Portfolio. A shareholder needs to obtain and read the prospectus of the fund
into which the exchange is made. The shares of these other funds acquired by
an exchange may later be exchanged for shares of the same (or an equivalent
class) of the original Fund at the next determined net asset value without the
imposition of an initial or contingent deferred sales charge if the dollar
amount in the Fund resulting from such exchanges is below the shareholder's
all-time highest dollar amount on which it has previously paid the applicable
sales charge. Shares of these other funds purchased through dividends and/or
capital gains reinvestment may be exchanged for shares of the Funds without a
sales charge. In addition to free automatic exchanges pursuant to the
Automatic Exchange Program, six free exchanges are permitted in each twelve-
month period. A fee of $12.50 may be charged for each subsequent exchange
during such period. The exchange privilege may be modified or withdrawn at any
time upon sixty (60) days' notice to shareholders and is subject to certain
limitations.
An exchange of shares subject to a CDSC will not be subject to the
applicable CDSC at the time of exchange. Shares subject to a CDSC acquired in
an exchange will be subject to the CDSC of the shares originally held. For
purposes of determining the amount of any applicable CDSC, the length of time
a shareholder had owned shares will be measured from the date the shareholder
acquired the original shares subject to a CDSC and will not be affected by any
subsequent exchange.
An exchange may be made by identifying the applicable Fund and class of
shares and either writing to Goldman Sachs, Attention: Goldman Sachs Fixed
Income Funds, Shareholder Services, c/o NFDS, P.O. Box 419711, Kansas City, MO
64141-6711 or, unless the investor has specifically declined telephone
exchange privileges on the Account Application or elected in writing not to
utilize telephone exchanges, by a telephone request to the Transfer Agent at
800-526-7384 (8:00 a.m. to 4:00 p.m. Chicago time). Certain procedures are
employed to prevent unauthorized or fraudulent exchange requests as set forth
under "How to Sell Shares of the Funds." Under the telephone exchange
privilege, shares may be exchanged among accounts with different names,
addresses and social security or other taxpayer identification numbers only if
the exchange instructions are in writing and received in accordance with the
procedures set forth under "How to Sell Shares of the Funds." In times of
drastic economic or market changes the telephone exchange privilege may be
difficult to implement.
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<PAGE>
For federal income tax purposes, an exchange, including an automatic
exchange, is treated as a redemption of the shares surrendered in the
exchange, on which an investor may be subject to tax, followed by a purchase
of shares received in the exchange. If such redemption occurs within ninety
(90) days after the purchase of such shares, to the extent an initial sales
charge that would otherwise apply to the shares received in the exchange is
not imposed, the sales charge paid on such purchase of Class A shares cannot
be taken into account by the exchanging shareholder for purposes of
determining gain or loss, if any, realized on such redemption for federal
income tax purposes, but instead will be added to the tax basis of the shares
received in the exchange. Shareholders should consult their own tax advisers
concerning the tax consequences of an exchange.
All exchanges which represent an initial investment in a Fund must satisfy
the minimum investment requirements of the Fund into which the shares are
being exchanged. Exchanges are available only in states where exchanges may
legally be made.
OTHER PURCHASE INFORMATION
Authorized Dealers and other financial intermediaries provide varying
arrangements for their clients to purchase and redeem Fund shares. Some may
establish higher minimum investment requirements and others may limit the
availability of certain privileges with respect to the purchase and redemption
of shares or the reinvestment of dividends. Firms may arrange with their
clients for other investment or administrative services and may independently
establish and charge additional fees not described in this Prospectus to their
clients for such services. If shares of a Fund are held in a "street name"
account or were purchased through an Authorized Dealer, shareholders should
contact the Authorized Dealer to purchase, redeem or exchange shares, to make
changes in or give instructions concerning the account or to obtain
information about the account.
The Funds and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by
a particular purchaser (or group of related purchasers). This may occur, for
example, when a purchaser or group of purchasers' pattern of frequent
purchases, sales or exchanges of shares of a Fund is evident, or if purchases,
sales or exchanges are, or a subsequent abrupt redemption might be, of a size
that would disrupt management of a Fund.
In the sole discretion of Goldman Sachs, a Fund may accept securities
instead of cash for the purchase of shares of the Fund. Such purchases will be
permitted only if the Investment Adviser determines that any securities
acquired in this manner are consistent with the Fund's investment objectives,
restrictions and policies and are desirable investments for the Fund.
The Investment Advisers, Distributor, and/or their affiliates may also pay
additional compensation, out of their assets and not as an additional charge
to the Funds, to selected Authorized Dealers and other persons in connection
with the sale, distribution and/or servicing of Class A, Class B or Class C
shares (such as additional payments based on new sales, amounts exceeding pre-
established thresholds, or the length of time clients' assets have remained in
a Fund), and will from time to time, subject to applicable NASD regulations,
contribute to various non-cash and cash incentive arrangements to promote the
sale of shares, as well as sponsor various educational programs, sales
contests and/or promotions in which participants may receive reimbursement of
expenses, entertainment and prizes such as travel awards, merchandise, cash,
investment research and educational information and related support materials.
This additional compensation may vary among Authorized Dealers depending upon
such factors as the amounts their clients have invested (or may invest) in the
Funds, the particular program involved, or the amount of reimbursable
expenses. Additional compensation based on sales may, but is currently not
expected to, exceed .50% (annualized) of the amount invested. For Further
information, see "Other Information Regarding Purchases, Redemptions,
Exchanges and Dividends" in the Additional Statement.
50
<PAGE>
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
DISTRIBUTION PLAN -- CLASS A SHARES
The Trust, on behalf of each Fund's Class A shares, has adopted a
Distribution Plan pursuant to Rule 12b-1 under the Act (the "Class A
Distribution Plan"). Under the Class A Distribution Plan, Goldman Sachs is
entitled to a quarterly fee from each Fund for distribution services equal, on
an annual basis, to 0.25% of a Fund's average daily net assets attributable to
Class A shares of such Fund. Currently, Goldman Sachs has voluntarily agreed
to waive the entire amount of such fee for the Adjustable Rate Government,
Short Duration Government, Short Duration Tax-Free, Core Fixed Income,
Government Income, Municipal Income and High Yield Funds and to limit the
amount of such fee to 0.21% of average daily net assets attributable to Class
A shares of the Global Income Fund. Goldman Sachs has no current intention of
modifying or discontinuing such waiver, but may do so in the future at its
discretion. For the period ended October 31, 1996, the Global Income Fund paid
Goldman Sachs a fee at the rate of 0.21% of the Fund's average daily net
assets attributable to Class A shares of such Fund.
Goldman Sachs may use the distribution fee for its expenses of distributing
Class A shares of the Funds. The types of expenses for which Goldman Sachs may
be compensated for distribution services under the Class A Distribution Plan
include compensation paid to and expenses incurred by Authorized Dealers,
Goldman Sachs and their respective officers, employees and sales
representatives, allocable overhead, telephone and travel expenses, the
printing of prospectuses for prospective shareholders, preparation and
distribution of sales literature, advertising of any type and all other
expenses incurred in connection with activities primarily intended to result
in the sale of Class A shares. If the fee received by Goldman Sachs pursuant
to the Class A Distribution Plan exceeds its expenses, Goldman Sachs may
realize a profit from these arrangements. The Class A Distribution Plan will
be reviewed and is subject to approval annually by the Trustees. The aggregate
compensation that may be received under the Class A Distribution Plan for
distribution services may not exceed the limitations imposed by the NASD's
Conduct Rules.
DISTRIBUTION PLAN -- CLASS B AND CLASS C SHARES
The Trust, on behalf of each Fund's Class B and Class C shares (other than
the Adjustable Rate Government Fund which does not offer Class B or Class C
shares), has adopted a Distribution Plan pursuant to Rule 12b-1 under the Act
(each a "Distribution Plan"). Goldman Sachs is entitled to a quarterly fee
from each Fund under its Class B or Class C Distribution Plan for distribution
services equal, on an annual basis, to 0.75% of its average daily net assets
attributable to Class B or Class C shares. Goldman Sachs has voluntarily
agreed to limit such fee to 0.60% of the average daily net assets of the Short
Duration Government and Short Duration Tax-Free Funds, attributable to Class B
shares of such Funds. For the fiscal year ended October 31, 1996 the Funds
then offering Class B shares paid distribution fees with respect to their
Class B shares at the foregoing rate.
Goldman Sachs may use the distribution fee for its expenses of distributing
Class B and Class C shares of the Funds. The types of expenses for which
Goldman Sachs may be compensated for distribution services under the Class B
and Class C Distribution Plans include compensation paid to and expenses
incurred by Authorized Dealers, Goldman Sachs and their respective officers,
employees and sales representatives, commissions paid to Authorized Dealers,
allocable overhead, telephone and travel expenses, the printing of
prospectuses for prospective shareholders, preparation and distribution of
sales literature, advertising of any type and all other expenses incurred in
connection with activities primarily intended to result in the sale of Class B
and Class C
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<PAGE>
shares. If the fee received by Goldman Sachs pursuant to a Distribution Plan
exceeds its expenses, Goldman Sachs may realize a profit from these
arrangements. The Distribution Plans will be reviewed and are subject to
approval annually by the Trustees. The aggregate compensation that may be
received under each Distribution Plan for distribution services may not exceed
the limitations imposed by the NASD's Conduct Rules.
In connection with the sale of Class C shares, Goldman Sachs pays sales
commissions of 0.75% of the purchase price to Authorized Dealers from its own
resources at the time of sale. Goldman Sachs plans to pay the 0.75%
distribution fee on a quarterly basis as an ongoing commission to Authorized
Dealers on Class C shares that have been outstanding for one year or more.
AUTHORIZED DEALER SERVICE PLANS
The Trust on behalf of each Fund's Class A, Class B and Class C shares has
adopted non-Rule 12b-1 Authorized Dealer Service Plans (each a "Service Plan")
pursuant to which Goldman Sachs, Authorized Dealers or other persons are
compensated for providing personal and account maintenance services. Each Fund
pays a fee under its Class A, Class B or Class C Service Plan equal on an
annual basis to 0.25% of its average daily net assets attributable to Class A,
Class B or Class C shares. The fee for personal and account maintenance
services paid pursuant to a Service Plan may be used to make payments to
Goldman Sachs, Authorized Dealers and their officers, sales representatives
and employees for responding to inquiries of, and furnishing assistance to,
shareholders regarding ownership of their shares or their accounts or similar
services not otherwise provided on behalf of the Funds. The Service Plans will
be reviewed and are subject to approval annually by the Trustees. For the
fiscal year ended October 31, 1996, each Fund (other than the Short Duration
Government, Short Duration Tax-Free, Core Fixed Income and High Yield Funds
which did not offer Class A or Class B shares) paid Authorized Dealer service
fees at the foregoing rate for each Fund's Class A and Class B shares.
In connection with the sale of Class C shares of any Fund or Class B shares
or Class A shares (on purchases of $500,000 or more) of the Short Duration
Government and Short Duration Tax-Free Funds, Goldman Sachs pays the 0.25%
service fee to Authorized Dealers in advance for the first year after such
shares have been sold by the Authorized Dealer. After the shares have been
held for one year, Goldman Sachs pays the service fee on a quarterly basis. In
addition, Goldman Sachs pays sales commissions to Authorized Dealers from its
own resources at the time of sale equal to 0.75% of the purchase price of
Class C shares of any Fund, 0.75% of the purchase price of Class B shares of
the Short Duration Government and Short Duration Tax-Free Funds, and 1.75% of
the purchase price of Class A shares of the Short Duration Government and
Short Duration Tax-Free Funds (on purchases of $500,000 or more). Accordingly,
the total up front commission paid by Goldman Sachs to the Authorized Dealer
at the time of sale of each class described above is 1.00%, 1.00% and 2.00%,
respectively.
HOW TO SELL SHARES OF THE FUNDS
Each Fund will redeem its shares upon request of a shareholder on any
Business Day at the net asset value next determined after the receipt of such
request in proper form, subject to any applicable CDSC. See "Net Asset Value."
Redemption proceeds will be mailed by check to a shareholder within three (3)
Business Days of receipt of a properly executed request. If shares to be
redeemed were recently purchased by check, a Fund may delay transmittal of
redemption proceeds until such time as it has assured itself that good funds
have been collected for the purchase of such shares. This may take up to
fifteen (15) days. Redemption requests may be made by writing to or calling
the Transfer Agent at the address or telephone number set forth on the back
cover page of this Prospectus or an Authorized Dealer.
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The Trust accepts telephone requests for redemption of shares for amounts up
to $50,000 within any seven (7) calendar day period, except for investors who
have specifically declined telephone redemption privileges on the Account
Application or elected in writing not to utilize telephone redemptions
(proceeds which are sent to a Goldman Sachs brokerage account are not subject
to the $50,000 limit). It may be difficult to implement redemptions by
telephone in times of drastic economic or market changes. By completing an
Account Application, an investor agrees that the Trust, the Distributor and
the Transfer Agent shall not be liable for any loss incurred by the investor
by reason of the Trust accepting unauthorized telephone redemption requests
for his account if the Trust reasonably believes the instructions to be
genuine. Thus, shareholders risk possible losses in the event of a telephone
redemption not authorized by them. The Trust may accept telephone redemption
instructions from any person identifying himself as the owner of an account or
the owner's broker where the owner has not declined in writing to utilize this
service.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs and NFDS each employ reasonable
procedures specified by the Trust to confirm that such instructions are
genuine. Consequently, proceeds of telephone redemption requests will be sent
only to the shareholder's address of record or authorized bank account
designated in the Account Application and exchanges of shares will be made
only to an identical account. Telephone requests will also be recorded. The
Trust may implement other procedures from time to time. If reasonable
procedures are not employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. Proceeds of telephone redemptions
will be mailed to the shareholder's address of record or wired to the
authorized bank account indicated on the Account Application, unless the
shareholder provides written instructions (accompanied by a signature
guarantee) indicating another address. Telephone redemptions will not be
accepted during the 30-day period following any change in a shareholder's
address of record. This redemption option does not apply to shares held in a
"street name" account. Shareholders whose accounts are held in "street name"
should contact their broker of record who may effect telephone redemptions on
their behalf. The Trust reserves the right to terminate or modify the
telephone redemption service at any time. Shares of each Fund (other than
Global Income Fund) earn dividends accrued through the day on which such
shares are redeemed.
Written requests for redemptions must be signed by each shareholder with its
signature guaranteed by a bank, a securities broker or dealer, a credit union
having authority to issue signature guarantees, a savings and loan
association, a building and loan association, a cooperative bank, a federal
savings bank or association, a national securities exchange, a registered
securities association or a clearing agency, provided that such institution
satisfies the standards established by the Transfer Agent.
The Funds will also arrange for the proceeds of redemptions effected by any
means to be wired as federal funds to the bank account designated in the
shareholder's Account Application. Redemption proceeds will normally be wired
on the next Business Day in federal funds (for a total one Business Day delay)
following receipt of a properly executed wire transfer redemption request.
Wiring of redemption proceeds may be delayed one additional Business Day if
the Federal Reserve Bank is closed on the day redemption proceeds would
ordinarily be wired. A transaction fee of $7.50 may be charged for payments of
redemption proceeds by wire. In order to change the bank designated on the
Account Application to receive redemption proceeds, a written request must be
received by the Transfer Agent. This request must be signature guaranteed as
set forth above. Further documentation may be required for executors, trustees
or corporations. Once wire transfer instructions have been given by Goldman
Sachs or an Authorized Dealer, neither a Fund, the Trust, Goldman Sachs nor
any Authorized Dealer assumes any further responsibility for the performance
of intermediaries or the shareholder's bank in the transfer process. If a
problem with such performance arises, the shareholder should deal directly
with such intermediaries or bank.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by the Transfer Agent. The
request for such redemption will not be considered to have been received in
proper form until such additional documentation has been received.
53
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may draw on shareholdings systematically via check or ACH in
any amount specified by the shareholder over $50. Checks are only available on
or about the 25th of each month. Each systematic withdrawal is a redemption
and therefore a taxable transaction. A minimum balance of $5,000 in shares of
a Fund is required. The maintenance of a withdrawal plan concurrently with
purchases of additional Class A, Class B or Class C shares would be
disadvantageous because of the sales charge imposed on your purchases of Class
A shares or the imposition of a CDSC on your redemptions of Class A, Class B
or Class C shares. The CDSC applicable to Class A, Class B and Class C shares
redeemed under a systematic withdrawal plan may be waived. See "How to
Invest--Waiver or Reduction of Contingent Deferred Sales Charge." See
Additional Statement for more information about the Systematic Withdrawal
Plan.
DIVIDENDS
Each dividend from net investment income and capital gains distributions, if
any, declared by a Fund on its outstanding shares will, at the election of
each shareholder, be paid (i) in cash, (ii) in additional shares of the same
class of the Fund or (iii) in shares of the same or an equivalent class of any
other Goldman Sachs Fund or units of the ILA Portfolios (the Prime Obligations
Portfolio only for Class B and Class C) as described under "Cross-Reinvestment
of Dividends and Distributions and Automatic Exchange Program." This election
should initially be made on a shareholder's Account Application and may be
changed upon written notice to Goldman Sachs at any time prior to the record
date for a particular dividend or distribution. If no election is made, all
dividends from net investment income and capital gains distributions will be
reinvested in the Fund. Capital gains distributions will be reinvested or paid
in cash, in accordance with the shareholder's prior election, on the payment
date.
The election to reinvest dividends and distributions paid by the Fund in
additional shares or units of the Fund or any other Goldman Sachs Fund or ILA
Portfolio will not affect the tax treatment of such dividends and
distributions, which will be treated as received by the shareholder and then
used to purchase shares or units of the Fund, another Goldman Sachs Fund or an
ILA Portfolio.
Each Fund intends that all or substantially all of its net investment income
and net realized long-term and short-term capital gains, after reduction by
available capital losses, including any capital losses carried forward from
prior years, will be declared as dividends for each taxable year. In the case
of the Core Fixed Income, Global Income and High Yield Funds, net loss, if
any, from certain foreign currency transactions or instruments that is
otherwise taken into account in calculating net investment income or net
realized capital gains for accounting purposes may not be taken into account
in determining the amount of dividends to be declared and paid, with the
result that a portion of the Fund's dividends may be treated as a return of
capital, nontaxable to the extent of a shareholder's tax basis in his shares.
Each Fund (other than the Global Income Fund) will declare dividends daily and
pay dividends monthly. The Global Income Fund will declare and pay dividends
monthly. All of the Funds will pay dividends from net realized long-term and
short-term capital gains, reduced by available capital losses, at least
annually. From time to time a portion of any Fund's dividends may constitute a
return of capital.
At the time of an investor's purchase of shares of a Fund a portion of the
net asset value per share may be represented by undistributed income (in the
case of the Global Income Fund) or realized or unrealized appreciation of any
Fund's portfolio securities. Therefore, subsequent distributions on such
shares from such income or realized appreciation may be taxable to the
investor even if the net asset value of the investor's shares is, as a result
of the distributions, reduced below the cost of such shares and the
distributions (or portions thereof) represent a return of a portion of the
purchase price.
54
<PAGE>
NET ASSET VALUE
The net asset value per share of each class of a Fund is calculated by the
Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time) on each
Business Day (as such term is defined under "Additional Information")
immediately after the determination, if any, of the income to be declared as a
dividend (except in the case of the Global Income Fund). Net asset value per
share of each class is calculated by determining the net assets attributable
to each class and dividing by the number of outstanding shares of that class.
Each Fund's portfolio securities for which accurate market quotations are
readily available are valued on the basis of quotations, which may be
furnished by a pricing service or provided by dealers in such securities and
other portfolio securities are valued at fair value, based on yield
equivalents, a pricing matrix or other sources, under valuation procedures
established by the Trustees. Debt obligations with a remaining maturity of 60
days or less are valued at amortized cost. The Board of Trustees has
determined that the amortized cost of such securities approximates fair market
value.
PERFORMANCE INFORMATION
From time to time each Fund may publish yield, distribution rate and average
annual total return and the Short Duration Tax-Free and Municipal Income Funds
may publish their tax equivalent yields in advertisements and communications
to shareholders or prospective investors. Average annual total return is
determined by computing the average annual percentage change in value of
$1,000 invested at the maximum public offering price for specified periods
ending with the most recent calendar quarter, assuming reinvestment of all
dividends and distributions at net asset value. The total return calculation
assumes a complete redemption of the investment at the end of the relevant
period. Total return calculations for Class A shares reflect the effect of
paying the maximum initial sales charge. Investment at a lower sales charge
would result in higher performance figures. Total return calculations for
Class B and Class C shares reflect deduction of the applicable CDSC imposed
upon redemption of Class B and Class C shares held for the applicable period.
Each Fund may also from time to time advertise total return on a cumulative,
average, year-by-year or other basis for various specified periods by means of
quotations, charts, graphs or schedules. In addition, each Fund may furnish
total return calculations based on investments at various sales charge levels
or at net asset value. Any performance data which is based on a Fund's net
asset value per share would be reduced if a sales charge were taken into
account. In addition to the above, each Fund may from time to time advertise
its performance relative to certain averages, performance rankings, indices,
other information prepared by recognized mutual fund statistical services and
investments for which reliable performance data is available.
Yield is computed by dividing net investment income earned during a recent
thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the
maximum offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from
the net investment income determined for accounting purposes.
55
<PAGE>
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, the tax-free yield of the Short Duration Tax-Free or the
Municipal Income Funds. Tax equivalent yield is calculated by dividing the
applicable Fund's tax-exempt yield by one minus a stated federal tax rate.
Quotations of distribution rates are calculated by annualizing the most
recent distribution of net investment income for a monthly, quarterly or other
relevant period and dividing this amount by the net asset value per share or
maximum public offering price on the last day of the period for which the
distribution rates are being calculated.
Each Fund's yield, total return and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, the yield, total return and distribution
rate calculations with respect to each class of shares for the same period
will differ. The investment performance of the Class A, Class B and Class C
shares will be affected by the payment of a sales charge and distribution fees
and other class specific expenses. See "Shares of the Trust."
The investment results of a Fund will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Funds may, in their discretion, from time to time,
make a list of their holdings available to investors upon request.
SHARES OF THE TRUST
Each Fund is a series of the Goldman Sachs Trust, which was formed under the
laws of the State of Delaware on January 28, 1997. The Funds were formerly
series of Goldman Sachs Trust, a Massachusetts business trust, and were
reorganized into the Trust as of April 30, 1997. The Trustees have authority
under the Trust's Declaration of Trust to create and classify shares of
beneficial interest in separate series, without further action by
shareholders. Additional series may be added in the future. The Trustees also
have authority to classify or reclassify any series or portfolio of shares
into one or more classes.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable Fund available for distribution to such shareholders. All
shares are freely transferable and have no preemptive, subscription or
conversion rights. Shareholders are entitled to one vote per share, provided
that at the option of the Trustees, shareholders will be entitled to a number
of votes based upon the net asset values represented by their shares.
The Trust does not intend to hold annual meetings of shareholders. However,
pursuant to the Trust's By-Laws, the recordholders of at least 10% of the
shares outstanding and entitled to vote at a special meeting may require the
Trust to hold such special meeting of shareholders for any purpose and,
recordholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting for the
purpose of electing Trustees if, at any time, less than a majority of Trustees
holding office at the time were elected by shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Funds' shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Funds are reflected in
account statements from the Transfer Agent.
56
<PAGE>
As of April 1, 1997, the shareholders listed below owned beneficially and of
record 25% or more of the outstanding shares of such Fund: Short Duration
Government Fund--State Street Bank and Trust Company, P.O. Box 1992, Boston,
MA 02105-1992 (34.05%).
TAXATION
FEDERAL TAXES
Each Fund is treated as a separate entity for tax purposes, has elected or
intends to elect to be treated as a regulated investment company and intends
to qualify for such treatment for each taxable year under Subchapter M of the
Code. To qualify as such, a Fund must satisfy certain requirements relating to
the sources of its income, diversification of its assets and distribution of
its income to shareholders. As a regulated investment company, a Fund will not
be subject to federal income or excise tax on any net investment income and
net realized capital gains that are distributed to its shareholders in
accordance with certain timing requirements of the Code.
The Short Duration Tax-Free and Municipal Income Funds intend to satisfy
certain requirements of the Code so that they may distribute the tax-exempt
interest they receive as "exempt-interest dividends," as defined in the Code.
If such requirements are satisfied, distributions of the Short Duration Tax-
Free and Municipal Income Funds that are attributable to interest on tax-
exempt obligations and that the Funds properly designate as exempt-interest
dividends will be exempt from regular federal income tax, although all or a
portion of such a distribution may be subject to the federal alternative
minimum tax and the entire distribution may be includable in the tax base for
determining taxability of social security or railroad retirement benefits.
Persons who are "substantial users" (or related persons to such substantial
users) of facilities financed by industrial development or certain private
activity bonds should consult their own tax advisers before purchasing shares
of the Short Duration Tax-Free and Municipal Income Funds. Interest on
indebtedness incurred or continued to purchase or carry shares of the Short
Duration Tax-Free and Municipal Income Funds is not deductible to the extent
attributable to the Funds' distributions that are exempt-interest dividends.
Dividends paid by a Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to shareholders as ordinary income, except for any exempt-
interest dividends paid by the Short Duration Tax-Free and Municipal Income
Funds, as described above. Dividends paid by a Fund from the excess of net
long-term capital gain over net short-term capital loss will be taxable as
long-term capital gains regardless of how long the shareholders have held
their shares. These tax consequences will apply regardless of whether
distributions are received in cash or reinvested in shares. Certain
distributions paid by a Fund in January of a given year may be taxable to
shareholders as if received the prior December 31. Shareholders will be
informed annually about the amount and character of distributions received
from the Funds for federal income tax purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution other than a daily dividend will pay a per
share price that includes the value of the anticipated distribution and will
be taxed on any taxable distribution even though the distribution represents a
return of a portion of the purchase price.
Redemptions and exchanges of shares are taxable events.
57
<PAGE>
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions (other than exempt-
interest dividends), redemptions and exchanges if they fail to furnish their
correct taxpayer identification number and certain certifications required by
the Internal Revenue Service or if they are otherwise subject to backup
withholding. Individuals, corporations and other shareholders that are not
U.S. persons under the Code are subject to different tax rules and may be
subject to nonresident alien withholding at the rate of 30% (or a lower rate
provided by an applicable tax treaty) on amounts treated as ordinary dividends
from the Funds.
The Core Fixed Income, Global Income and High Yield Funds may be subject to
foreign withholding or other foreign taxes on income or gain from certain
foreign securities. If more than 50% of the value of the total assets of
either Fund is comprised of stock or securities of foreign corporations at the
end of its taxable year and the applicable Fund so elects, that Fund's
shareholders will include in their gross incomes (in addition to dividends and
distributions they receive) their pro rata shares of qualified foreign taxes
paid by that Fund and may be entitled under the Code to claim foreign tax
credits or deductions with respect to such taxes. It is not expected that the
Core Fixed Income Fund will qualify to make this election with respect to such
taxes. If either Fund cannot or does not so elect, it may deduct these taxes
in computing its taxable income, if any.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Funds, including exempt-
interest dividends. A state income (and possibly local income and/or
intangible property) tax exemption is generally available to the extent (if
any) a Fund's distributions are derived from interest on (or, in the case of
intangible property taxes, the value of its assets is attributable to) certain
U.S. government obligations and/or tax-exempt municipal obligations issued by
or on behalf of the particular state or a political subdivision thereof,
provided in some states that certain thresholds for holdings of such
obligations and/or reporting requirements are satisfied. For a further
discussion of certain tax consequences of investing in shares of the Funds,
see "Taxation" in the Additional Statement. Shareholders are urged to consult
their own tax advisers regarding specific questions as to federal, state and
local taxes as well as to any foreign taxes.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of a Fund means
the vote of the lesser of (i) 67% or more of the shares present at a meeting,
if the holders of more than 50% of the outstanding shares of the Fund are
present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
58
<PAGE>
APPENDIX
STATEMENT OF INTENTION
(APPLICABLE ONLY TO CLASS A SHARES PURCHASED SUBJECT TO A SALES CHARGE)
If a shareholder anticipates purchasing $100,000 ($500,000 in the case of
the Adjustable Rate Government Fund and $250,000 in the case of Short Duration
Government and Short Duration Tax-Free Funds) or more of Class A shares of a
Fund alone or in combination with Class A shares of another Fund or another
Goldman Sachs Fund within a 13-month period, the shareholder may obtain Class
A shares of the Fund at the same reduced sales charge as though the total
quantity were invested in one lump sum by filing this Statement of Intention
incorporated by reference in the Account Application. Income dividends and
capital gain distributions taken in additional shares will not apply toward
the completion of this Statement of Intention.
To ensure that the reduced price will be received on future purchases, the
investor must inform Goldman Sachs that this Statement of Intention is in
effect each time shares are purchased. Subject to the conditions mentioned
below, each purchase will be made at the public offering price applicable to a
single transaction of the dollar amount specified on the Account Application.
The investor makes no commitment to purchase additional shares, but if his
purchases within 13 months plus the value of shares credited toward completion
do not total the sum specified, he will pay the increased amount of the sales
charge prescribed in the Escrow Agreement.
ESCROW AGREEMENT
Out of the initial purchase (or subsequent purchases if necessary) 5% of the
dollar amount specified on the Account Application shall be held in escrow by
the Transfer Agent in the form of shares registered in the investor's name.
All income dividends and capital gains distributions on escrowed shares will
be paid to the investor or to his order. When the minimum investment so
specified is completed (either prior to or by the end of the thirteenth
month), the shareholder will be notified and the escrowed shares will be
released. In signing the Account Application, the investor irrevocably
constitutes and appoints the Transfer Agent his attorney to surrender for
redemption any or all escrowed shares with full power of substitution in the
premises.
If the intended investment is not completed, the investor will be asked to
remit to Goldman Sachs any difference between the sales charge on the amount
specified and on the amount actually attained. If the investor does not within
20 days after written request by Goldman Sachs pay such difference in the
sales charge, the Transfer Agent will redeem an appropriate number of the
escrowed shares in order to realize such difference. Shares remaining after
any such redemption will be released by the Transfer Agent.
59
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS
MANAGEMENT, L.P.
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET
MANAGEMENT INTERNATIONAL
133 PETERBOROUGH COURT
LONDON, ENGLAND EC4A 2BB
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN
1776 HERITAGE DRIVE
NORTH QUINCY, MASSACHUSETTS 02110
ARTHUR ANDERSEN LLP
AUDITORS
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
TOLL FREE (IN U.S.) . . . . . . . . 800-526-7384
FIPROAB
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS
FIXED INCOME FUNDS
- --------------------------------------------------------------------------------
PROSPECTUS CLASS A, B AND C SHARES
LOGO GOLDMAN
SACHS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- -----------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED JUNE 13, 1997
PROSPECTUS GOLDMAN SACHS FIXED INCOME FUNDS
INSTITUTIONAL SHARES
, 1997
GOLDMAN SACHS ADJUSTABLE RATE
GOVERNMENT FUND GOLDMAN SACHS MUNICIPAL INCOME FUND
Seeks a high level of current income
Seeks a high level of current that is exempt from regular federal in-
income, consistent with low come tax, consistent with preservation
volatility of principal. The of capital. The Fund invests primarily
Fund invests primarily in ad- in municipal securities.
justable rate mortgage pass-
through securities and other
mortgage securities with peri-
odic interest rate resets,
which are issued or guaranteed
by the U.S. government, its
agencies, instrumentalities or
sponsored enterprises.
GOLDMAN SACHS CORE FIXED INCOME FUND
Seeks a total return consisting of
capital appreciation and income that
exceeds the total return of the Lehman
Brothers Aggregate Bond Index. The Fund
invests primarily in fixed-income
securities, including securities issued
or guaranteed by the U.S. government,
GOLDMAN SACHS SHORT DURATION its agencies, instrumentalities or
GOVERNMENT FUND sponsored enterprises, corporate
securities, mortgage-backed securities
Seeks a high level of current and asset-backed securities.
income and secondarily, in
seeking current income, may
also consider the potential
for capital appreciation. The
Fund invests primarily in se-
curities issued or guaranteed
by the U.S. government, its
agencies, instrumentalities or
sponsored enterprises.
GOLDMAN SACHS GLOBAL INCOME FUND
Seeks a high total return, emphasizing
current income and, to a lesser extent,
providing opportunities for capital
appreciation. The Fund invests primarily
in a portfolio of high quality fixed-
income securities of U.S. and foreign
issuers and foreign currencies.
GOLDMAN SACHS SHORT
DURATIONTAX-FREE FUND
GOLDMAN SACHS HIGH YIELD FUND
Seeks a high level of current Seeks a high level of current income
income, consistent with rela- and, secondarily, capital appreciation.
tively low volatility of prin- The Fund invests primarily in fixed-
cipal, that is exempt from income securities rated below investment
regular federal income tax. grade.
The Fund invests primarily in
municipal securities.
GOLDMAN SACHS GOVERNMENT IN-
COME FUND
Seeks a high level of current
income, consistent with safety
of principal. The Fund invests
primarily in securities, in-
cluding mortgage-backed secu-
rities, issued or guaranteed
by the U.S. government, its
agencies, instrumentalities or
sponsored enterprises.
Goldman Sachs Funds Management, L.P. ("GSFM"), New York, New York, an
affiliate of Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment
adviser to the Adjustable Rate Government and Short Duration Government Funds.
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman Sachs, serves as investment adviser to the Short
Duration Tax-Free, Government Income, Municipal Income, Core Fixed Income and
High Yield Funds. Goldman Sachs Asset Management International ("GSAMI"),
London, England, an affiliate of Goldman Sachs, serves as investment adviser to
the Global Income Fund. GSAM, GSFM and GSAMI are each referred to in this
Prospectus as the "Investment Adviser." Goldman Sachs serves as each Fund's
distributor and transfer agent.
INSTITUTIONAL SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
(continued on next page)
<PAGE>
(cover continued)
THE ADJUSTABLE RATE GOVERNMENT, SHORT DURATION GOVERNMENT AND GOVERNMENT
INCOME FUNDS' NET ASSET VALUES AND YIELDS ARE NOT GUARANTEED BY THE U.S.
GOVERNMENT OR BY ITS AGENCIES, INSTRUMENTALITIES OR SPONSORED ENTERPRISES.
THE CORE FIXED INCOME, GLOBAL INCOME AND HIGH YIELD FUNDS MAY INVEST IN
SECURITIES OF FOREIGN ISSUERS AND FOREIGN CURRENCIES THAT ENTAIL CERTAIN RISKS
NOT CUSTOMARILY ASSOCIATED WITH INVESTING IN U.S. DOLLAR-DENOMINATED FIXED-
INCOME SECURITIES. IN PARTICULAR, THE SECURITIES MARKETS OF EMERGING MARKET
COUNTRIES ARE LESS LIQUID, ARE SUBJECT TO GREATER PRICE VOLATILITY, HAVE
SMALLER MARKET CAPITALIZATIONS, HAVE LESS GOVERNMENT REGULATION AND ARE NOT
SUBJECT TO AS EXTENSIVE AND FREQUENT ACCOUNTING, FINANCIAL AND OTHER REPORTING
REQUIREMENTS AS THE SECURITIES MARKETS OF MORE DEVELOPED COUNTRIES.
THE HIGH YIELD FUND INVESTS PRIMARILY IN HIGH YIELD, FIXED-INCOME SECURITIES
RATED BELOW INVESTMENT GRADE THAT ARE CONSIDERED SPECULATIVE AND GENERALLY
INVOLVE GREATER PRICE VOLATILITY AND GREATER RISK OF LOSS OF PRINCIPAL AND
INTEREST THAN INVESTMENTS IN HIGHER RATED FIXED-INCOME SECURITIES.
INVESTORS SHOULD CONSIDER THE RISKS ASSOCIATED WITH INVESTMENT IN A FUND
INVESTING IN FOREIGN AND OR HIGH YIELD SECURITIES. THE FUNDS MAY NOT BE
SUITABLE FOR ALL INVESTORS. SEE "DESCRIPTION OF SECURITIES" AND "RISK
FACTORS."
This Prospectus provides information about Goldman Sachs Trust (the "Trust")
and the Funds that a prospective investor should understand before investing.
This Prospectus should be retained for future reference. A Statement of
Additional Information (the "Additional Statement"), dated May 1, 1997,
containing further information about the Trust and the Funds which may be of
interest to investors, has been filed with the Securities and Exchange
Commission ("SEC"), is incorporated herein by reference in its entirety, and
may be obtained without charge from Goldman Sachs by calling the telephone
number, or writing to one of the addresses, listed on the back cover of this
Prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains
the Additional Statement and other information regarding the Trust.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights..................... 1
Fees and Expenses................... 7
Financial Highlights................ 9
Investment Objectives and Policies.. 13
Description of Securities........... 20
Risk Factors........................ 27
Investment Techniques............... 30
Investment Restrictions............. 34
Portfolio Turnover.................. 34
Management.......................... 35
Dividends........................... 38
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Net Asset Value................... 39
Performance Information........... 40
Shares of the Trust............... 41
Taxation.......................... 41
Additional Information............ 43
Reports to Shareholders........... 44
Purchase of Institutional Shares.. 44
Exchange Privilege................ 46
Redemption of Institutional
Shares........................... 47
Appendix.......................... A-1
Account Information Form
</TABLE>
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information contained in
this Prospectus and is qualified in its entirety by the more detailed
information contained herein.
WHAT IS THE GOLDMAN SACHS TRUST?
The Goldman Sachs Trust is an open-end management investment company that
offers its shares in several investment funds (mutual funds). Each Fund
pools the monies of investors by selling its shares to the public and
investing these monies in a portfolio of securities designed to achieve that
Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS?
Each Fund has distinct investment objectives and policies. There can be no
assurance that a Fund's objectives will be achieved. For a complete
description of each Fund's investment objectives and policies, see
"Investment Objectives and Policies," "Description of Securities" and
"Investment Techniques."
1
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
INTEREST
INVESTMENT RATE
FUND NAME OBJECTIVES DURATION SENSITIVITY INVESTMENT SECTOR CREDIT QUALITY OTHER INVESTMENTS
- -------------- ------------------- ------------------- ------------ --------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
ADJUSTABLE A high level of Target = 6-month 9-month note At least 65% of U.S. Government Fixed-rate
RATE current income, to 1-year total assets in Securities mortgage
GOVERNMENT consistent with U.S. Treasury securities issued or pass-through
FUND low volatility Security guaranteed by the securities and
of principal. Maximum = 2 years U.S. government, repurchase
its agencies, agreements
instrumentalities collateralized by
or sponsored U.S. Government
enterprises Securities.
("U.S. Government
Securities'')
that are adjustable
rate mortgage
pass-through
securities and
other mortgage
securities with
periodic interest
rate resets.
--------------------------------------------------------------------------------------------
SHORT DURATION A high level of Target = 2-year 2-year bond At least 65% of U.S. Government Mortgage pass-
GOVERNMENT current income, U.S. Treasury total assets in Securities through
FUND and secondarily, Security plus U.S. Government securities and
in seeking current or minus .5 years Securities other securities
income, may also Maximum = 3 years and repurchase representing an
consider the poten- agreements interest in or
tial for capital collateralized collateralized
appreciation. by such securities. by mortgage loans.
--------------------------------------------------------------------------------------------
SHORT DURATION A high level of Target = Lehman 3-year bond At least 80% of Minimum = BBB/Baa U.S. Government
TAX-FREE current income, Brothers net assets in Securities
FUND consistent with 3-year Municipal municipal securities. and repurchase
low volatility Bond Index agreements
of principal, plus or minus collateralized
that is exempt .5 years by such securities.
from regular Maximum = 4 years
federal
income tax.
--------------------------------------------------------------------------------------------
GOVERNMENT A high level of Target = Lehman 5-year bond At least 65% of U.S. Government Non-government
INCOME current income, Brothers Mutual assets in U.S. Securities and mortgage pass-
FUND consistent with Fund Government/ Government non-U.S. through securities,
safety of Mortgage Index Securities, including Government asset-backed
principal. plus or minus mortgage-backed Securities rated securities,
1 year U.S. Government AAA/Aaa corporate
Maximum = Securities. fixed-income
6 years securities and
repurchase
agreements
collateralized by
U.S. Government
Securities.
<CAPTION>
FUND NAME BENCHMARK
- --------------- -----------------
<S> <C>
ADJUSTABLE 6-month and
RATE 1-Year U.S.
GOVERNMENT Treasury Security
FUND
--------------------------------------------------------------------------------------------
SHORT DURATION 2-Year U.S.
GOVERNMENT Treasury Security
FUND
--------------------------------------------------------------------------------------------
SHORT DURATION Lehman Brothers
TAX-FREE 3-Year Municipal
FUND Bond Index
--------------------------------------------------------------------------------------------
GOVERNMENT Lehman Brothers
INCOME Mutual Fund
FUND Government/
Mortgage Index
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
INTEREST
INVESTMENT RATE
FUND NAME OBJECTIVES DURATION SENSITIVITY INVESTMENT SECTOR CREDIT QUALITY
- ----------- --------------------- -------------------- ------------ ---------------------- -------------------
<S> <C> <C> <C> <C> <C>
CORE FIXED Total return Target = Lehman 5-year bond At least 65% of Minimum = BBB/Baa
INCOME FUND consisting Brothers assets in fixed-income Minimum for non-
of capital Aggregate Bond securities, including dollar securities =
appreciation Index plus or U.S. Government AA/Aa
and income that minus 1 year Securities, corporate,
exceeds the total Maximum = 6 years mortgage-backed
return of the and asset-backed
Lehman Brothers securities.
Aggregate Bond
Index.
--------------------------------------------------------------------------------------------
MUNICIPAL A high level of Target = Lehman 15-year bond At least 80% of Minimum =
INCOME current income Brothers 15-year net assets in BBB/Baa
FUND that is exempt Municipal Bond municipal securities. Average = AA/Aa
from regular Index plus
federal income or minus 1 year
tax, consistent Maximum = 12 years
with preservation
of capital.
--------------------------------------------------------------------------------------------
GLOBAL A high total return, Target = J.P. Morgan 6-year bond Securities of U.S. Minimum = AA/Aa
INCOME emphasizing current Global Government and foreign or A if sovereign
FUND income, and, to a Bond Index governments and issuer
lesser extent, (hedged) corporations. At least 50% =
providing plus or minus AAA/Aaa
opportunities 2.5 years
for capital Maximum = 7.5 years
appreciation.
--------------------------------------------------------------------------------------------
HIGH YIELD A high level of Target = Lehman 6-year bond At least 65% of At least 65% =
FUND current income Brothers High assets in fixed- BB/Ba or below
and, secondarily, Yield Bond Index income securities
capital appreciation. plus or minus rated below
2.5 years investment grade,
Maximum =7.5 years including U.S. and
non-U.S. dollar
corporate debt,
foreign government
securities,
convertible
securities
and preferred stock.
<CAPTION>
FUND NAME OTHER INVESTMENTS BENCHMARK
- ------------ ---------------------- ---------------
<S> <C> <C>
CORE FIXED Foreign fixed- Lehman Brothers
INCOME FUND income, Aggregate Bond
municipal and Index
convertible
securities,
foreign currencies
and repurchase
agreements
collateralized
by U.S.
Government
Securities.
--------------------------------------------------------------------------------------------
MUNICIPAL U.S. Government Lehman Brothers
INCOME Securities and 15-year
FUND repurchase Municipal
agreements Bond Index
collateralized by
such securities.
--------------------------------------------------------------------------------------------
GLOBAL Mortgage and asset- J.P. Morgan
INCOME backed securities, Global
FUND foreign currencies Government Bond
and repurchase Index (hedged)
agreements
collateralized by
U.S. Government
Securities or
certain foreign
government securities.
--------------------------------------------------------------------------------------------
HIGH YIELD Mortgage-backed Lehman Brothers
FUND and asset-backed High Yield
securities, U.S. Bond Index
Government
Securities,
investment grade
corporate fixed-
income securities,
structured
securities,
foreign currencies
and repurchase
agreements
collateralized by
U.S. Government
Securities.
</TABLE>
3
<PAGE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
Each Fund's share price will fluctuate with market, economic and, with
respect to the Core Fixed Income, Global Income and High Yield Funds,
foreign exchange conditions, so that an investment in any of the Funds may
be worth more or less when redeemed than when purchased. None of the Funds
should be relied upon as a complete investment program. There can be no
assurance that a Fund's investment objectives will be achieved. See "Risk
Factors."
Interest Rate Risk. When interest rates decline, the market value of
fixed-income securities tends to increase. Conversely, when interest rates
increase, the market value of fixed-income securities tends to decline.
Volatility of a security's market value will differ depending upon the
security's duration, the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed-income securities are
subject to the risk that the issuer could default on its obligations and a
Fund could sustain losses on such investments. A default could impact both
interest and principal payments.
Call Risk and Extension Risk. Fixed-income securities may be subject to
both call risk and extension risk. Call risk (i.e., where the issuer
exercises its right to pay principal on an obligation earlier than
scheduled) causes cash flow to be returned earlier than expected. This
typically results when interest rates have declined and a Fund will suffer
from having to reinvest in lower yielding securities. Extension risk (i.e.,
where the issuer exercises its right to pay principal on an obligation later
than scheduled) causes cash flows to be returned later than expected. This
typically results when interest rates have increased and a Fund will suffer
from the inability to invest in higher yielding securities. The investment
characteristics of Mortgage-Backed Securities (including adjustable rate
mortgage securities) and Asset-Backed Securities differ from those of
traditional fixed-income securities because they generally have both call
risk (also known as prepayment risk) and extension risk.
Tax Risk of Municipal Securities. Due to Municipal Securities' tax-exempt
status, their yields and market values may be more adversely impacted by
changes in tax rates and policies than taxable fixed-income securities.
Risks of investing in non-investment grade fixed-income securities. Non-
investment grade fixed-income securities (commonly referred to as "junk
bonds") are subject to greater volatility and risk of loss and are less
liquid than securities which are perceived to be of higher credit quality.
Such securities, also referred to as high yield securities, are considered
to be speculative by traditional investment standards. High yield securities
are subject to increased risk of an issuer's inability to meet principal and
interest payments. The High Yield Fund may invest in securities which are in
default at the time of investment. The market for non-investment grade
securities tends to be concentrated in a limited number of market makers,
which may affect liquidity. In addition, the market price of such securities
tends to reflect individual corporate developments to a greater extent than
that of higher rated securities which react primarily to the general level
of interest rates.
Foreign Risks. Investments in securities of foreign issuers and currencies
involve risks that are different from those associated with investments in
domestic securities. The risks associated with foreign investments and
currencies include changes in relative currency exchange rates, political
and economic developments, the imposition of exchange controls, confiscation
and other governmental restrictions. In addition, the securities
4
<PAGE>
markets of foreign countries are generally less liquid and subject to
greater price volatility. To the extent that the Core Fixed Income, Global
Income and High Yield Funds invest in emerging markets and countries, these
risks may be heightened.
Other. A Fund's use of certain investment techniques, including
derivatives, forward contracts, options, futures and swap transactions, will
subject the Fund to greater risk than funds that do not employ such
techniques.
Non-Diversification. Global Income Fund is a "non-diversified" fund as
defined under the Investment Company Act of 1940, as amended (the "Act"),
and is, therefore, subject only to certain federal tax diversification
requirements (to which the other Funds are also subject), in addition to the
policies adopted by the Investment Adviser. To the extent that the Fund is
not diversified under the Act, it will be more susceptible to adverse
developments affecting any single issuer of portfolio securities. See
"Investment Restrictions."
WHO MANAGES THE FUNDS?
Goldman Sachs Funds Management, L.P. serves as the Investment Adviser to
the Adjustable Rate Government and Short Duration Government Funds. Goldman
Sachs Asset Management serves as Investment Adviser to the Short Duration
Tax-Free, Government Income, Municipal Income, Core Fixed Income and High
Yield Funds. Goldman Sachs Asset Management International serves as
Investment Adviser to the Global Income Fund. As of , 1997, the
Investment Advisers, together with their affiliates, acted as investment
adviser, administrator or distributor for assets in excess of $ billion.
WHO DISTRIBUTES THE FUNDS' SHARES?
Goldman Sachs acts as distributor of each Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $50,000 ($1,000,000 for the Government
Income, Municipal Income, Global Income and High Yield Funds) in
Institutional Shares of the Fund alone or in combination with Institutional
Shares (or the corresponding class) of any other mutual fund sponsored by
Goldman Sachs and designated as an eligible fund for this purpose.
HOW DO I PURCHASE INSTITUTIONAL SHARES?
You may purchase Institutional Shares of the Funds through Goldman Sachs.
Institutional Shares are purchased at the current net asset value without
any sales load. See "Purchase of Institutional Shares."
HOW DO I SELL MY INSTITUTIONAL SHARES?
You may redeem Institutional Shares upon request on any Business Day, as
defined under "Additional Information," at the net asset value next
determined after receipt of such request in proper form. See "Redemption of
Institutional Shares."
5
<PAGE>
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME
DIVIDENDS
------------------ CAPITAL GAINS
FUND DECLARED PAID DISTRIBUTIONS
---- ------------------ -------------
<S> <C> <C> <C>
Adjustable Rate Government.................. Daily Monthly Annually
Short Duration Government................... Daily Monthly Annually
Short Duration Tax-Free..................... Daily Monthly Annually
Government Income........................... Daily Monthly Annually
Municipal Income............................ Daily Monthly Annually
Core Fixed Income........................... Daily Monthly Annually
Global Income............................... Monthly Monthly Annually
High Yield.................................. Daily Monthly Annually
</TABLE>
Recordholders of Institutional Shares may receive dividends in additional
Institutional Shares of the Fund in which you have invested or you may elect
to receive cash. For further information concerning dividends, see
"Dividends."
6
<PAGE>
FEES AND EXPENSES (INSTITUTIONAL SHARES)
<TABLE>
<CAPTION>
ADJUSTABLE SHORT SHORT CORE
RATE DURATION DURATION GOVERNMENT MUNICIPAL FIXED GLOBAL HIGH
GOVERNMENT GOVERNMENT TAX-FREE INCOME INCOME INCOME INCOME YIELD
FUND/1/ FUND FUND FUND/1/ FUND/1/ FUND FUND FUND/1/
---------- ---------- -------- ---------- --------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
Maximum Sales Charge
Imposed on Pur-
chases............... none none none none none none none none
Maximum Sales Charge
Imposed on Reinvested
Dividends............ none none none none none none none none
Redemption Fees....... none none none none none none none none
Exchange Fees......... none none none none none none none none
ANNUAL FUND OPERATING EXPENSES:
(as a
percentage of average daily net
assets)
Management Fees (after
applicable limita-
tions)/2/............ 0.40% 0.40% 0.40% 0.25% 0.55% 0.40% 0.59% 0.65%
Distribution (Rule
12b-1) Fees.......... none none none none none none none none
Other Expenses (after
applicable
limitations)/3/...... 0.11% 0.05% 0.05% 0.00% 0.05% 0.05% 0.06% 0.05%
---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES (after fee
and
expense limita-
tions)/4/........... 0.51% 0.45% 0.45% 0.25% 0.60% 0.45% 0.65% 0.70%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
EXAMPLE
You would pay the following expenses on a hypothetical $1,000 investment
assuming (i) a 5% annual return and (ii) redemption at the end of each time
period.
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Adjustable Rate Government...................... $ 5 $16 $29 $64
Short Duration Government....................... $ 5 $14 $25 $57
Short Duration Tax-Free......................... $ 5 $14 $25 $57
Government Income............................... $ 3 $ 8 $14 $32
Municipal Income................................ $ 6 $19 $33 $75
Core Fixed Income............................... $ 5 $14 $25 $57
Global Income................................... $ 7 $21 $36 $81
High Yield...................................... $ 7 $22 N/A N/A
</TABLE>
- --------
/1/Based on estimated amounts for the current fiscal year for the Adjustable
Rate Government, Government Income, Municipal Income and High Yield Funds.
/2/The Investment Advisers have voluntarily agreed that a portion of the
management fee would not be imposed on the Short Duration Government,
Government Income, Global Income and High Yield Funds equal to .10%, .40%,
.31% and .05%, respectively. Without such limitations, management fees would
be .50%, .65%, .90% and .70% of each Fund's average daily net assets,
respectively.
/3/The Investment Advisers voluntarily have agreed to reduce or limit certain
other expenses (excluding management fees, taxes, interest and brokerage
fees and litigation, indemnification and other extraordinary expenses (and
transfer agency fees in the case of the Global Income and High Yield Funds))
to the extent such expenses exceed .05%, .05%, .00%, .05%, .05%, .06% and
.01% of the average daily net assets of the Short Duration Government, Short
Duration Tax-Free, Government Income, Municipal Income, Core Fixed Income,
Global Income and High Yield Funds, respectively.
7
<PAGE>
/4/Without the limitations described above, "Other Expenses" and "Total
Operating Expenses" of each Fund (other than the Adjustable Rate Government,
Government Income, Municipal Income and High Yield Funds) for the fiscal
year ended October 31, 1996 would have been as follows:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Short Duration Government................................. .21% .71%
Short Duration Tax-Free................................... .61% 1.01%
Core Fixed Income......................................... .43% .83%
Global Income............................................. .21% 1.11%
</TABLE>
In addition, without the limitations described above, "Other Expenses" and
"Total Operating Expenses" for the Government Income, Municipal Income and
High Yield Funds, for the current fiscal year are estimated to be:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Government Income......................................... .74% 1.39%
Municipal Income.......................................... .50% 1.05%
High Yield................................................ .60% 1.30%
</TABLE>
The Investment Advisers have no current intention of modifying or
discontinuing any of the limitations set forth above but may do so in the
future at their discretion. The information set forth in the foregoing table
and hypothetical example relates only to Institutional Shares of the Funds.
The Short Duration Government, Short Duration Tax-Free and Core Fixed Income
Funds also offer Administration Shares, Service Shares, Class A Shares, Class
B Shares and Class C Shares; Adjustable Rate Government Fund also offers
Administration Shares, Service Shares and Class A Shares; Government Income,
Municipal Income, Global Income and High Yield Funds also offer Service
Shares, Class A Shares, Class B Shares and Class C Shares. The other classes
of the Funds are subject to different fees and expenses (which affect
performance), have different minimum investment requirements and are entitled
to different services. Information regarding any other class of the Funds may
be obtained from your sales representative or from Goldman Sachs by calling
the number on the back cover page of this Prospectus.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of a Fund that an investor will bear directly or
indirectly. The information on the fees and expenses included in the table and
the hypothetical example above are based on each Fund's fees and expenses
(actual or estimated) and should not be considered as representative of past
or future expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, a Fund's
actual performance will vary and may result in an actual return greater or
less than 5%. See "Management --Investment Advisers."
8
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following data with respect to a share (of the Class specified) of the
Funds outstanding during the period(s) indicated has been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report
incorporated by reference into the Additional Statement from the Annual Report
to shareholders for the Funds for the year ended October 31, 1996 (the "Annual
Report"). This information should be read in conjunction with the financial
statements and related notes incorporated by reference and attached to the
Additional Statement. The Annual Report also contains performance information
and is available upon request and without charge by calling the telephone
number or writing to one of the addresses on the back cover of this
Prospectus. During the periods shown, the Trust did not offer Institutional or
Service shares of the High Yield Fund. Accordingly, there are no financial
highlights for these classes.
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS(n)
---------------------------------------------------
NET REALIZED NET
AND REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
ADJUSTABLE RATE GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Institu-
tional Shares.. $ 9.83 $0.2971(a) $0.0216(a) -- $0.3187
1997-Administra-
tion Shares.... 9.83 0.2844(a) 0.0221(a) -- 0.3065
1997-Service
Shares(m)...... 9.84 0.0527(a) 0.0200(a) -- 0.0727
1997-Class A
Shares......... 9.83 0.2766(a) 0.0300(a) -- 0.3066
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares.. 9.77 0.5759(a) 0.0772 (a) -- 0.6531
1996-Administra-
tion Shares.... 9.77 0.5489(a) 0.0797 (a) -- 0.6286
1996-Class A
Shares......... 9.77 0.5481(a) 0.0806 (a) -- 0.6287
1995-Institu-
tional Shares.. 9.74 0.5630(a) 0.0717 (a) -- 0.6347
1995-Administra-
tion Shares.... 9.74 0.5366(a) 0.0737 (a) -- 0.6103
1995-Class A
Shares(c)...... 9.79 0.2721(a) (0.0090)(a) -- 0.2631
1994-Institu-
tional Shares.. 10.00 0.4341(a) (0.2455)(a) -- 0.1886
1994-Administra-
tion Shares.... 10.00 0.4211(a) (0.2572)(a) -- 0.1639
1993-Institu-
tional Shares.. 10.04 0.4397 (0.0376)(d) -- 0.4021
1993-Administra-
tion
Shares(e)...... 10.02 0.2146 (0.0173)(d) -- 0.1973
1992-Institu-
tional Shares.. 10.03 0.5599 (0.0029)(d) -- 0.5570
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
- ---------------------------------------------------
1991-Institu-
tional Shares.. 10.00 0.1531 0.0322 (d) -- 0.1853
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
---------------------------------------------------------------------
IN EXCESS
FROM NET OF NET
REALIZED REALIZED
GAIN ON GAIN ON
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS
INVESTMENT FUTURES INVESTMENT FUTURES IN TO
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS
---------- ------------ ---------- ------------ ------- -------------
ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Institu-
tional Shares.. $(0.2887) -- -- -- -- $(0.2887)
1997-Administra-
tion Shares.... (0.2765) -- -- -- -- (0.2765)
1997-Service
Shares(m)...... (0.0527) -- -- -- -- (0.0527)
1997-Class A
Shares......... (0.2766) -- -- -- -- (0.2766)
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares.. (0.5725) -- (0.0206) -- -- (0.5931)
1996-Administra-
tion Shares.... (0.5489) -- (0.0198) -- -- (0.5687)
1996-Class A
Shares......... (0.5489) -- (0.0198) -- -- (0.5687)
1995-Institu-
tional Shares.. (0.5759) -- (0.0287) -- -- (0.6046)
1995-Administra-
tion Shares.... (0.5528) -- (0.0275) -- -- (0.5803)
1995-Class A
Shares(c)...... (0.2697) -- (0.0134) -- -- (0.2831)
1994-Institu-
tional Shares.. (0.4486) -- -- -- -- (0.4486)
1994-Administra-
tion Shares.... (0.4239) -- -- -- -- (0.4239)
1993-Institu-
tional Shares.. (0.4397) -- (0.0024) -- -- (0.4421)
1993-Administra-
tion
Shares(e)...... (0.2146) -- (0.0027) -- -- (0.2173)
1992-Institu-
tional Shares.. (0.5470) -- -- -- -- (0.5470)
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
- ---------------------------------------------------
1991-Institu-
tional Shares.. (0.1553) -- -- -- -- (0.1553)
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
----------------------
RATIO OF RATIO OF RATIO OF
NET NET NET NET RATIO OF NET
INCREASE ASSET EXPENSES INVESTMENT EXPENSES INVESTMENT
(DECREASE) VALUE TO INCOME PORT NET ASSETS TO INCOME
IN NET AT END AVERAGE (LOSS) TO FOLIO AT END OF AVERAGE (LOSS) TO
ASSET OF TOTAL NET AVERAGE TURNOVER PERIOD NET AVERAGE
VALUE PERIOD RETURN(k) ASSETS NET ASSETS RATE(d) (IN 000S) ASSETS NET ASSETS
---------- ------ --------- -------- ---------- -------- ---------- -------- ----------
ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Institu-
tional Shares.. $0.0300 $9.86 3.28%(f) 0.45%(b) 6.08%(b) 25.64%(f) $ 549,611 0.51%(b) 6.02%(b)
1997-Administra-
tion Shares.... 0.0300 9.86 3.16(f) 0.70(b) 5.83(b) 25.64(f) 4,182 0.76(b) 5.77(b)
1997-Service
Shares(m)...... 0.0200 9.86 0.74(f) 0.95(b) 5.64(b) 25.64(f) 22 1.01(b) 5.58(b)
1997-Class A
Shares......... 0.0300 9.86 3.16(f) 0.70(b) 5.61(b) 25.64(f) 39,063 1.01(b) 5.30(b)
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares.. 0.0600 9.83 6.86 0.45 5.85 52.36 613,149 0.51 5.79
1996-Administra-
tion Shares.... 0.0600 9.83 6.60 0.70 5.59 52.36 3,792 0.76 5.53
1996-Class A
Shares......... 0.0600 9.83 6.60 0.70 5.59 52.36 10,728 1.01 5.28
1995-Institu-
tional Shares.. 0.0301 9.77 6.75 0.46 5.77 24.12 657,358 0.53 5.70
1995-Administra-
tion Shares.... 0.0300 9.77 6.48 0.71 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares(c)...... (0.0200) 9.77 2.74(f) 0.69(b) 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institu-
tional Shares.. (0.2600) 9.74 1.88 0.46 4.38 37.81 942,523 0.49 4.35
1994-Administra-
tion Shares.... (0.2600) 9.74 1.63 0.71 4.27 37.81 6,960 0.74 4.24
1993-Institu-
tional Shares.. (0.0400) 10.00 4.13 0.45 4.36 103.74 2,760,871 0.48 4.33
1993-Administra-
tion
Shares(e)...... (0.0200) 10.00 2.01(f) 0.70(b) 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institu-
tional Shares.. 0.0100 10.04 6.12 0.42 5.61 286.40 2,145,064 0.55 5.48
FOR THE PERIOD JULY 17, 1991(G) THROUGH OCTOBER 31,
- ---------------------------------------------------
1991-Institu-
tional Shares.. 0.0300 10.03 2.14(f) 0.20(b) 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS(n)
---------------------------------------------------
NET REALIZED NET
AND REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30,(unaudited)
- ---------------------------------------------
1997-Institu-
tional Shares.. $9.83 $0.3287(a) $(0.0700)(a) -- $0.2587
1997-Administra-
tion Shares.... 9.85 0.3175(a) (0.0700)(a) -- 0.2475
1997-Service
Shares......... 9.82 0.3043(a) (0.0700)(a) -- 0.2343
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares.. 9.82 0.6290(a) 0.0136 (a) -- 0.6426
1996-Administra-
tion
Shares(h)...... 9.86 0.3837(a) 0.0003 (a) -- 0.3840
1996-Service
Shares(i)...... 9.72 0.3134(a) 0.1018 (a) -- 0.4152
1995-Institu-
tional Shares.. 9.64 0.6652(a) 0.1666 (a) -- 0.8318
1995-Administra-
tion Shares.... 9.64 0.2384(a) (0.0433)(a) -- 0.1951
1994-Institu-
tional Shares.. 10.14 0.5628(a) (0.4592)(a) -- 0.1036
1994-Administra-
tion Shares.... 10.14 0.5329(a) (0.4539)(a) -- 0.0790
1993-Institu-
tional Shares.. 10.16 0.5627 (0.0135)(d) -- 0.5492
1993-Administra-
tion Shares(e). 10.23 0.2725 (0.0900)(d) -- 0.1825
1992-Institu-
tional Shares.. 10.22 0.6703 (0.0600)(d) -- 0.6103
1991-Institu-
tional Shares.. 10.00 0.8020 0.2200 (d) -- 1.0220
1990-Institu-
tional Shares.. 10.07 0.8300 (0.0700)(d) -- 0.7600
1989-Institu-
tional Shares.. 10.10 0.8800 -- -- 0.8800
FOR THE PERIOD AUGUST 15, 1988(g) THROUGH OCTOBER 31,
- -----------------------------------------------------
1988-Institu-
tional Shares.. 10.00 0.1800 0.1000 (d) -- 0.2800
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
-----------------------------------------------------------------------
IN EXCESS
FROM NET OF NET
REALIZED REALIZED
GAIN ON GAIN ON
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS
INVESTMENT FUTURES INVESTMENT FUTURES IN TO
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS
---------- ------------ ---------- ------------ -------- -------------
SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30,(unaudited)
- ---------------------------------------------
1997-Institu-
tional Shares.. $(0.3287) -- -- -- -- $(0.3287)
1997-Administra-
tion Shares.... (0.3175) -- -- -- -- (0.3175)
1997-Service
Shares......... (0.3043) -- -- -- -- (0.3043)
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares.. (0.6326) -- -- -- -- (0.6326)
1996-Administra-
tion Shares(h). (0.3940) -- -- -- -- (0.3940)
1996-Service
Shares(i)...... (0.3152) -- -- -- -- (0.3152)
1995-Institu-
tional Shares.. (0.6518) -- -- -- -- (0.6518)
1995-Administra-
tion Shares.... (0.2051) -- -- -- -- (0.2051)
1994-Institu-
tional Shares.. (0.5598) (0.0438) -- -- -- (0.6036)
1994-Administra-
tion Shares.... (0.5352) (0.0438) -- -- -- (0.5790)
1993-Institu-
tional Shares.. (0.5627) -- (0.0065) -- -- (0.5692)
1993-Administra-
tion
Shares(e)...... (0.2725) -- -- -- -- (0.2725)
1992-Institu-
tional Shares.. (0.6703) -- -- -- -- (0.6703)
1991-Institu-
tional Shares.. (0.8020) -- -- -- -- (0.8020)
1990-Institu-
tional Shares.. (0.8300) -- -- -- -- (0.8300)
1989-Institu-
tional Shares.. (0.8800) -- -- -- (0.0300) (0.9100)
FOR THE PERIOD AUGUST 15, 1988(g) THROUGH OCTOBER 31,
- -----------------------------------------------------
1988-Institu-
tional Shares.. (0.1800) -- -- -- -- (0.1800)
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
---------------------
RATIO OF RATIO OF NET RATIO OF
NET NET NET NET ASSETS RATIO OF NET
INCREASE ASSET EXPENSES INVESTMENT AT END EXPENSES INVESTMENT
(DECREASE) VALUE TO INCOME OF TO INCOME
IN NET AT END AVERAGE (LOSS) TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
ASSET OF TOTAL NET AVERAGE TURNOVER (IN NET AVERAGE
VALUE PERIOD RETURN(k) ASSETS NET ASSETS RATE(d) 000S) ASSETS NET ASSETS
---------- ------ --------- -------- ---------- --------- ------- -------- ----------
SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30,(unaudited)
- ---------------------------------------------
1997-Institu-
tional Shares.. $(0.0700) $9.76 2.67%(f) 0.45%(b) 6.44%(b) 43.72%(f) $99,824 0.73%(b) 6.16%(b)
1997-Administra-
tion Shares.... (0.0700) 9.78 2.55(f) 0.70(b) 6.22(b) 43.72(f) 1,504 0.98(b) 5.94(b)
1997-Service
Shares......... (0.0700) 9.75 2.42(f) 0.95(b) 5.94(b) 43.72(f) 2,522 1.23(b) 5.66(b)
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares.. 0.0100 9.83 6.75 0.45 6.44 115.45 99,944 0.71 6.18
1996-Administra-
tion
Shares(h)...... (0.0100) 9.85 4.00(f) 0.70(b) 5.97(b) 115.45 252 0.96(b) 5.71(b)
1996-Service
Shares(i)...... 0.1000 9.82 4.35(f) 0.95(b) 6.05(b) 115.45 1,822 1.21(b) 5.79(b)
1995-Institu-
tional Shares.. 0.1800 9.82 8.97 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administra-
tion Shares.... (0.0100) 9.63(h) 2.10 0.70(b) 7.91(b) 292.56 -- 0.90(b) 7.71(b)
1994-Institu-
tional Shares.. (0.5000) 9.64 0.99 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administra-
tion Shares.... (0.5000) 9.64 0.73 0.70 5.38 289.79 730 0.84 5.24
1993-Institu-
tional Shares.. (0.0200) 10.14 5.55 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administra-
tion Shares(e). (0.0900) 10.14 1.74 0.70(b) 4.84(b) 411.66 16,490 0.80(b) 4.74(b)
1992-Institu-
tional Shares.. (0.0600) 10.16 6.24 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institu-
tional Shares.. 0.2200 10.22 10.93 0.45 8.25 155.44 158,848 0.79 7.91
1990-Institu-
tional Shares.. (0.0700) 10.00 8.23 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institu-
tional Shares.. (0.0300) 10.07 9.08 0.46 8.71 137.37 31,015 1.39 7.78
FOR THE PERIOD AUGUST 15, 1988(g) THROUGH OCTOBER 31,
- -----------------------------------------------------
1988-Institu-
tional Shares.. 0.1000 10.10 3.30(f) 0.55(b) 8.55(b) 167.00(b) 39,052 1.42(b) 7.68(b)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS(n)
---------------------------------------------------
NET REALIZED NET
AND REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Institu-
tional Shares.. $ 9.96 $0.2097(a) $(0.0200)(a) -- $0.1897
1997-Administra-
tion Shares.... 9.96 0.1976(a) (0.0200)(a) -- 0.1776
1997-Service
Shares......... 9.97 0.1852(a) (0.0300)(a) -- 0.1552
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares.. 9.94 0.4192(a) 0.0200 (a) -- 0.4392
1996-Administra-
tion Shares.... 9.94 0.3944(a) 0.0200 (a) -- 0.4144
1996-Service
Shares......... 9.95 0.3697(a) 0.0200 (a) -- 0.3897
1995-Institu-
tional Shares.. 9.79 0.4235(a) 0.1500 (a) -- 0.5735
1995-Administra-
tion Shares.... 9.79 0.3989(a) 0.1500 (a) -- 0.5489
1995-Service
Shares......... 9.79 0.3744(a) 0.1600 (a) -- 0.5344
1994-Institu-
tional Shares.. 10.23 0.3787(a) (0.3575)(a) -- 0.0212
1994-Administra-
tion Shares.... 10.23 0.3537(a) (0.3575)(a) -- (0.0038)
1994-Service
Shares(j)...... 9.86 0.0475(a) (0.0700)(a) (0.0225)
1993-Institu-
tional Shares.. 9.93 0.3834 0.3000(d) -- 0.6834
1993-Administra-
tion
Shares(j)...... 10.16 0.1555 0.0720(d) -- 0.2275
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1992-Institu-
tional Shares.. 10.00 0.0341 (0.0700)(d) -- (0.0359)
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD ENDED APRIL 30,(unaudited)
- -----------------------------------------
1997-Class A
shares.......... $14.36 $ 0.46 $ (0.20) -- $ 0.26
1997-Class B
shares.......... 14.37 0.40 (0.19) -- 0.21
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... 14.47 0.92 (0.11) -- 0.81
1996-Class B
shares(m)....... 14.11 0.41 0.26 -- 0.67
1995-Class A
shares.......... 13.47 0.94 1.00 -- 1.94
1994-Class A
shares.......... 14.90 0.85 (1.28) -- (0.43)
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
- -------------------------------------------------------
1993-Class A
shares.......... 14.32 0.56 0.58 -- 1.14
MUNICIPAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD ENDED APRIL 30,(unaudited)
- -----------------------------------------
1997-Class A
shares.......... $14.37 $ 0.34 $ 0.03 -- $ 0.37
1997-Class B
shares.......... 14.37 0.28 0.03 -- 0.31
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... 14.17 0.65 0.20 -- 0.85
1996-Class B
shares(m)....... 14.03 0.27 0.34 -- 0.61
1995-Class A
shares.......... 13.08 0.67 1.09 -- 1.76
1994-Class A
shares.......... 14.64 0.73 (1.51) -- (0.78)
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
- ---------------------------------------------------
1993-Class A
shares.......... 14.32 0.22 0.32 -- 0.54
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
---------------------------------------------------------------------
IN EXCESS
FROM NET OF NET
REALIZED REALIZED
GAIN ON GAIN ON
INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL
FROM NET OPTION AND OF NET OPTION AND PAID DISTRIBUTIONS
INVESTMENT FUTURES INVESTMENT FUTURES IN TO
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS
---------- ------------ ---------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Institu-
tional Shares.. $(0.2097) -- -- -- -- $(0.2097)
1997-Administra-
tion Shares.... (0.1976) -- -- -- -- (0.1976)
1997-Service
Shares......... (0.1852) -- -- -- -- (0.1852)
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares.. (0.4192) -- -- -- -- (0.4192)
1996-Administra-
tion Shares.... (0.3944) -- -- -- -- (0.3944)
1996-Service
Shares......... (0.3697) -- -- -- -- (0.3697)
1995-Institu-
tional Shares.. (0.4235) -- -- -- -- (0.4235)
1995-Administra-
tion Shares.... (0.3989) -- -- -- -- (0.3989)
1995-Service
Shares......... (0.3744) -- -- -- -- (0.3744)
1994-Institu-
tional Shares.. (0.3787) (0.0825) -- -- -- (0.4612)
1994-Administra-
tion Shares.... (0.3537) (0.0825) -- -- -- (0.4362)
1994-Service
Shares(j)...... (0.0475) -- (0.0475)
1993-Institu-
tional Shares.. (0.3834) -- -- -- -- (0.3834)
1993-Administra-
tion
Shares(j)...... (0.1555) -- -- -- -- (0.1555)
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1992-Institu-
tional Shares.. (0.0341) -- -- -- -- (0.0341)
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD ENDED APRIL 30,(unaudited)
- -----------------------------------------
1997-Class A
shares.......... $ (0.45) $ (0.07) -- -- -- $ (0.52)
1997-Class B
shares.......... (0.40) (0.07) -- -- -- (0.47)
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... (0.92) -- -- -- -- (0.92)
1996-Class B
shares(m)....... (0.41) -- -- -- -- (0.41)
1995-Class A
shares.......... (0.94) -- -- -- -- (0.94)
1994-Class A
shares.......... (0.85) (0.12) (0.02) (0.01) -- (1.00)
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
- -------------------------------------------------------
1993-Class A
shares.......... (0.56) -- -- -- -- (0.56)
MUNICIPAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD ENDED APRIL 30,(unaudited)
- -----------------------------------------
1997-Class A
shares.......... $ (0.34) -- -- -- -- $ (0.34)
1997-Class B
shares.......... (0.28) -- -- -- -- (0.28)
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... (0.65) -- -- -- -- (0.65)
1996-Class B
shares(m)....... (0.27) -- -- -- -- (0.27)
1995-Class A
shares.......... (0.67) -- -- -- -- (0.67)
1994-Class A
shares.......... (0.73) (0.05) -- -- -- (0.78)
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
- ---------------------------------------------------
1993-Class A
shares.......... (0.22) -- -- -- -- (0.22)
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
---------------------
RATIO OF RATIO OF NET RATIO OF
NET NET NET NET ASSETS RATIO OF NET
INCREASE ASSET EXPENSES INVESTMENT AT END EXPENSES INVESTMENT
(DECREASE) VALUE TO INCOME OF TO INCOME
IN NET AT END AVERAGE (LOSS) TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
ASSET OF TOTAL NET AVERAGE TURNOVER (IN NET AVERAGE
VALUE PERIOD RETURN(K) ASSETS NET ASSETS RATE(D) 000S) ASSETS NET ASSETS
---------- ------ --------- -------- ---------- --------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, (UNAUDITED)
- ----------------------------------------------
1997-Institu-
tional Shares.. $(0.0200) $ 9.94 1.91%(f) 0.45%(b) 4.24%(b) 99.59%(f) $37,159 1.05%(b) 3.64%(b)
1997-Administra-
tion Shares.... (0.0200) 9.94 1.79(f) 0.70(b) 4.03(b) 99.59(f) 113 1.30(b) 3.43(b)
1997-Service
Shares......... (0.0300) 9.94 1.56(f) 0.95(b) 3.77(b) 99.59(f) 1,045 1.55(b) 3.17(b)
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares.. 0.0300 9.96 4.50 0.45 4.21 231.65 34,814 1.01 3.65
1996-Administra-
tion Shares.... 0.0300 9.96 4.24 0.70 3.96 231.65 48 1.26 3.40
1996-Service
Shares......... 0.0200 9.97 3.98 0.95 3.74 231.65 695 1.51 3.18
1995-Institu-
tional Shares.. 0.1500 9.94 5.98 0.45 4.31 259.52 58,389 0.77 3.99
1995-Administra-
tion Shares.... 0.1500 9.94 5.76 0.70 4.14 259.52 46 1.02 3.82
1995-Service
Shares......... 0.1600 9.95 5.59 0.95 3.87 259.52 454 1.27 3.55
1994-Institu-
tional Shares.. (0.4400) 9.79 0.17 0.45 3.74 354.00 83,704 0.61 3.58
1994-Administra-
tion Shares.... (0.4400) 9.79 (0.11) 0.70 3.51 354.00 3,866 0.86 3.35
1994-Service
Shares(j)...... (0.0700) 9.79 (0.32)(f) 0.95(b) 4.30(b) 354.00 440 1.11(b) 4.14(b)
1993-Institu-
tional Shares.. 0.3000 10.23 7.03 0.41 3.70 404.60 115,803 1.06 3.05
1993-Administra-
tion
Shares(j)...... 0.0720 10.23 2.28(f) 0.70(b) 3.32(b) 404.60 911 1.07(b) 2.95(b)
FOR THE PERIOD OCTOBER 1, 1992(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1992-Institu-
tional Shares.. (0.0700) 9.93 (0.34)(f) 0.05(b) 4.58(b) 31.19(f) 14,601 2.68(b) 1.95(b)
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD ENDED APRIL 30,(unaudited)
- -----------------------------------------
1997-Class A
shares.......... $ (0.26) $14.10 1.83%(f) 0.50%(b) 6.34%(b) 182.25%(f) $52,946 1.83%(b) 5.01%(b)
1997-Class B
shares.......... (0.26) 14.11 1.43(f) 1.25(b) 5.37(b) 182.25(f) 2,937 2.33(b) 4.29(b)
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... (0.11) 14.36 5.80 0.50 6.42 485.09 30,603 1.89 5.03
1996-Class B
shares(m)....... 0.26 14.37 4.85(f) 1.25(b) 5.65(b) 485.09 234 2.39(b) 4.51(b)
1995-Class A
shares.......... 1.00 14.47 14.90 0.47 6.67 449.53 29,503 2.34 4.80
1994-Class A
shares.......... (1.43) 13.47 (2.98) 0.11 6.06 654.90 14,452 2.86 3.31
FOR THE PERIOD FEBRUARY 10, 1993(G) THROUGH OCTOBER 31,
- -------------------------------------------------------
1993-Class A
shares.......... 0.58 14.90 8.03(f) 0.00(b) 4.87(b) 725.41(f) 12,860 4.00(b) 0.87(b)
MUNICIPAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD ENDED APRIL 30,(unaudited)
- -----------------------------------------
1997-Class A
shares.......... $ 0.03 $14.40 2.57%(f) 0.85%(b) 4.70%(b) 90.46%(f) $58,033 1.51%(b) 4.04%(b)
1997-Class B
shares.......... 0.03 14.40 2.180(f) 1.60(b) 3.92(b) 90.46(f) 617 2.01(b) 3.51(b)
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... 0.20 14.37 6.13 0.85 4.58 344.13 52,267 1.55 3.88
1996-Class B
shares(m)....... 0.34 14.37 4.40(f) 1.60(b) 3.55(b) 344.13 255 2.05(b) 3.10(b)
1995-Class A
shares.......... 1.09 14.17 13.79 0.76 4.93 335.55 53,797 1.49 4.20
1994-Class A
shares.......... (1.56) 13.08 (5.51) 0.45 5.28 357.54 47,373 1.55 4.18
FOR THE PERIOD JULY 20, 1993(G) THROUGH OCTOBER 31,
- ---------------------------------------------------
1993-Class A
shares.......... 0.32 14.64 3.73(f) 0.00(b) 5.15(b) 99.99(f) 30,166 2.42(b) 2.73(b)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS(n)
-----------------------------------------------
NET REALIZED NET
AND REALIZED
UNREALIZED AND
GAIN (LOSS) UNREALIZED TOTAL
ON GAIN (LOSS) INCOME
NET ASSET INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS TRANSACTIONS OPERATIONS
--------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, (unaudited)
- ----------------------------------------------
1997-
Institutional
Shares.......... $ 9.85 $0.3236 $(0.1403) $(0.0003) $0.1830
1997-
Administrative
Shares.......... 9.84 0.3108 (0.1398) (0.0003) 0.1707
1997-Service
Shares.......... 9.86 0.2991 (0.1399) (0.0003) 0.1589
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares... 10.00 0.6448 (0.0704) -- 0.5744
1996-Administra-
tion Shares(1).. 9.91 0.4083 (0.0703) -- 0.3380
1996-Service
Shares(1)....... 9.77 0.3756 0.0898 -- 0.4654
1995-Institu-
tional Shares... 9.24 0.6423 0.7610 -- 1.4033
FOR THE PERIOD JANUARY 5, 1994(g) THROUGH OCTOBER 31,
- -----------------------------------------------------
1994-Institu-
tional Shares... 10.00 0.4648 (0.7617) -- (0.2969)
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, (unaudited)
- ----------------------------------------------
1997-Class A
shares.......... $14.53 $0.25 $ (0.07) $ 0.28 $ 0.46
1997-Class B
shares.......... 14.53 0.36 (0.02) 0.08 0.42
1997-
Institutional
shares.......... 14.52 0.42 (0.02) 0.10 0.50
1997-Services
shares(o)....... 14.69 0.10 0.02 (0.09) 0.03
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... 14.45 0.71 0.62 0.18 1.51
1996-Class B
shares(m)....... 14.03 0.34 0.41 0.11 0.86
1996-
Institutional
shares.......... 14.45 1.15 0.32 0.10 1.57
1995-Class A
shares.......... 13.43 0.89 0.92 0.15 1.96
1995-
Institutional
shares(m)....... 14.09 0.22 0.34 0.06 0.62
1994-Class A
shares.......... 15.07 0.84 (1.37) (0.12) (0.65)
1993-Class A
shares.......... 14.69 0.85 1.07 (0.42) 1.50
1992-Class A
shares.......... 14.60 1.14 0.45 (0.36) 1.23
FOR THE PERIOD AUGUST 2, 1991(g) THROUGH OCTOBER 31,
- ----------------------------------------------------
1991-Class A
shares.......... 14.55 0.25 0.23 (0.19) 0.29
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
----------------------------------------------------------------
IN EXCESS
FROM NET OF NET
REALIZED REALIZED
GAIN ON GAIN ON
INVESTMENT, INVESTMENT, FROM TOTAL
FROM NET OPTION AND IN EXCESS OF OPTION AND PAID DISTRIBUTIONS
INVESTMENT FUTURES NET INVESTMENT FUTURES IN TO
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS
---------- ------------ -------------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, (unaudited)
- ----------------------------------------------
1997-
Institutional
Shares.......... $(0.3230) -- -- -- -- $(0.3230)
1997-
Administrative
Shares.......... (0.3107) -- -- -- -- (0.3107)
1997-Service
Shares.......... (0.2989) -- -- -- -- (0.2989)
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares... (0.6438) (0.0806) -- -- -- (0.7244)
1996-Administra-
tion Shares(1).. (0.4080) -- -- -- -- (0.4080)
1996-Service
Shares(1)....... (0.3754) -- -- -- -- (0.3754)
1995-Institu-
tional Shares... (0.6433) -- -- -- -- (0.6433)
FOR THE PERIOD JANUARY 5, 1994(g) THROUGH OCTOBER 31,
- -----------------------------------------------------
1994-Institu-
tional Shares... (0.4648) -- -- -- -- (0.4648)
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, (unaudited)
- ----------------------------------------------
1997-Class A
shares.......... $ (0.40) -- -- -- -- $ (0.40)
1997-Class B
shares.......... $ (0.37) -- -- -- -- (0.37)
1997-
Institutional
shares.......... (0.44) -- -- -- -- (0.44)
1997-Services
shares(o)....... (0.13) -- -- -- -- (0.13)
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... (1.43) -- -- -- -- (1.43)
1996-Class B
shares(m)....... (0.36) -- -- -- -- (0.36)
1996-
Institutional
shares.......... (1.50) -- -- -- -- (1.50)
1995-Class A
shares.......... (0.94) -- -- -- -- (0.94)
1995-
Institutional
shares(m)....... (0.26) -- -- -- -- (0.26)
1994-Class A
shares.......... (0.22) (0.16) -- -- (0.61) (0.99)
1993-Class A
shares.......... (0.85) (0.27) -- -- -- (1.12)
1992-Class A
shares.......... (1.14) -- -- -- -- (1.14)
FOR THE PERIOD AUGUST 2, 1991(g) THROUGH OCTOBER 31,
- ----------------------------------------------------
1991-Class A
shares.......... (0.24) -- -- -- -- (0.24)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
---------------------
RATIO OF NET RATIO OF
NET NET NET RATIO OF ASSETS RATIO OF NET
INCREASE ASSET EXPENSES NET AT END EXPENSES INVESTMENT
(DECREASE) VALUE TO INVESTMENT OF TO INCOME
IN NET AT END AVERAGE INCOME TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
ASSET OF TOTAL NET AVERAGE TURNOVER (IN NET AVERAGE
VALUE PERIOD RETURN(k) ASSETS NET ASSETS RATE(d) 000s) ASSETS NET ASSETS
---------- ------ --------- -------- ---------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, (unaudited)
- ----------------------------------------------
1997-
Institutional
Shares.......... $(0.1400) $ 9.71 1.87%(f) 0.45%(b) 6.66%(b) 174.52%(f) $ 73,483 0.76%(b) 6.35%(b)
1997-
Administrative
Shares.......... (0.1400) 9.70 1.75(f) 0.70(b) 6.49(b) 174.52(f) 6,194 1.01(b) 6.18(b)
1997-Service
Shares.......... (0.1400) 9.72 1.63(f) 0.95(b) 6.22(b) 174.52(f) 1,108 1.26(b) 5.91(b)
FOR THE YEAR ENDED OCTOBER 31,
- ------------------------------
1996-Institu-
tional Shares... (0.1500) 9.85 5.98 0.45 6.51 414.20 72,061 0.83 6.13
1996-Administra-
tion Shares(1).. (0.0700) 9.84 3.56(f) 0.70(b) 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service
Shares(1)....... 0.0900 9.86 4.90(f) 0.95(b) 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institu-
tional Shares... 0.7600 10.00 15.72 0.45 6.56 383.26 55,502 0.96 6.05
FOR THE PERIOD JANUARY 5, 1994(G) THROUGH OCTOBER 31,
- -----------------------------------------------------
1994-Institu-
tional Shares... (0.7617) 9.24 (3.00)(f) 0.45(b) 6.48(b) 288.25(f) 24,508 1.46(b) 5.47(b)
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, (unaudited)
- ----------------------------------------------
1997-Class A
shares.......... $ 0.06 $14.59 3.22%(f) 1.17%(b) 5.12%(b) 136.72%(f) $171,668 1.60%(b) 4.69%(b)
1997-Class B
shares.......... 0.05 14.58 2.94(f) 1.71(b) 4.73(b) 136.72(f) 1,095 2.10(b) 4.34(b)
1997-
Institutional
shares.......... 0.06 14.58 3.50(f) 0.65(b) 5.64(b) 136.72(f) 56,431 1.04(b) 5.25(b)
1997-Services
shares(o)....... (0.10) 14.59 0.21(f) 1.15(b) 5.85(b) 136.72(f) 94 1.54(b) 5.46%(b)
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1996-Class A
shares.......... 0.08 14.53 11.05 1.16 5.81 232.15 198,665 1.64 5.33
1996-Class B
shares(m)....... 0.50 14.53 6.24(f) 1.70(b) 5.16(b) 232.15 256 2.14(b) 4.72(b)
1996-
Institutional
shares.......... 0.07 14.52 11.55 0.65 6.35 232.15 54,254 1.11 5.89
1995-Class A
shares.......... 1.02 14.45 15.08 1.29 6.23 265.86 245,835 1.58 5.94
1995-
Institutional
shares(m)....... 0.36 14.45 4.42(f) 0.65(b) 6.01(b) 265.86 31,619 1.08(b) 5.58(b)
1994-Class A
shares.......... (1.64) 13.43 (4.49) 1.28 5.73 343.74 396,584 1.53 5.48
1993-Class A
shares.......... 0.38 15.07 10.75 1.30 5.78 313.88 675,662 1.55 5.53
1992-Class A
shares.......... 0.09 14.69 8.77 1.37 7.85 270.75 588,893 1.62 7.60
FOR THE PERIOD AUGUST 2, 1991(g) THROUGH OCTOBER 31,
- ----------------------------------------------------
1991-Class A
shares.......... 0.05 14.60 2.00 0.38(f) 1.72(f) 34.22(f) 388,744 0.44(f) 1.66(f)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Calculated based on the average shares outstanding methodology.
(b) Annualized.
(c) Class A share activity commenced on May 15, 1995.
(d) Includes the effect of mortgage dollar roll transactions.
(e) Administration share activity commenced on April 15, 1993.
(f) Not annualized.
(g) Commencement of operations.
(h) GS Short Duration Government Fund Administration shares were redeemed in
full on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
(i) Service share activity commenced on April 10, 1996.
(j) Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
(k) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and not
sales charges. For Class A shares only, total return would be reduced if a
sales charge were taken into account.
(l) Administration and Service share activity commenced operations on February
28, 1996 and March 13, 1996 respectively.
(m) Institutional and Class B shares commenced operations on June 1, 1995 and
May 1, 1996, respectively.
(n) Includes the balancing effect of calculating per share amounts.
(o) Service Class shares commenced operations on March 12, 1997.
12
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of each Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that a Fund's
investment objectives will be achieved.
A Fund's duration approximates its price sensitivity to changes in interest
rates. Maturity measures the time until final payment is due; it takes no
account of the pattern of a security's cash flows over time. In computing
portfolio duration, a Fund will estimate the duration of obligations that are
subject to prepayment or redemption by the issuer taking into account the
influence of interest rates on prepayments and coupon flows. This method of
computing duration is known as "option-adjusted" duration. A Fund will not be
limited as to its maximum weighted average portfolio maturity or the maximum
stated maturity with respect to individual securities unless otherwise noted.
A Fund will deem a security to have met its minimum credit rating
requirement if the security receives the minimum required long-term rating (or
the equivalent short-term credit rating) at the time of purchase from at least
one rating organization (including, but not limited to, Standard & Poor's
Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's")) even
though it has been rated below the minimum rating by one or more other rating
organizations, or, if unrated by a rating organization, is determined by the
Investment Adviser to be of comparable quality. If a security satisfies a
Fund's minimum rating criteria at the time of purchase and is subsequently
downgraded below such rating, the Fund will not be required to dispose of such
security. If a downgrade occurs, the Investment Adviser will consider what
action, including the sale of such security, is in the best interest of a Fund
and its shareholders.
The Investment Adviser will have access to the research of, and proprietary
technical models developed by, Goldman Sachs and will apply quantitative and
qualitative analysis in determining the appropriate allocations among the
categories of issuers and types of securities.
ADJUSTABLE RATE GOVERNMENT FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with low volatility of principal.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be in a range approximately equal to that of a six-month to one-
year U.S. Treasury security. In addition, under normal interest rate
conditions, the Fund's maximum duration will not exceed two years. The
approximate interest rate sensitivity of the Fund is comparable to a nine-
month note.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in U.S. Government Securities that are adjustable rate
mortgage pass-through securities and other U.S. Government Securities. The
remainder of the Fund's assets (up to 35%) may be invested in other U.S.
Government Securities, including mortgage pass-through securities, other
securities representing an interest in or collateralized by adjustable rate
and fixed rate mortgage loans ("Mortgage-Backed Securities") and repurchase
agreements collateralized by U.S. Government Securities. Substantially all of
the Fund's assets will be invested in U.S. Government Securities. 100% of the
Fund's portfolio will be invested in U.S. dollar-denominated securities.
13
<PAGE>
CREDIT QUALITY. The Fund invests in U.S. Government Securities and
repurchase agreements collateralized by such securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
SHORT DURATION GOVERNMENT FUND
OBJECTIVE. The Fund's investment objective is to provide a high level of
current income. Secondarily, the Fund may, in seeking current income, also
consider the potential for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the two-year U.S.
Treasury security, plus or minus .5 years. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed three years. The
approximate interest rate sensitivity of the Fund is comparable to a two-year
bond.
INVESTMENT SECTOR. The Fund invests, under normal market conditions, at
least 65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. Substantially all of the Fund's
assets will be invested in U.S. Government Securities. 100% of the Fund's
portfolio will be invested in U.S. dollar-denominated securities.
CREDIT QUALITY. The Fund invests in U.S. Government Securities and
repurchase agreements collateralized by such securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
SHORT DURATION TAX-FREE FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with relatively low volatility of
principal, that is exempt from regular federal income tax.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
three-year Municipal Bond Index, plus or minus .5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
four years. The approximate interest rate sensitivity of the Fund is
comparable to a three-year bond.
INVESTMENT SECTOR. The Fund invests, under normal conditions, at least 80%
of its net assets in fixed-income securities issued by or on behalf of states,
territories and possessions of the United States (including the District of
Columbia) and the political subdivisions, agencies and instrumentalities
thereof ("Municipal
14
<PAGE>
Securities"), the interest on which is exempt from regular federal income tax
(i.e., excluded from gross income for federal income tax purposes), and is not
a tax preference item under the federal alternative minimum tax. Under normal
circumstances, the Fund's investments in private activity bonds and taxable
investments will not exceed, in the aggregate, 20% of the Fund's net assets.
The interest from certain private activity bonds (including the Fund's
distributions of such interest) may be a preference item for purposes of the
federal alternative minimum tax. 100% of the Fund's portfolio will be invested
in U.S. dollar-denominated securities.
CREDIT QUALITY. The Municipal Securities in which the Fund invests will be
rated, at the time of investment, at least BBB by S&P or Baa by Moody's.
Municipal Securities rated BBB or Baa are considered medium-grade obligations
with speculative characteristics, and adverse economic conditions or changing
circumstances may weaken their issuers' capability to pay interest and repay
principal. The credit rating assigned to Municipal Securities by these rating
organizations or by the Investment Adviser may reflect the existence of
guarantees, letters of credit or other credit enhancement features available
to the issuers or holders of such Municipal Securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), interest rate
swaps, floors, caps and collars. The Fund may also employ other investment
techniques to seek to enhance returns, such as lending portfolio securities
and entering into repurchase agreements and other investment practices
described under "Investment Techniques."
While the Fund, under normal market conditions, invests substantially all of
its assets in Municipal Securities, the recognition of certain accrued market
discount income (if the Fund acquires Municipal Securities or other
obligations at a market discount), income from investments other than
Municipal Securities and any capital gains generated from the disposition of
investments, will result in taxable income. In addition to federal income tax,
shareholders may be subject to state, local or foreign taxes on distributions
of such income received from the Fund. See "Description of Securities."
GOVERNMENT INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with safety of principal.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
Mutual Fund Government/Mortgage Index, plus or minus one year. In addition,
under normal interest rate conditions, the Fund's maximum duration will not
exceed six years. The approximate interest rate sensitivity of the Fund is
comparable to a five-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. The remainder of the Fund's
assets may be invested in non-government securities such as privately issued
Mortgage-Backed Securities, Asset-Backed Securities and corporate securities.
100% of the Fund's portfolio will be invested in U.S. dollar-denominated
securities.
CREDIT QUALITY. The Fund's non-U.S. Government Securities will be rated, at
the time of investment, AAA by S&P or Aaa by Moody's.
15
<PAGE>
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
MUNICIPAL INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income that is exempt from regular federal income tax,
consistent with preservation of capital.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
fifteen-year Municipal Bond Index, plus or minus one year. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
twelve years. The approximate interest rate sensitivity of the Fund is
comparable to a fifteen-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
80% of its net assets in Municipal Securities, the interest on which is exempt
from regular federal income tax (i.e., excluded from gross income for federal
income tax purposes). The Fund may invest up to 100% of its net assets in
private activity bonds, the interest from certain of which (including the
Fund's distributions of such interest) may be a preference item for purposes
of the federal alternative minimum tax. 100% of the Fund's portfolio will be
invested in U.S. dollar-denominated securities.
CREDIT QUALITY. Under normal market conditions, the weighted average credit
quality of the Fund's portfolio will be equivalent to that of securities rated
AA by S&P or Aa by Moody's. All securities purchased by the Fund will be
rated, at the time of investment, at least BBB by S&P or Baa by Moody's.
Fixed-income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions
or changing circumstances may weaken their issuers' capability to pay interest
and repay principal. The credit rating assigned to Municipal Securities by
these rating organizations or by the Investment Adviser may reflect the
existence of guarantees, letters of credit or other credit enhancement
features available to the issuers or holders of such Municipal Securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), interest rate
swaps, interest rate floors, caps and collars. The Fund may also employ other
investment techniques to seek to enhance returns, such as lending portfolio
securities and entering into repurchase agreements and other investment
practices described under "Investment Techniques."
While the Fund, under normal market conditions, invests substantially all of
its assets in Municipal Securities, the recognition of certain accrued market
discount income (if the Fund acquires Municipal Securities or other
obligations at a market discount), income from investments other than
Municipal Securities and any capital gains generated from the disposition of
investments, will result in taxable income. In addition to federal income tax,
shareholders may be subject to state, local or foreign taxes on distributions
of such income received from the Fund. See "Description of Securities."
16
<PAGE>
CORE FIXED INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
total return consisting of capital appreciation and income that exceeds the
total return of the Lehman Brothers Aggregate Bond Index (the "Index").
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
Aggregate Bond Index, plus or minus one year. In addition, under normal
interest rate conditions, the Fund's maximum duration will not exceed six
years. The approximate interest rate sensitivity of the Fund is comparable to
a five-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in fixed-income securities, including U.S. Government
Securities, corporate debt securities, Mortgage-Backed Securities, and Asset-
Backed Securities. The Fund may invest up to 25% of its total assets in
obligations of domestic and foreign issuers which are denominated in
currencies other than the U.S. dollar, 10% of which may be invested in issuers
in countries with emerging markets and economies. A number of investment
strategies will be used to achieve the Fund's investment objective, including
market sector selection, determination of yield curve exposure, and issuer
selection. In addition, the Investment Adviser will attempt to take advantage
of pricing inefficiencies in the fixed-income markets.
The Index currently includes U.S. Government Securities and fixed-rate,
publicly issued, U.S. dollar-denominated fixed-income securities rated at
least BBB or Baa or in their equivalent ratings category by S&P or Moody's.
The securities currently included in the Index have at least one year
remaining to maturity; have an outstanding principal amount of at least $100
million; and are issued by the following types of issuers, with each category
receiving a different weighting in the Index: U.S. Treasury; agencies,
authorities or instrumentalities of the U.S. government; issuers of Mortgage-
Backed Securities; utilities; industrial issuers; financial institutions;
foreign issuers; and issuers of Asset-Backed Securities. The Index is a
trademark of Lehman Brothers. Inclusion of a security in the Index does not
imply an opinion by Lehman Brothers as to its attractiveness or
appropriateness for investment. Although Lehman Brothers obtains factual
information used in connection with the Index from sources which it considers
reliable, Lehman Brothers claims no responsibility for the accuracy,
completeness or timeliness of such information and has no liability to any
person for any loss arising from results obtained from the use of the Index
data.
CREDIT QUALITY. All U.S. dollar-denominated fixed-income securities
purchased by the Fund will be rated, at the time of investment, at least BBB
by S&P or Baa by Moody's. The non-U.S. dollar-denominated fixed-income
securities in which the Fund may invest will be rated, at the time of
investment, at least AA by S&P or Aa by Moody's. Fixed-income securities rated
BBB or Baa are considered medium-grade obligations with speculative
characteristics, and adverse economic conditions or changing circumstances may
weaken their issuers' capability to pay interest and repay principal.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign currencies and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to
17
<PAGE>
hedge against currency exchange rate fluctuations or to seek to increase total
return. The Fund may invest in custodial receipts, Municipal Securities and
convertible securities. The Fund may also employ other investment techniques
to seek to enhance returns, such as lending portfolio securities and entering
into mortgage dollar rolls, repurchase agreements and other investment
practices, described under "Investment Techniques."
GLOBAL INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high total return, emphasizing current income, and, to a lesser extent,
providing opportunities for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the J.P. Morgan Global
Government Bond Index (hedged), plus or minus 2.5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
7.5 years. The approximate interest rate sensitivity of the Fund is comparable
to a six-year bond.
INVESTMENT SECTOR. The Fund invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and enters into
transactions in foreign currencies. Under normal market conditions, the Fund
will (i) have at least 30% of its total assets, after considering the effect
of currency positions, denominated in U.S. dollars and (ii) invest in
securities of issuers in at least three countries. The Fund may also invest up
to 10% of its total assets in issuers in countries with emerging markets and
economies. The Fund seeks to meet its investment objective by pursuing
investment opportunities in foreign and domestic fixed-income securities
markets and by engaging in currency transactions to seek to enhance returns
and to seek to hedge its portfolio against currency exchange rate
fluctuations.
The fixed-income securities in which the Fund may invest include: (i) U.S.
Government Securities and custodial receipts therefor; (ii) securities issued
or guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, instrumentalities or by supranational entities (i.e.,
international organizations designated or supported by governmental entities
to promote economic reconstruction or development, such as the World Bank);
(iii) corporate debt securities; (iv) certificates of deposit and bankers'
acceptances issued or guaranteed by, or time deposits maintained at, U.S. or
foreign banks (and their branches wherever located) having total assets of
more than $1 billion; (v) commercial paper and (vi) Mortgage-Backed and Asset-
Backed Securities.
CREDIT QUALITY. All securities purchased by the Fund will be rated, at the
time of investment, at least AA by S&P or Aa by Moody's. However, the Fund may
also invest in obligations of a sovereign issuer, denominated in the issuer's
own currency, rated at least A by S&P or Moody's. The Fund will invest at
least 50% of its total assets in securities rated, at the time of investment,
AAA by S&P or Aaa by Moody's.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign currencies and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to hedge against currency exchange rate fluctuations or to seek to
increase total return. While the Fund will have both long and short currency
positions, its net long and short foreign currency exposure will not exceed
the value
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of the Fund's total assets. To the extent that the Fund is fully invested in
foreign securities while also maintaining currency positions, it may be
exposed to greater combined risk. The Fund's net currency positions may expose
it to risks independent of its securities positions. The Fund may also employ
other investment techniques to seek to enhance returns, such as lending
portfolio securities and entering into mortgage dollar rolls, repurchase
agreements and other investment practices described under "Investment
Techniques."
The Fund may invest more than 25% of its total assets in the securities of
corporate and governmental issuers located in each of Canada, Germany, Japan,
and the United Kingdom as well as in the securities of U.S. issuers.
Concentration of the Fund's investments in such issuers will subject the Fund,
to a greater extent than if investment was more limited, to the risks of
adverse securities markets, exchange rates and social, political or economic
events which may occur in those countries. With respect to other countries,
not more than 25% of the Fund's total assets will be invested in securities of
issuers in any other foreign country.
HIGH YIELD FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income. Secondarily, the Fund may, in seeking current
income, also consider the potential for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers High
Yield Bond Index, plus or minus 2.5 years. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed 7.5 years. The
approximate interest rate sensitivity of the Fund is comparable to a 6-year
bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in high yield, fixed-income securities rated, at the
time of investment, below investment grade. Non-investment grade securities
are securities rated BB or below by S&P, Ba or below by Moody's, an equivalent
rating by another rating organization, or if unrated by a rating organization,
determined by the Investment Adviser to be of comparable quality. The Fund may
invest in all types of fixed-income securities, including senior and
subordinated corporate debt obligations (such as bonds, debentures, notes and
commercial paper), convertible and non-convertible corporate debt obligations,
and preferred stock. The Fund may invest up to 25% of its total assets in
obligations of domestic and foreign issuers (including securities of issuers
located in countries with emerging markets and economies) which are
denominated in currencies other than the U.S. dollar. Under normal market
conditions, the Fund may invest up to 35% of its total assets in investment
grade fixed-income securities, including U.S. Government Securities, Asset-
Backed and Mortgage-Backed Securities and corporate securities. The Fund may
also invest in common stocks, warrants, rights and other equity securities,
but will generally hold such equity investments only when debt or preferred
stock of the issuer of such equity securities is held by the Fund. A number of
investment strategies are used to seek to achieve the Fund's investment
objective, including market sector selection, determination of yield curve
exposure, and issuer selection. In addition, the Investment Adviser will
attempt to take advantage of pricing inefficiencies in the fixed-income
markets.
CREDIT QUALITY. The Fund invests primarily in high yield, fixed income
securities rated below investment grade. Non-investment grade securities
(commonly known as "junk bonds") tend to offer higher yields than higher rated
securities with similar maturities. Non-investment grade securities are,
however, considered speculative and generally involve greater price volatility
and greater risk of loss of principal and interest than higher rated
securities. See "Description of Securities." A description of the corporate
bond and preferred stock ratings is contained in Appendix B to the Additional
Statement.
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OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign securities and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps, and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use currency techniques to seek to
hedge against currency exchange rate fluctuations or to seek to increase total
return. The Fund may also employ other investment techniques to seek to
enhance returns, such as lending portfolio securities and entering into
repurchase agreements and other investment practices described under
"Investment Techniques."
DESCRIPTION OF SECURITIES
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. Government Securities. Generally, these
securities include U.S. Treasury obligations and obligations issued or
guaranteed by U.S. government agencies, instrumentalities or sponsored
enterprises which are supported by (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie
Mae")), (b) the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Student Loan Marketing Association), (c) the discretionary
authority of the U.S. government to purchase certain obligations of the issuer
(such as the Federal National Mortgage Association ("Fannie Mae") and Federal
Home Loan Mortgage Corporation ("Freddie Mac")), or (d) only the credit of the
issuer. No assurance can be given that the U.S. government will provide
financial support to U.S. government agencies, instrumentalities or sponsored
enterprises in the future.
U.S. Government Securities also include Treasury receipts, zero coupon bonds
and other stripped U.S. Government Securities, where the interest and
principal components of stripped U.S. Government Securities are traded
independently. The most widely recognized program is the Separate Trading of
Registered Interest and Principal of Securities Program.
MORTGAGE-BACKED SECURITIES
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities
represent direct or indirect participations in, or are collateralized by and
payable from, mortgage loans secured by real property. Mortgagors can
generally prepay interest or principal on their mortgage whenever they choose.
Therefore, Mortgage-Backed Securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of
principal prepayments on the underlying loans. This can result in
significantly greater price and yield volatility than is the case with
traditional fixed-income securities. During periods of declining interest
rates, prepayments can be expected to accelerate, and thus impair a Fund's
ability to reinvest the returns of principal at comparable yields. Conversely,
in a rising interest rate environment, a declining prepayment rate will extend
the average life of many Mortgage-Backed Securities and prevent a Fund from
taking advantage of such higher yields.
FIXED RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans pay interest
at fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed-rate mortgage loans typically provide for monthly payments of
principal and interest in substantially equal installments for the term of the
mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain fixed-rate mortgage loans provide for a large final "balloon"
payment upon maturity.
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ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). The Adjustable Rate Government Fund
will primarily, and the Short Duration Government, Government Income, Core
Fixed Income, Global Income and High Yield Funds may, invest in ARMs, which
are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed coupon rates. ARMs generally provide for a fixed
initial mortgage interest rate for a set period. Thereafter, the interest
rates are subject to periodic adjustments based on changes to a designated
benchmark index.
ARMs allow a Fund to participate in increases in interest rates through
periodic increases in the securities' coupon rates. During periods of
declining interest rates, coupon rates may readjust downward resulting in
lower yields to a Fund. Therefore, the value of an ARM is unlikely to rise
during periods of declining interest rates to the same extent as fixed-rate
securities. Interest rate declines may result in accelerated prepayment of
mortgages with the result that proceeds from prepayments will be reinvested at
lower interest rates. During periods of rising interest rates, changes in the
coupon rate will lag behind changes in the market rate. ARMs are also
typically subject to maximum increases and decreases in the interest rate
adjustment which can be made on any one adjustment date, in any one year, or
during the life of the security. In the event of dramatic increases or
decreases in prevailing market interest rates, the value of a Fund's
investments in ARMs may fluctuate more substantially since these limits may
prevent the security from fully adjusting its interest rate to the prevailing
market rates.
U.S. GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. Certain Mortgage-
Backed Securities are issued or guaranteed by the U.S. government, its
agencies, instrumentalities or sponsored enterprises. Such issuers include,
but are not limited to, Ginnie Mae, Fannie Mae and Freddie Mac. See "U.S.
Government Securities."
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES. The Government Income, Core
Fixed Income, Global Income and High Yield Funds may invest in Mortgage-Backed
Securities issued or sponsored by non-governmental entities. Privately issued
Mortgage-Backed Securities are generally backed by pools of conventional
(i.e., non-government guaranteed or insured) mortgage loans. Since such
Mortgage-Backed Securities normally are not guaranteed by an entity having the
credit standing of Ginnie Mae, Fannie Mae or Freddie Mac, in order to receive
a high quality rating from the rating organizations (i.e., S&P or Moody's),
they normally are structured with one or more types of "credit enhancement."
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. The Adjustable Rate Government, Short Duration Government,
Government Income, Core Fixed Income, Global Income and High Yield Funds may
also invest in multiple class securities, including collateralized mortgage
obligations ("CMOs") and Real Estate Mortgage Investment Conduit ("REMIC")
pass-through or participation certificates. CMOs provide an investor with a
specified interest in the cash flow from a pool of underlying mortgages or of
other Mortgage-Backed Securities. CMOs are issued in multiple classes, each
with a specified fixed or floating interest rate and a final scheduled
distribution date. In most cases, payments of principal are applied to the CMO
classes in the order of their respective stated maturities, so that no
principal payments will be made on a CMO class until all other classes having
an earlier stated maturity date are paid in full. A REMIC is a CMO that
qualifies for special tax treatment under the Internal Revenue Code of 1986,
as amended (the "Code"), and invests in certain mortgages principally secured
by interests in real property and other permitted investments. The Funds do
not intend to purchase residual interests in REMICs.
STRIPPED MORTGAGE-BACKED SECURITIES. The Adjustable Rate Government, Short
Duration Government, Government Income, Core Fixed Income, Global Income and
High Yield Funds may invest in Stripped Mortgage-Backed Securities ("SMBS"),
which are derivative multiple class Mortgage-Backed Securities.
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SMBS are usually structured with two different classes; one that receives 100%
of the interest payments and the other that receives 100% of the principal
payments from a pool of mortgage loans. If the underlying mortgage loans
experience different than anticipated prepayments of principal, a Fund may
fail to fully recoup its initial investment in these securities. The market
value of the class consisting entirely of principal payments generally is
unusually volatile in response to changes in interest rates. The yields on a
class of SMBS that receives all or most of the interest from mortgage loans
are generally higher than prevailing market yields on other Mortgage-Backed
Securities because their cash flow patterns are more volatile and there is a
greater risk that the initial investment will not be fully recouped.
ASSET-BACKED SECURITIES
The Government Income, Core Fixed Income, Global Income and High Yield Funds
may invest in Asset-Backed Securities. The principal and interest payments on
Asset-Backed Securities are collateralized by pools of assets such as auto
loans, credit card receivables, leases, installment contracts and personal
property. Such asset pools are securitized through the use of special purpose
trusts or corporations. Principal and interest payments may be credit enhanced
by a letter of credit, a pool insurance policy or a senior/subordinated
structure.
MUNICIPAL SECURITIES
GENERAL. Municipal Securities in which the Short Duration Tax-Free and
Municipal Income Funds and, to a limited extent, the Core Fixed Income and
High Yield Funds, invest consist of bonds, notes, commercial paper and other
instruments (including participation interests in such securities) issued by
or on behalf of states, territories and possessions of the United States
(including the District of Columbia) and their political subdivisions,
agencies or instrumentalities, the interest on which, in the opinion of bond
counsel for the issuers or counsel selected by the Investment Adviser, is
exempt from regular federal income tax (i.e., excluded from gross income for
federal income tax purposes but not necessarily exempt from federal
alternative minimum tax or from state or local taxes). Such securities may pay
fixed, variable or floating rates of interest. Municipal Securities are often
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities such as bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works.
Other public purposes for which Municipal Securities may be issued include
refunding outstanding obligations, obtaining funds for general operating
expenses, and obtaining funds to lend to other public institutions and
facilities.
PRIVATE ACTIVITY BONDS. Municipal Securities also include "private activity
bonds" or industrial development bonds, which are issued by or on behalf of
public authorities to obtain funds for such projects as privately-operated
housing facilities, airport, mass transit or port facilities and sewage
disposal. In addition, proceeds of certain industrial development bonds are
used for constructing, equipping, repairing or improving privately operated
industrial or commercial facilities. The Short Duration Tax-Free and Municipal
Income Funds distributions attributable to the interest income from private
activity bonds may subject certain investors to the federal alternative
minimum tax.
MUNICIPAL LEASES AND CERTIFICATES OF PARTICIPATION. A municipal lease is an
obligation in the form of a lease or installment purchase which is issued by a
state or local government to acquire equipment and facilities. Certificates of
participation represent undivided interests in municipal leases, installment
purchase agreements or other instruments. The primary risk associated with
municipal lease obligations and certificates of participation is that the
governmental lessee will fail to appropriate funds to enable it to meet its
payment obligations under the lease. Although the obligations may be secured
by the leased equipment or facilities, the disposition of the
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property in the event of non-appropriation or foreclosure might prove
difficult, time consuming and costly, and result in a delay in recovering or
the failure to fully recover the Fund's original investment. To the extent
that a Fund invests in unrated municipal leases or participates in such
leases, the Trustees will monitor on an ongoing basis the credit quality
rating and risk of cancellation of such unrated leases. Certain municipal
lease obligations and certificates of participation may be deemed illiquid for
the purpose of a Fund's limitation on investments in illiquid securities.
PRE-REFUNDED MUNICIPAL SECURITIES. The interest and principal payments on
pre-refunded Municipal Securities are typically paid from the cash flow
generated from an escrow fund consisting of U.S. Government Securities. These
payments have been "pre-refunded" using the escrow fund.
INSURED SECURITIES. "Insured" Municipal Securities are those for which
scheduled payments of interest and principal are guaranteed by a private (non-
governmental) insurance company. The insurance entitles a Fund to receive only
the face or par value of the securities held by the Fund. The insurance does
not guarantee the market value of the Municipal Securities or the net asset
value of a Fund's shares.
AUCTION RATE SECURITIES. Auction rate Municipal Securities permit the holder
to sell the securities in an auction at par value at specified intervals. The
dividend or interest is typically reset by "Dutch" auction in which bids are
made by broker-dealers and other institutions for a certain amount of
securities at a specified minimum yield. The rate set by the auction is the
lowest interest or dividend rate that covers all securities offered for sale.
While this process is designed to permit auction rate securities to be traded
at par value, there is the risk that an auction will fail due to insufficient
demand for the securities. A Fund will take the time remaining until the next
scheduled auction date into account for purposes of determining the
securities' duration.
CORPORATE DEBT OBLIGATIONS
The Government Income, Core Fixed Income, Global Income and High Yield Funds
may invest in corporate debt obligations. In addition to obligations of
corporations, corporate debt obligations include securities issued by banks
and other financial institutions. Corporate debt obligations are subject to
the risk of an issuer's inability to meet principal and interest payments on
the obligations.
CONVERTIBLE SECURITIES
The Core Fixed Income and High Yield Funds may invest in convertible
securities, including debt obligations, and for High Yield Fund preferred
stock, of an issuer convertible at a stated exchange rate into common stock of
the issuer. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. As with all debt
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates
decline. However, when the market price of the common stock underlying a
convertible security exceeds the conversion price, the price of the
convertible security tends to reflect the market price of the underlying
common stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus
may not depreciate to the same extent as the underlying common stock.
Convertible securities in which a Fund invests are subject to the same rating
criteria as its other investments in fixed-income securities.
PREFERRED STOCK, WARRANTS AND RIGHTS
The High Yield Fund may invest in preferred stock, warrants and rights.
Preferred stocks are securities that represent an ownership interest providing
the holder with claims on the issuer's earnings and assets before
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common stock owners but after bond owners. Unlike debt securities, the
obligations of an issuer of preferred stock, including dividend and other
payment obligations, may not typically be accelerated by the holders of such
preferred stock on the occurrence of an event of default (such as a covenant
default or filing of a bankruptcy petition) or other non-compliance by the
issuer with the terms of the preferred stock. Often, however, on the
occurrence of any such event of default or non-compliance by the issuer,
preferred stockholders will be entitled to gain representation on the issuer's
board of directors or increase their existing board representation. In
addition, preferred stockholders may be granted voting rights with respect to
certain issues on the occurrence of any event of default.
Warrants and other rights are options to buy a stated number of shares of
common stock at a specified price at any time during the life of the warrant.
The holders of warrants and rights have no voting rights, receive no dividends
and have no rights with respect to the assets of the issuer.
FOREIGN INVESTMENTS
FOREIGN SECURITIES. The Global Income Fund will, and the Core Fixed Income
and High Yield Funds may, invest in fixed-income securities of foreign issuers
denominated in any currency. However, the Core Fixed Income and High Yield
Funds will limit their investments in non-U.S. dollar-denominated fixed-income
securities to 25% of their total assets. This may offer potential benefits
that are not available from investing exclusively in U.S. dollar-denominated
domestic issues. Foreign countries may have economic policies or business
cycles different from those of the U.S. and markets for foreign fixed-income
securities do not necessarily move in a manner parallel to U.S. markets.
Investing in the securities of foreign issuers involves risks that are not
typically associated with investing in fixed-income securities of domestic
issuers quoted in U.S. dollars. Such investments may be affected by changes in
currency rates, changes in foreign or U.S. laws or restrictions applicable to
such investments and in exchange control regulations (e.g., currency
blockage). A decline in the exchange rate of the currency (i.e., weakening of
the currency against the U.S. dollar) in which a portfolio security is quoted
or denominated relative to the U.S. dollar would reduce the value of the
portfolio security. In addition, if the currency in which a Fund receives
dividends, interest or other payments declines in value against the U.S.
dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends. In addition, clearance and
settlement procedures may be different in foreign countries and, in certain
markets, such procedures have on occasion been unable to keep pace with the
volume of securities transactions, making it more difficult to conduct such
transactions.
The Core Fixed Income, Global Income and High Yield Funds may invest in an
issuer domiciled in one country yet issuing the security in the currency of
another country. The Funds may also invest in debt securities denominated in
the European Currency Unit ("ECU"), which is a "basket" consisting of
specified amounts in the currencies of certain of the twelve member states of
the European Community. The specific amounts of currencies comprising the ECU
may be adjusted by the Council of Ministers of the European Community from
time to time to reflect changes in relative values of the underlying
currencies. In addition, the Funds may invest in securities denominated in
other currency "baskets."
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less
government regulation of foreign markets, companies and securities dealers
than in the U.S. Foreign securities markets may have substantially less volume
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than U.S. securities markets and securities of many foreign issuers may be
less liquid and more volatile than securities of comparable domestic issuers.
Furthermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation or confiscatory taxation, imposition of
withholding or other taxes on dividend or interest payments (or, in some cases
capital gains), limitations on the removal of funds or other assets of a Fund,
political or social instability or diplomatic developments which could affect
investments in those countries.
FOREIGN GOVERNMENT SECURITIES. The Core Fixed Income, Global Income and High
Yield Funds may invest in debt obligations of foreign governments and
governmental agencies, including those of emerging countries. Investment in
sovereign debt obligations involves special risks not present in debt
obligations of corporate issuers. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling
to repay principal or interest when due in accordance with the terms of such
debt, and a Fund may have limited recourse in the event of a default. Periods
of economic uncertainty may result in the volatility of market prices of
sovereign debt, and in turn a Fund's net asset value, to a greater extent than
the volatility inherent in debt obligations of U.S. issuers. A sovereign
debtor's willingness or ability to repay principal and pay interest in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's
policy toward international lenders and the political constraints to which a
sovereign debtor may be subject.
EMERGING MARKETS. The Core Fixed Income and Global Income Funds may invest
up to 10% and the High Yield Fund may invest up to 25% of their total assets
in securities of issuers located in countries with emerging economies or
securities markets ("emerging markets"). Political and economic structures in
many emerging markets may be undergoing significant evolution and rapid
development, and emerging markets may lack the social, political and economic
stability characteristic of more developed countries. As a result, the risks
relating to investments in foreign securities described above, including the
possibility of nationalization, expropriation and confiscatory taxation, may
be heightened. In addition, unanticipated political and social developments
may affect the value of the Fund's investments in emerging markets and the
availability to the Fund of additional investments in such countries. The
small size and inexperience of the securities markets in certain emerging
markets and the limited volume of trading in securities in those countries may
make the Fund's investments in such countries less liquid and more volatile
than investments in countries with more developed securities markets (such as
the U.S., Japan and most Western European countries). See the Additional
Statement for further information regarding a Fund's investments in emerging
markets.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers by the
Core Fixed Income, Global Income and High Yield Funds will usually involve
currencies of foreign countries, and because the Funds may have currency
exposure independent of their securities positions, the value of the assets of
a Fund as measured in U.S. dollars will be affected by changes in foreign
currency exchange rates. A Fund may, to the extent it invests in foreign
securities, purchase or sell forward foreign currency exchange contracts for
hedging purposes and to seek to protect against anticipated changes in future
foreign currency exchange rates. A Fund also may enter into such contracts to
seek to increase total return when the Investment Adviser anticipates that the
foreign currency will appreciate or depreciate in value, but securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio. When entered into to
seek to increase total return, forward foreign currency exchange contracts are
considered speculative. The Funds may also engage in cross-hedging by using
forward contracts in a currency different from that in which the hedged
security is denominated or quoted if the Investment Adviser determines that
there is a pattern of correlation between the two currencies. If a Fund enters
into a forward foreign currency exchange contract to buy foreign
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currency for any purpose or to sell foreign currency to seek to increase total
return, the Fund will be required to place cash or liquid assets in a
segregated account with the Fund's custodian in an amount equal to the value
of the Fund's total assets committed to the consummation of the forward
contract. A Fund will incur costs in connection with conversions between
various currencies. A Fund may hold foreign currency received in connection
with investments in foreign securities when, in the judgment of the Investment
Adviser, it would be beneficial to convert such currency into U.S. dollars at
a later date, based on anticipated changes in the relevant exchange rate.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's net asset value to fluctuate.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by the intervention of U.S.
or foreign governments or central banks, or the failure to intervene, or by
currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of a Fund's total assets, adjusted to
reflect the Fund's net position after giving effect to currency transactions,
is denominated or quoted in the currencies of foreign countries, the Fund will
be more susceptible to the risk of adverse economic and political developments
within those countries.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available for
currency instruments traded on an exchange. Such contracts are subject to the
risk that the counterparty to the contract will default on its obligations.
Since these contracts are not guaranteed by an exchange or clearinghouse, a
default on a contract would deprive a Fund of unrealized profits, transaction
costs or the benefits of a currency hedge or force the Fund to cover its
purchase or sale commitments, if any, at the current market price. A Fund will
not enter into forward foreign currency exchange contracts, currency swaps or
other privately negotiated currency instruments unless the credit quality of
the unsecured senior debt or the claims-paying ability of the counterparty is
considered to be investment grade by the Investment Adviser.
The Core Fixed Income, Global Income and High Yield Fund's use of foreign
currency management techniques in emerging markets may be limited. Due to the
limited market for these instruments in emerging markets, the Investment
Adviser does not currently anticipate that a significant portion of the Fund's
currency exposure in emerging markets, if any, will be covered by such
instruments. For a discussion of such instruments and the risks associated
with their use, see "Investment Objectives and Policies" in the Additional
Statement.
STRUCTURED SECURITIES
The Core Fixed Income, Global Income and High Yield Funds may invest in
structured securities. The value of the principal of and/or interest on such
securities is determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The
interest rate or the principal amount payable upon maturity or redemption may
be increased or decreased depending upon changes in the applicable Reference.
The terms of the structured securities may provide that in certain
circumstances no principal is due at maturity and, therefore, result in the
loss of a Fund's investment. Structured securities may be positively or
negatively indexed, so that appreciation of the Reference may produce an
increase or decrease in the interest rate or value of the security at
maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the
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value of the Reference. Consequently, structured securities may entail a
greater degree of market risk than other types of fixed-income securities.
Structured securities may also be more volatile, less liquid and more
difficult to accurately price than less complex securities.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon, deferred interest, and capital
appreciation bonds. These are securities issued at a discount from their face
value because interest payments are typically postponed until maturity. The
amount of the discount rate varies depending on factors including the time
remaining until maturity, prevailing interest rates, the security's liquidity
and the issuer's credit quality. These securities also may take the form of
debt securities that have been stripped of their interest payments. Each Fund
may also invest in pay-in-kind securities which are securities that have
interest payable by the delivery of additional securities. A portion of the
discount with respect to stripped tax-exempt securities or their coupons may
be taxable. The market prices of zero coupon, deferred interest, pay-in-kind
and capital appreciation bonds generally are more volatile than the market
prices of interest-bearing securities and are likely to respond to a greater
degree to changes in interest rates than interest-bearing securities having
similar maturities and credit quality. A Fund's investments in zero coupon,
deferred interest, pay-in-kind and capital appreciation bonds or stripped
securities may require the Fund to sell certain of its portfolio securities to
generate sufficient cash to satisfy certain income distribution requirements.
See "Taxation" in the Additional Statement.
RISK FACTORS
INTEREST RATE RISK. When interest rates decline, the market value of fixed-
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed-income securities tends to decline. Volatility of a
security's market value will differ depending upon the security's duration,
the issuer and the type of instrument.
DEFAULT RISK/CREDIT RISK. Investments in fixed-income securities are subject
to the risk that the issuer could default on its obligations and a Fund could
sustain losses on such investments. A default could impact both interest and
principal payments.
CALL RISK AND EXTENSION RISK. Fixed-income securities may be subject to both
call risk and extension risk. Call risk (i.e., where the issuer exercises its
right to pay principal on an obligation earlier than scheduled) causes cash
flow to be returned earlier than expected. This typically results when
interest rates have declined and a Fund will suffer from having to reinvest in
lower yielding securities. Extension risk (i.e., where the issuer exercises
its right to pay principal on an obligation later than scheduled) causes cash
flows to be returned later than expected. This typically results when interest
rates have increased and a Fund will suffer from the inability to invest in
higher yielding securities. Certain types of U.S. Government, Asset-Backed,
corporate, foreign, Mortgage-Backed and Municipal Securities have this call
and/or extension risk.
The investment characteristics of Mortgage-Backed Securities and Asset-
Backed Securities differ from those of traditional fixed-income securities
because they generally have both call risk (also known as prepayment risk) and
extension risk. Homeowners have the option to prepay their mortgage.
Therefore, the duration of a security backed by home mortgages can either
shorten (call risk) or lengthen (extension risk). Investors are exposed to the
fluctuating principal and interest payments associated with such securities.
In general, if interest
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rates on new mortgage loans fall sufficiently below the interest rates on
existing outstanding mortgage loans, the rate of prepayment would be expected
to increase. Conversely, if mortgage loan interest rates rise above the
interest rates on existing outstanding mortgage loans, the rate of prepayment
would be expected to decrease.
ARMs also have the risk of prepayments, which will have a greater impact on
the Adjustable Rate Government Fund. The rate of principal prepayments with
respect to ARMs has fluctuated in recent years. As with fixed-rate mortgage
loans, ARMs may be subject to a greater rate of principal repayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, ARMs could be subject to higher prepayment rates (than if
prevailing interest rates remain constant or increase) because the
availability of low fixed-rate mortgages may encourage mortgagors to refinance
their ARMs to "lock-in" a fixed-rate mortgage. Conversely, if prevailing
interest rates rise significantly, ARMs may prepay slower. As with fixed-rate
mortgages, ARM prepayment rates vary in both stable and changing interest rate
environments. There are certain ARMs where the homeowner's payments do not
fully cover interest, so the principal balance increases over time. These
"negative amortizing" ARMs may be subject to greater default risk.
DERIVATIVE MORTGAGE-BACKED SECURITIES. Because derivative Mortgage-Backed
Securities (such as principal-only (POs), interest-only (IOs) or inverse
floating rate securities) are more exposed to mortgage prepayments, they
generally involve a greater amount of risk. Small changes in prepayments can
significantly impact the cash flow and the market value of these securities.
The risk of faster than anticipated prepayments generally adversely affects
IOs, super floaters and premium priced Mortgage-Backed Securities. The risk of
slower than anticipated prepayments generally adversely affects POs, floating-
rate securities subject to interest rate caps, support tranches and discount
priced Mortgage-Backed Securities. In addition, particular derivative
securities may be leveraged such that their exposure (i.e., price sensitivity)
to interest rate and/or prepayment risk is magnified.
TAX RISK OF MUNICIPAL SECURITIES. Due to Municipal Securities' tax-exempt
status, their yields and market values may be more adversely impacted by
changes in tax rates and policies than taxable fixed-income securities.
Because interest income from Municipal Securities is not subject to regular
federal income taxation, the attractiveness of Municipal Securities in
relation to other investment alternatives is affected by changes in federal
income tax rates applicable to, or the continuing federal income tax-exempt
status of, such interest income. Any proposed or actual changes in such rates
or exempt status, therefore, can significantly affect the demand for and
supply, liquidity and marketability of Municipal Securities, which could in
turn affect a Fund's ability to acquire and dispose of Municipal Securities at
desirable yield and price levels.
RISKS OF INVESTING IN NON-INVESTMENT GRADE FIXED-INCOME SECURITIES. Non-
investment grade fixed-income securities are considered predominantly
speculative by traditional investment standards. In some cases, these
obligations may be highly speculative and have poor prospects for reaching
investment grade standing. Non-investment grade fixed-income securities and
unrated securities of comparable credit quality (commonly known as "junk
bonds") are subject to the increased risk of an issuer's inability to meet
principal and interest obligations. These securities, also referred to as high
yield securities, may be subject to greater price volatility due to such
factors as specific corporate developments, interest rate sensitivity,
negative perceptions of the junk bond markets generally and less secondary
market liquidity.
Non-investment grade fixed-income securities are often issued in connection
with a corporate reorganization or restructuring or as part of a merger,
acquisition, takeover or similar event. They are also issued by less
established companies seeking to expand. Such issuers are often highly
leveraged and generally less able than
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more established or less leveraged entities to make scheduled payments of
principal and interest in the event of adverse developments or business
conditions.
The market value of non-investment grade fixed-income securities tends to
reflect individual corporate developments to a greater extent than that of
higher rated securities which react primarily to fluctuations in the general
level of interest rates. As a result, a Fund's ability to achieve its
investment objectives may depend to a greater extent on the Investment
Adviser's judgment concerning the creditworthiness of issuers than funds which
invest in higher-rated securities. Issuers of non-investment grade fixed-
income securities may not be able to make use of more traditional methods of
financing and their ability to service debt obligations may be more adversely
affected than issuers of higher-rated securities by economic downturns,
specific corporate developments or the issuer's inability to meet specific
projected business forecasts. Negative publicity about the junk bond market
and investor perceptions regarding lower rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
A holder's risk of loss from default is significantly greater for non-
investment grade fixed-income securities than is the case for holders of other
debt securities because such non-investment grade securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by a Fund in defaulted securities poses
additional risk of loss should nonpayment of principal and interest continue
in respect of such securities. Even if such securities are held to maturity,
recovery by a Fund of its initial investment and any anticipated income or
appreciation is uncertain.
The secondary market for non-investment grade fixed-income securities is
concentrated in relatively few market makers and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as, and is more volatile than, the secondary market for higher-rated
securities. In addition, market trading volume for high yield fixed-income
securities is generally lower and the secondary market for such securities
could contract under adverse market or economic conditions, independent of any
specific adverse changes in the condition of a particular issuer. These
factors may have an adverse effect on the market price and a Fund's ability to
dispose of particular portfolio investments. A less liquid secondary market
also may make it more difficult for a Fund to obtain precise valuations of the
high yield securities in its portfolio.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities
and, therefore, may not fully reflect the true risks of an investment. In
addition, credit rating agencies may or may not make timely changes in a
rating to reflect changes in the economy or in the conditions of the issuer
that affect the market value of the security. Consequently, credit ratings are
used only as a preliminary indicator of investment quality. Investments in
non-investment grade and comparable unrated obligations will be more dependent
on the Investment Adviser's credit analysis than would be the case with
investments in investment-grade debt obligations. The Investment Adviser
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic conditions, its operating
history and the current trend of earnings. The Investment Adviser continually
monitors the investments in a Fund's portfolio and evaluates whether to
dispose of or to retain non-investment grade and comparable unrated securities
whose credit ratings or credit quality may have changed.
OTHER RISKS. Floating-rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced below market rates if a designated
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interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to lower prices in the event of an
unfavorable change in the spread between two designated interest rates.
Asset-Backed Securities present certain credit risks that are not presented
by Mortgage-Backed Securities because Asset-Backed Securities generally do not
have the benefit of a security interest in collateral that is comparable to
mortgage assets. There is the possibility that, in some cases, recoveries on
repossessed collateral may not be available to support payments on these
securities.
FOREIGN RISKS. See "Foreign Securities" for a description of the risks of
investing in foreign securities and currencies.
INVESTMENT TECHNIQUES
MORTGAGE DOLLAR ROLLS. The Adjustable Rate Government, Short Duration
Government, Government Income, Core Fixed Income and Global Income Funds may
enter into mortgage "dollar rolls" in which a Fund sells securities for
delivery in the current month and simultaneously contracts with the same
counterparty to repurchase substantially similar (same type, coupon and
maturity) but not identical securities on a specified future date. During the
roll period, the Fund loses the right to receive principal and interest paid
on the securities sold. However, the Fund would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase or fee income plus the interest earned
on the cash proceeds of the securities sold until the settlement date for the
forward purchase. Unless such benefits exceed the income, capital appreciation
and gain or loss due to mortgage prepayments that would have been realized on
the securities sold as part of the mortgage dollar roll, the use of this
technique will diminish the investment performance of the Fund. Successful use
of mortgage dollar rolls depends upon the Investment Adviser's ability to
predict correctly interest rates and mortgage prepayments. There is no
assurance that mortgage dollar rolls can be successfully employed. The Fund
will hold and maintain in a segregated account until the settlement date cash
or liquid assets in an amount equal to the forward purchase price. For
financial reporting and tax purposes, each Fund treats mortgage dollar rolls
as two separate transactions; one involving the purchase of a security and a
separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
OPTIONS ON SECURITIES AND SECURITIES INDICES. Each Fund may write (sell)
covered call and put options and purchase put and call options on any
securities in which it may invest or on any securities index composed of
securities in which it may invest. The writing and purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities
transactions. The use of options to seek to increase total return involves the
risk of loss if the Investment Adviser is incorrect in its expectation of
fluctuations in securities prices or interest rates. The successful use of
options for hedging purposes also depends in part on the ability of the
Investment Adviser to manage future price fluctuations and the degree of
correlation between the options and securities markets. If the Investment
Adviser is incorrect in its expectation of changes in securities prices or
determination of the correlation between the securities indices on which
options are written and purchased and the securities in a Fund's investment
portfolio, the investment performance of the Fund will be less favorable than
it would have been in the absence of such options transactions. The writing of
options could increase a Fund's portfolio turnover rate and, therefore,
associated brokerage commissions or spreads.
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OPTIONS ON FOREIGN CURRENCIES. The Core Fixed Income, Global Income and High
Yield Funds may, to the extent they invest in foreign securities, purchase and
sell (write) put and call options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of foreign portfolio
securities and against increases in the U.S. dollar cost of foreign securities
to be acquired. In addition, the Core Fixed Income, Global Income and High
Yield Funds may use options on currency to cross-hedge, which involves writing
or purchasing options on one currency to hedge against changes in exchange
rates for a different currency, if there is a pattern of correlation between
the two currencies. As with other kinds of option transactions, however, the
writing of an option on foreign currency will constitute only a partial hedge,
up to the amount of the premium received. If an option that a Fund has written
is exercised, the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of exchange rate
movements adverse to a Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs. In addition to purchasing put
and call options for hedging purposes, a Fund may purchase call or put options
on currency to seek to increase total return when the Investment Adviser
anticipates that the currency will appreciate or depreciate in value, but the
securities quoted or denominated in that currency do not present attractive
investment opportunities and are not held in the Fund's portfolio. When
purchased or sold to seek to increase total return, options on currencies are
considered speculative. Options on foreign currencies to be written or
purchased by the Funds will be traded on U.S. and foreign exchanges or over-
the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To seek to increase
total return, to hedge against changes in interest rates or securities prices,
or in the case of the Core Fixed Income, Global Income and High Yield Funds,
currency exchange rates, a Fund may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on any of such futures
contracts. Each Fund may also enter into closing purchase and sale
transactions with respect to any such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), foreign currencies, in the case of the Core Fixed Income, Global
Income and High Yield Funds, securities indices and other financial
instruments and indices. A Fund will engage in futures and related options
transactions for bona fide hedging purposes as defined in regulations of the
Commodity Futures Trading Commission or to seek to increase total return to
the extent permitted by such regulations. A Fund may not purchase or sell
futures contracts or purchase or sell related options to seek to increase
total return, except for closing purchase or sale transactions, if immediately
thereafter the sum of the amount of initial margin deposits and premiums paid
on a Fund's outstanding positions in futures and related options entered into
for the purpose of seeking to increase total return would exceed 5% of the
market value of a Fund's net assets. These transactions involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
segregate and maintain cash or liquid assets with a value equal to the amount
of the Fund's obligations.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Techniques--Futures Contracts and Options on Futures Contracts" in
the Additional Statement. Thus, while a Fund may benefit from the use of
futures and options on futures, unanticipated changes in interest rates,
securities prices or currency exchange rates may result in a poorer overall
performance than if the Fund had not entered into any futures contracts or
options transactions. Because perfect correlation between a futures position
and portfolio position which is intended to be protected is impossible to
achieve, the desired protection may not be obtained and a Fund may be exposed
to risk of loss. The loss incurred by a Fund in entering into futures
contracts and in writing call options on futures is potentially unlimited and
may exceed the amount of the premium received. Futures markets are highly
volatile and the use of futures may increase the volatility of a Fund's net
asset value. The profitability of a Fund's trading in futures
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to seek to increase total return depends upon the ability of the Investment
Adviser to correctly analyze the futures markets. In addition, because of the
low margin deposits normally required in futures trading, a relatively small
price movement in a futures contract may result in substantial losses to a
Fund. Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single
day.
CURRENCY SWAPS. The Core Fixed Income, Global Income and High Yield Funds
may enter into currency swaps for hedging purposes or to seek to increase
total return. Currency swaps involve the exchange by a Fund with another party
of their respective rights to make or receive payments in specified
currencies. Currency swaps usually involve the delivery of a gross payment
stream in one designated currency in exchange for the gross payment stream in
another designated currency. Therefore, the entire payment stream under a
currency swap is subject to the risk that the other party to the swap will
default on its contractual delivery obligations. A Fund will not enter into
swap transactions unless the unsecured commercial paper, senior debt or
claims-paying ability of the other party thereto is rated either AA or A-1 or
better by S&P or Aa or P-1 or better by Moody's, or, if unrated by such rating
organizations, determined to be of comparable quality by the Investment
Adviser. The use of currency swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Investment Adviser is
incorrect in its forecasts of currency exchange rates, the investment
performance of a Fund would be less favorable than it would have been if this
investment technique were not used. The staff of the SEC currently take the
position that swaps are illiquid and thus subject to a Fund's limitation on
investments in illiquid securities.
RISKS OF DERIVATIVE TRANSACTIONS. A Fund's transactions, if any, in options,
futures, options on futures, swap transactions, interest rate caps, floors and
collars, structured securities, inverse floating-rate securities and currency
forward contracts involve certain risks, including a possible lack of
correlation between changes in the value of hedging instruments and the
portfolio assets being hedged, the potential illiquidity of the markets for
derivative instruments, the risks arising from the margin requirements and
related leverage factors associated with such transactions. The use of these
management techniques to seek to increase total return may be regarded as a
speculative practice and involves the risk of loss if the Investment Adviser
is incorrect in its expectation of fluctuations in securities prices, interest
rates or currency prices. A Fund's use of certain derivative transactions may
be limited by the requirements of the Code for qualification as a regulated
investment company.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. Each Fund may purchase when-
issued securities. When-issued transactions arise when securities are
purchased by a Fund with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous price and yield to
the Fund at the time of entering into the transaction. Each Fund may also
purchase securities on a forward commitment basis; that is, make contracts to
purchase securities for a fixed price at a future date beyond the customary
three-day settlement. A Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to settlement date,
cash or liquid assets in an amount sufficient to meet the purchase price.
Alternatively, each Fund may enter into offsetting contracts for the forward
sale of other securities that it owns. The purchase of securities on a when-
issued or forward commitment basis involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date. Although a
Fund would generally purchase securities on a when-issued or forward
commitment basis with the intention of acquiring securities for its portfolio,
a Fund may dispose of when-issued securities or forward commitments prior to
settlement if the Investment Adviser deems it appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES. A Fund may not invest more than 15% of
its net assets in illiquid investments, which includes securities (both
foreign and domestic) that are not readily marketable, swap
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transactions, certain SMBS, certain municipal leases and participation
interests, repurchase agreements maturing in more than seven days, time
deposits with a notice or demand period of more than seven days and certain
restricted securities, unless it is determined, based upon the continuing
review of the trading markets for a specific restricted security, that such
restricted security is eligible for resale under Rule 144A under the
Securities Act of 1933 and, therefore, is liquid. The Trustees have adopted
guidelines and delegated to the Investment Adviser the daily function of
determining and monitoring the liquidity of portfolio securities. The
Trustees, however, retain oversight focusing on factors such as valuation,
liquidity and availability of information and are ultimately responsible for
each determination. Investing in restricted securities eligible for resale
pursuant to Rule 144A may decrease the liquidity in a Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities. The purchase price and subsequent valuation of
restricted and illiquid securities normally reflect a discount, which may be
significant, from the market price of comparable securities for which a liquid
market exists.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with
dealers in U.S. Government Securities and member banks of the Federal Reserve
System which furnish collateral at least equal in value or market price to the
amount of their repurchase obligation. The Core Fixed Income, Global Income
and High Yield Funds may also enter into repurchase agreements involving
certain foreign government securities. If the other party or "seller"
defaults, a Fund might suffer a loss to the extent that the proceeds from the
sale of the underlying securities and other collateral held by the Fund in
connection with the related repurchase agreement are less than the repurchase
price. In addition, in the event of bankruptcy of the seller or failure of the
seller to repurchase the securities as agreed, a Fund could suffer losses,
including loss of interest on or principal of the security and costs
associated with delay and enforcement of the repurchase agreement. The
Trustees have reviewed and approved certain counterparties whom they believe
to be creditworthy and have authorized the Funds to enter into repurchase
agreements with such counterparties. In addition, each Fund, together with
other registered investment companies having management agreements with the
Investment Adviser, may transfer uninvested cash balances into a single joint
account, the daily aggregate balance of which will be invested in one or more
repurchase agreements.
TEMPORARY INVESTMENTS. Each Fund may, for temporary defensive purposes,
invest up to 100% of its total assets in (a) U. S. Government Securities or
(b) repurchase agreements collateralized by U.S. Government Securities. The
Short Duration Tax-Free and Municipal Income Funds may for temporary defensive
purposes depart from their stated investment objectives and invest more than
20% of its net assets in taxable investments. The High Yield Fund may for
temporary defensive purposes invest in investment grade securities.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, each Fund
may, with respect to no more than 5% of its net assets, engage in the
following techniques and investments: (i) portfolio securities lending, (ii)
mortgage swaps (other than Short Duration Tax-Free and Municipal Income Funds)
and interest rate swaps, caps, floors and collars, (iii) inverse floating-rate
securities, (iv) yield curve options, (v) other investment companies, (vi)
custodial receipts and (vii) with respect to the Short Duration Tax-Free and
Municipal Income Funds, tender option bonds and standby commitments. For more
information, see the Additional Statement.
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INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions that are described
in detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of a Fund cannot be changed without
approval of a majority of the outstanding shares of that Fund. Each Fund's
investment objectives and all policies not specifically designated as
fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in a Fund's investment objectives, shareholders
should consider whether that Fund still remains an appropriate investment in
light of their then current financial positions and needs.
The Short Duration Tax-Free and Municipal Income Funds' policy to invest,
under normal market conditions, at least 80% of its net assets in Municipal
Securities, the interest on which is exempt from regular federal income tax,
is fundamental and may not be changed without shareholder approval. For more
information on a Fund's investment restrictions, an investor should obtain the
Additional Statement.
NON-DIVERSIFICATION STATUS. Since the Global Income Fund is "non-
diversified" under the Act, it is subject only to certain federal tax
diversification requirements. Under federal tax laws, the Global Income Fund
may, with respect to 50% of its total assets, invest up to 25% of its total
assets in the securities of any issuer (except that this limitation does not
apply to U.S. Government Securities). With respect to the remaining 50% of the
Fund's total assets, (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer (other than the U.S. government),
and (2) the Fund may not acquire more than 10% of the outstanding voting
securities of any one issuer. These tests apply at the end of each quarter of
its taxable year and are subject to certain conditions and limitations under
the Code. Since the Global Income Fund is not diversified under the Act, it
will be more susceptible to adverse developments affecting any single issuer.
The Adjustable Rate Government, Short Duration Government, Short Duration Tax-
Free, Government Income, Municipal Income, Core Fixed Income and High Yield
Funds are, in addition to these tax diversification requirements, also subject
to the diversification requirements arising out of their diversified status
under the Act.
PORTFOLIO TURNOVER
Each Fund may engage in active short-term trading to benefit from yield
disparities among different issues of securities or among the markets for
fixed-income securities, or for other reasons. It is anticipated that the
portfolio turnover rate of each Fund will vary from year to year. It is
anticipated that the annual portfolio turnover rate for the High Yield Fund
will generally not exceed 150%. The portfolio turnover rate is computed by
dividing the lesser of the dollar amount of securities purchased or securities
sold (excluding all securities whose maturities at acquisition are one year or
less) by the average monthly value of such securities owned during the year. A
100% turnover rate would occur, for example, if all of the securities held by
a Fund were sold and replaced within one year. The Investment Adviser will not
consider the portfolio turnover rate a limiting factor in making investment
decisions for a Fund consistent with the Fund's investment objectives and
portfolio management policies. A high rate of portfolio turnover results in
increased transaction costs to a Fund. The portfolio turnover rate includes
the effect of entering into mortgage dollar rolls. See "Financial Highlights"
for a statement of each Fund's historical portfolio turnover rates.
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MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Advisers, distributor and transfer
agent. The officers of the Trust conduct and supervise each Fund's daily
business operations. The Additional Statement contains information as to the
identity of, and other information about, the Trustees and officers of the
Trust.
INVESTMENT ADVISERS
INVESTMENT ADVISERS. Goldman Sachs Funds Management, L.P., One New York
Plaza, New York, New York 10004, a Delaware limited partnership, which is an
affiliate of Goldman Sachs, serves as investment adviser to the Short Duration
Government and Adjustable Rate Government Funds. Goldman Sachs Funds
Management, L.P. registered as an investment adviser in 1990. Goldman Sachs
Asset Management, One New York Plaza, New York, New York 10004, a separate
operating division of Goldman Sachs, serves as the investment adviser to the
Short Duration Tax-Free, Government Income, Municipal Income, Core Fixed
Income and High Yield Funds. Goldman Sachs registered as an investment adviser
in 1981. Goldman Sachs Asset Management International, 133 Peterborough Court,
London EC4A 2BB, England, an affiliate of Goldman Sachs, serves as investment
adviser to the Global Income Fund. Goldman Sachs Asset Management
International became a member of the Investment Management Regulatory
Organization Limited in 1990 and registered as an investment adviser in 1991.
As of , 1997, GSAM, GSFM and GSAMI, together with their affiliates, acted
as investment adviser, administrator or distributor for assets in excess of
$ billion.
Under a Management Agreement with each Fund, the applicable Investment
Adviser, subject to the general supervision of the Trustees, provides day-to-
day advice as to the Fund's portfolio transactions. Goldman Sachs has agreed
to permit the Trust to use the name "Goldman Sachs" or a derivative thereof as
part of each Fund's name for as long as a Fund's Management Agreement is in
effect.
In performing its investment advisory services, each Investment Adviser,
while remaining ultimately responsible for the management of the Funds, is
able to draw upon the research and expertise of its affiliate offices for
portfolio decisions and management with respect to certain portfolio
securities. In addition, the Investment Advisers will have access to the
research of, and proprietary technical models developed by, Goldman Sachs and
may apply quantitative and qualitative analysis in determining the appropriate
allocations among the categories of issuers and types of securities.
Under the Management Agreement, each Investment Adviser also: (i) supervises
all non-advisory operations of each Fund that it advises; (ii) provides
personnel to perform such executive, administrative and clerical services as
are reasonably necessary to provide effective administration of each Fund;
(iii) arranges for at each Fund's expense (a) the preparation of all required
tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and statements of
additional information and (d) the preparation of reports to be filed with the
SEC and other regulatory authorities; (iv) maintains each Fund's records; and
(v) provides the Fund with office space and all necessary office equipment and
services.
ADJUSTABLE RATE GOVERNMENT AND SHORT DURATION GOVERNMENT FUNDS. The Funds'
portfolio manager is Jonathan A. Beinner. Mr. Beinner is a Vice President of
Goldman Sachs and Co-Head of GSAM's U.S. Fixed
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Income Department. Mr. Beinner joined the Investment Adviser in 1990 after
working in the trading and arbitrage group of Franklin Savings Association.
GOVERNMENT INCOME AND CORE FIXED INCOME FUNDS. The Funds' portfolio managers
are Jonathan A. Beinner and Richard C. Lucy. See above for information about
Mr. Beinner. Messrs. Beinner and Lucy each specialize in investing in a
particular type of security the Fund may hold. Mr. Lucy is a Vice President of
Goldman Sachs and Co-Head of GSAM's U.S. Fixed Income Department. Mr. Lucy
joined the Investment Adviser in 1992 after spending nine years managing fixed
income assets at Brown Brothers Harriman & Co.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS. The Funds' portfolio
managers are Benjamin S. Thompson and Elisabeth Schupf Lonsdale. Mr. Thompson
and Ms. Lonsdale each specialize in municipal securities. Mr. Thompson's
responsibilities include developing investment strategy and structuring
portfolios. Ms. Lonsdale is also responsible for GSAM's municipal credit
research. Mr. Thompson worked in the institutional sales and marketing group
at GSAM until he joined the fixed-income team in 1993. Prior to joining GSAM
in early 1992, Mr. Thompson worked in the Structured Finance Group of the
Chase Manhattan Bank. Before rejoining Goldman Sachs in 1995, Ms. Lonsdale was
a Director of Fitch Investors Service evaluating the credit ratings of tax-
backed issues. Prior to that, she worked for ten years in the Goldman Sachs
Municipal Finance Department.
GLOBAL INCOME FUND. The Fund's portfolio managers are Stephen Fitzgerald and
Andrew Wilson. Mr. Fitzgerald joined GSAMI in 1992 and is an Executive
Director and Chief Investment Officer for international fixed income. Prior to
1992, he spent two years managing multi-currency fixed-income and balanced
portfolios at Invesco MIM Limited, where he was a senior member of the
derivative products group. Mr. Wilson joined GSAMI in 1995 and is Executive
Director and Portfolio Manager for international fixed income. Prior to
joining GSAMI, he spent three years as an Assistant Director at Rothschild
Asset Management where he was responsible for managing global and
international bond portfolios, with specific focus on the U.S., Canadian,
Australian and Japanese economies. Prior to his employment at Rothschild, Mr.
Wilson spent seven years at the Reserve Bank of New Zealand, his most recent
position as Trading Manager of foreign reserves management. Mr. Wilson's
employment at the Reserve Bank at New Zealand also included a two year
assignment to the foreign investment unit at the Bank of England in London.
It is the responsibility of the Investment Adviser to make investment
decisions for a Fund and to place the purchase and sale orders for a Fund's
portfolio transactions in U.S. and foreign securities and currency markets.
Such orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Goldman Sachs or its affiliates. In
effecting purchases and sales of portfolio securities for the Funds, the
Investment Advisers will seek the best price and execution of a Fund's orders.
In doing so, where two or more brokers or dealers offer comparable prices and
execution for a particular trade, consideration may be given to whether the
broker or dealer provides investment research or brokerage services or sells
shares of any Goldman Sachs Fund. See the Additional Statement for a further
description of the Investment Advisers' brokerage allocation practices.
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As compensation for its services rendered and assumption of certain expenses
pursuant to separate Management Agreements, GSAM, GSFM and GSAMI are entitled
to the following fees, computed daily and payable monthly at the annual rates
listed below:
<TABLE>
<CAPTION>
FOR THE FISCAL
CONTRACTUAL YEAR ENDED
RATE* OCTOBER 31, 1996*
----------- ------------------
<S> <C> <C>
GSAM
- ----
Short Duration Tax-Free 0.40% 0.40%
Government Income 0.65% 0.25%
Municipal Income 0.55% 0.55%
Core Fixed Income 0.40% 0.40%
High Yield 0.70% N/A
GSFM
- ----
Short Duration Government 0.50% 0.40%
Adjustable Rate Government 0.40% 0.40%
GSAMI
- -----
Global Income 0.90% 0.59%
</TABLE>
- --------
* With respect to Government Income, Municipal Income and Global Income
Funds, a Management Agreement combining advisory and administration
services (and subadvisory services in the case of Global Income Fund) was
adopted effective April 30, 1997. The Management Agreements for the other
funds previously combined such services. The contractual rate set forth in
the table is the rate payable under the Management Agreements (and, in the
case of Global Income Fund, is identical to the aggregate advisory,
subadvisory and administration fee rate payable by the Fund under the
previously separate investment advisory, subadvisory and administration
agreements). For the fiscal year ended October 31, 1996, the annual rate
expressed is the combined advisory and administration fees paid (after
voluntary fee limitations). The difference, if any, between the stated fees
and the actual fees paid by the Funds reflects that the applicable
Investment Adviser did not charge the full amount of the fees to which it
would have been entitled. The Investment Advisers may discontinue or modify
such limitations in the future at their discretion, although they have no
current intention to do so.
The Investment Advisers to the Short Duration Government, Short Duration
Tax-Free, Core Fixed Income, Government Income, Municipal Income, Global
Income and High Yield Funds have voluntarily agreed to reduce or limit certain
"Other Expenses" of such Funds (excluding management fees, fees under service
and administration plans, taxes, interest and brokerage fees and litigation,
indemnification and other extraordinary expenses (and transfer agency fees in
the case of the Global Income and High Yield Funds) to the extent such
expenses exceed 0.05%, 0.05%, 0.05%, 0.00%, 0.05%, 0.06% and 0.01% per annum
of such Funds' average daily net assets, respectively. Such reductions or
limits, if any, are calculated monthly on a cumulative basis and may be
discontinued or modified by the applicable Investment Adviser in its
discretion at any time.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Advisers, Goldman Sachs and
their affiliates in the management of, or their interest in, other accounts
and other activities of Goldman Sachs may present conflicts of interest with
respect to a Fund or limit a Fund's investment activities. Goldman Sachs and
its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Funds and/or which
engage in and compete for transactions in the same types of securities,
currencies and instruments as the Funds. Goldman
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Sachs and its affiliates will not have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and in general it is not anticipated
that the Investment Advisers will have access to proprietary information for
the purpose of managing a Fund. The results of a Fund's investment activities,
therefore, may differ from those of Goldman Sachs and its affiliates and it is
possible that a Fund could sustain losses during periods in which Goldman
Sachs and its affiliates and other accounts achieve significant profits on
their trading for proprietary or other accounts. From time to time, a Fund's
activities may be limited because of regulatory restrictions applicable to
Goldman Sachs and its affiliates, and/or their internal policies designed to
comply with such restrictions. See "Management -- Activities of Goldman Sachs
and its Affiliates and Other Accounts Managed by Goldman Sachs" in the
Additional Statement for further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606 also serves as each Fund's
transfer agent (the "Transfer Agent") and as such performs various shareholder
servicing functions. Shareholders with inquiries regarding any Fund should
contact Goldman Sachs (as Transfer Agent) at the address or the telephone
number set forth on the back cover page of this Prospectus. Goldman Sachs is
not entitled to receive a fee from the Global Income Fund for transfer agency
services. Goldman Sachs is entitled to receive a fee from the Adjustable Rate
Government, Short Duration Government, Short Duration Tax-Free Government
Income, Municipal Income and Core Fixed Income Funds equal to each class'
proportionate share of the total transfer agency fees borne by the Fund. Such
fees are equal to the fixed per account charge of $12,000 per year plus $7.50
per account, together with out-of-pocket and transaction related expenses
(including those out-of-pocket expenses payable to servicing and/or sub-
transfer agents) applicable to Class A and B shares where applicable plus
0.04% of the average daily net assets of the other classes of the Funds.
Goldman Sachs is entitled to receive a fee from the High Yield Fund equal to
..04% of the average daily net assets of Institutional and Service shares.
DIVIDENDS
Each Fund (other than the Global Income Fund) will declare a daily dividend.
Such dividend will accrue to shareholders of record as of 3:00 p.m. Chicago
time, and will be paid monthly. The Global Income Fund will declare and pay
dividends monthly. Shares of Global Income Fund will be eligible for dividends
which accrue on or after the date such shares are purchased and will be paid
monthly. Over the course of the fiscal year, dividends accrued and paid will
constitute all or substantially all of the Funds' net investment income. From
time to time a portion of such dividends may constitute a return of capital.
In the case of Core Fixed Income, Global Income and High Yield Funds, net
loss, if any, from certain foreign currency transactions or instruments that
is otherwise taken into account in calculating net investment income or net
realized capital gains for accounting purposes may not be taken into account
in determining the amount of dividends to be declared and paid, with the
result that a portion of the Fund's dividends may be treated as a return of
capital, nontaxable to the extent of a shareholder's tax basis in his shares.
The Funds also intend that all net realized long-term and short-term capital
gains will be declared as a dividend at least annually. In determining amounts
of capital gains to be distributed, capital losses, including any available
capital loss carryovers from prior years will be offset against capital gains.
38
<PAGE>
A Fund's net investment income is determined on a daily basis (monthly in
the case of the Global Income Fund). On days on which net asset value is
calculated, such determination is made immediately prior to the calculation of
a Fund's net asset value as of 3:00 p.m. Chicago time. On days on which net
asset value is not calculated, such determination is made as of 3:00 p.m.
Chicago time.
Payment of dividends (other than the Global Income Fund) from net investment
income will be made on the last calendar day of each month in additional
shares of a Fund at the net asset value on such day, unless cash distributions
are elected, in which case, cash payment will be made on the first Business
Day of the succeeding month. In the case of Global Income Fund, reinvestment
of dividends from net investment income in additional shares of the Fund will
be made on the second to last Business Day of each month. Cash dividends will
be paid on or about the last Business Day of the month. Payment of dividends
with respect to capital gains, if any, when declared will be made in
additional shares of the Fund at the net asset value on the payment date,
unless cash distributions are elected. This election to receive dividends in
cash is initially made on the Account Information Form and may be changed upon
written notice to the Transfer Agent at any time prior to the record date for
a particular dividend or distribution. If cash dividends are elected with
respect to the Fund's monthly net investment income dividends, then cash
dividends must also be elected with respect to the non-long-term capital gains
component, if any, of the Fund's annual dividend.
At the time of an investor's purchase of shares of a Fund, a portion of the
net asset value per share may be represented by undistributed income (in the
case of the Global Income Fund) or realized or unrealized appreciation of any
Fund's portfolio securities. Therefore, subsequent distributions on such
shares from such income or realized appreciation may be taxable to the
investor even if the net asset value of the shares is, as a result of the
distributions, reduced below the cost of such shares and the distributions (or
portions thereof) represent a return of a portion of the purchase price.
NET ASSET VALUE
The net asset value per share of each class of a Fund is calculated by the
Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time) on each
Business Day (as such term is defined under "Additional Information")
immediately after the determination, if any, of the income to be declared as a
dividend (except in the case of the Global Income Fund). Net asset value per
share of each class is calculated by determining the net assets attributable
to each class and dividing by the number of outstanding shares of that class.
Each Fund's portfolio securities for which accurate market quotations are
readily available are valued on the basis of quotations, which may be
furnished by a pricing service or provided by dealers in such securities and
other portfolio securities are valued at fair value, based on yield
equivalents, a pricing matrix or other sources, under valuation procedures
established by the Trustees. Debt obligations with a remaining maturity of 60
days or less are valued at amortized cost. The Board of Trustees has
determined that the amortized cost of such securities approximates fair market
value.
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<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may publish yield, distribution rate and average
annual total return and the Short Duration Tax-Free and Municipal Income Funds
may publish its tax equivalent yield in advertisements and communications to
shareholders or prospective investors. Average annual total return is
determined by computing the average annual percentage change in value of
$1,000 invested at the maximum public offering price for specified periods
ending with the most recent calendar quarter, assuming reinvestment of all
dividends and distributions at net asset value. The total return calculation
assumes a complete redemption of the investment at the end of the relevant
period. Each Fund may also from time to time advertise total return on a
cumulative, average, year-by-year or other basis for various specified periods
by means of quotations, charts, graphs or schedules. In addition to the above,
each Fund may from time to time advertise its performance relative to certain
averages, performance rankings, indices, other information prepared by
recognized mutual fund statistical services and investments for which reliable
performance data is available.
Yield is computed by dividing net investment income earned during a recent
thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the
maximum offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semiannual) basis and then
annualized. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from
the net investment income determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, the Short Duration Tax-Free and Municipal Income Funds'
tax-free yield. Tax equivalent yield is calculated by dividing the Short
Duration Tax-Free Fund's tax-exempt yield by one minus a stated federal tax
rate.
Quotations of distribution rates are calculated by annualizing the most
recent distribution of net investment income for a monthly, quarterly or other
relevant period and dividing this amount by the net asset value per share or
maximum public offering price on the last day of the period for which the
distribution rates are being calculated.
Each Fund's yield, total return and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, the yield, total return and distribution
rate calculations with respect to each class of shares for the same period
will differ. See "Shares of the Trust."
The investment results of a Fund will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Funds may, in their discretion, from time to time,
make a list of their holdings available to investors upon request.
40
<PAGE>
SHARES OF THE TRUST
Each Fund is a series of the Goldman Sachs Trust, which was formed under the
laws of the state of Delaware on January 28, 1997. The Funds were formerly
series of Goldman Sachs Trust, a Massachusetts business trust, and were
reorganized into the Trust as of April 30, 1997. The Trustees have authority
under the Trust's Declaration of Trust to create and classify shares of
beneficial interest in separate series, without further action by
shareholders. Additional series may be added in the future. The Trustees also
have authority to classify or reclassify any series or portfolio of shares
into one or more classes.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable Fund available for distribution to such shareholders. All
shares are freely transferable and have no preemptive, subscription or
conversion rights. Shareholders are entitled to one vote per share, provided
that at the option of the Trustees, shareholders will be entitled to a number
of votes based upon the net asset values represented by their shares.
The Trust does not intend to hold annual meetings of shareholders. However,
pursuant to the Trust's By-Laws, the recordholders of at least 10% of the
shares outstanding and entitled to vote at a special meeting may require the
Trust to hold such special meeting of shareholders for any purpose and
recordholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting of
shareholders for the purpose of electing Trustees, if, at any time, less than
a majority of Trustees holding office at the time were elected by
shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Funds' shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Funds are reflected in
account statements from the Transfer Agent.
As of , 1997, the shareholders listed below owned beneficially and of
record 25% or more of the outstanding shares of such Fund: Short Duration
Government Fund--State Street Bank and Trust Company, P.O. Box 1992, Boston,
MA 02105-1992 (34.05%).
TAXATION
FEDERAL TAXES
Each Fund is treated as a separate entity for tax purposes, has elected or
intends to elect to be treated as a regulated investment company and intends
to qualify for such treatment for each taxable year under Subchapter M of the
Code. To qualify as such, a Fund must satisfy certain requirements relating to
the sources of its income, diversification of its assets and distribution of
its income to shareholders. As a regulated investment company, a Fund will not
be subject to federal income or excise tax on any net investment income and
net realized capital gains that are distributed to its shareholders in
accordance with certain timing requirements of the Code.
The Short Duration Tax-Free and Municipal Income Funds intend to satisfy
certain requirements of the Code so that it may distribute the tax-exempt
interest it receives as "exempt-interest dividends," as defined in
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<PAGE>
the Code. If such requirements are satisfied, distributions of the Short
Duration Tax-Free and Municipal Income Funds that are attributable to interest
on tax-exempt obligations and that the Fund properly designates as exempt-
interest dividends will be exempt from regular federal income tax, although
all or a portion of such a distribution may be subject to the federal
alternative minimum tax and the entire distribution may be includable in the
tax base for determining taxability of social security or railroad retirement
benefits. Persons who are "substantial users" (or related persons to such
substantial users) of facilities financed by industrial development or certain
private activity bonds should consult their own tax advisers before purchasing
shares of the Short Duration Tax-Free and Municipal Income Funds. Interest on
indebtedness incurred or continued to purchase or carry shares of the Short
Duration Tax-Free and Municipal Income Funds is not deductible to the extent
attributable to the Short Duration Tax-Free or Municipal Income Funds'
distributions that are exempt-interest dividends.
Dividends paid by a Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to shareholders as ordinary income, except for any exempt-
interest dividends paid by Short Duration Tax-Free and Municipal Income Funds,
as described above. Dividends paid by a Fund from the excess of net long-term
capital gain over net short-term capital loss will be taxable as long-term
capital gains regardless of how long the shareholders have held their shares.
These tax consequences will apply regardless of whether distributions are
received in cash or reinvested in shares. Certain distributions paid by a Fund
in January of a given year may be taxable to shareholders as if received the
prior December 31. Shareholders will be informed annually about the amount and
character of distributions received from the Funds for federal income tax
purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution other than a daily dividend will pay a per
share price that includes the value of the anticipated distribution and will
be taxed on any taxable distribution even though the distribution represents a
return of a portion of the purchase price.
Redemptions and exchanges of shares are taxable events.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions (other than exempt-
interest dividends), redemptions and exchanges if they fail to furnish their
correct taxpayer identification number and certain certifications required by
the Internal Revenue Services or if they are otherwise subject to backup
withholding. Individuals, corporations and other shareholders that are not
U.S. persons under the Code are subject to different tax rules and may be
subject to non-resident alien withholding at the rate of 30% (or a lower rate
provided by an applicable tax treaty) on amounts treated as ordinary dividends
from the Funds.
The Core Fixed Income, Global Income and High Yield Funds may be subject to
foreign withholding or other foreign taxes on income or gain from certain
foreign securities. If more than 50% of the value of the total assets of
either Fund is comprised of stock or securities of foreign corporations at the
end of its taxable year and the applicable Fund so elects, that Fund's
shareholders will include in their gross incomes (in addition to dividends and
distributions they receive) their pro rata shares of qualified foreign taxes
paid by that Fund and may be entitled under the Code to claim foreign tax
credits or deductions with respect to such taxes. It is not expected that the
Core Fixed Income Fund will qualify to make this election. If either Fund
cannot or does not so elect, it may deduct these taxes in computing its
taxable income, if any.
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OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Funds, including exempt-
interest dividends. A state income (and possibly local income and/or
intangible property) tax exemption is generally available to the extent (if
any) a Fund's distributions are derived from interest on (or, in the case of
intangible property taxes, the value of its assets is attributable to) certain
U.S. government obligations and/or tax-exempt municipal obligations issued by
or on behalf of the particular state or a political subdivision thereof,
provided in some states that certain thresholds for holdings of such
obligations and/or reporting requirements are satisfied. For a further
discussion of certain tax consequences of investing in shares of the Funds,
see "Taxation" in the Additional Statement. Shareholders are urged to consult
their own tax advisers regarding specific questions as to federal, state and
local taxes as well as to any foreign taxes.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of a Fund means
the vote of the lesser of (i) 67% or more of the shares present at a meeting,
if the holders of more than 50% of the outstanding shares of the Fund are
present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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REPORTS TO SHAREHOLDERS
Recordholders of Institutional Shares of the Funds will receive an annual
report containing audited financial statements and a semi-annual report. Each
recordholder of Institutional Shares will also be provided with a printed
confirmation for each transaction in its account and an individual monthly
statement (quarterly in the case of Global Income Fund). A year-to-date
statement for any account will be provided upon request made to Goldman Sachs.
SUB-ACCOUNTING SERVICE
Each Fund has designed special procedures to assist institutional investors
(including banks) desiring to establish multiple accounts (master accounts and
their sub-accounts). Sub-accounts may be established with registration by name
and/or number. Institutions will not normally be charged for this service
unless otherwise agreed upon. Upon request, master accounts will be provided
with a monthly summary report which sets forth in order by account number (or
name) the share balance at month end and the income, if any, together with the
total share balance and income, if any, for the master account. The Global
Income Fund does not generally provide sub-accounting services.
PURCHASE OF INSTITUTIONAL SHARES
Institutional Shares may be purchased on any Business Day through Goldman
Sachs at the net asset value per share next determined after receipt of an
order. No sales load will be charged. If, by the close of regular trading on
the New York Stock Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New
York time), an order is received by Goldman Sachs, the price per share will be
the net asset value per share computed on the day the purchase order is
received. See "Net Asset Value." Purchases of Institutional Shares of the
Funds must be settled within three (3) Business Days of receipt of a complete
purchase order. Payment of the proceeds of redemption of shares purchased by
check may be delayed for a period of time as described under "Redemption of
Institutional Shares."
Prior to making an initial investment in a Fund, an investor must open an
account with a Fund by furnishing necessary information to such Fund or
Goldman Sachs. An Account Information Form, a copy of which is attached to
this Prospectus, should be used to open such an account. Subsequent purchases
may be made in the manner set forth below.
PURCHASE PROCEDURES APPLICABLE TO EACH FUND OTHER THAN THE GLOBAL INCOME FUND
Purchases of Institutional Shares may be made by placing an order with
Goldman Sachs at 800-621-2550 and either wiring federal funds to The Northern
Trust Company ("Northern") as subcustodian for State Street Bank and Trust
Company ("State Street") on the next Business Day or initiating an ACH
transfer to ensure
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receipt by Northern on the next Business Day. Purchases may also be made by
check (except that the Trust will not accept a check drawn on a foreign bank
or a third-party check) or Federal Reserve draft payable to Goldman Sachs
Fixed Income Funds--Name of Fund and Class of shares and should be directed to
Goldman Sachs Fixed Income Funds--Name of Fund and Class of shares, c/o GSAM
Shareholder Services, 4900 Sears Tower, Chicago, Illinois 60606.
PURCHASE PROCEDURES APPLICABLE TO THE GLOBAL INCOME FUND
Purchases of Institutional Shares may be made by placing an order with
Goldman Sachs at 800-621-2550 and either wiring federal funds to State Street
or initiating an ACH transfer. Purchases may also be made by check (except
that the Trust will not accept a check drawn on a foreign bank or a third-
party check) or Federal Reserve draft made payable to Goldman Sachs Fixed
Income Funds-- Name of Fund and Class of shares and should be directed to
Goldman Sachs Fixed Income Funds--Name of Fund and Class of shares c/o
National Financial Data Services, Inc., P.O. Box 419711, Kansas City, MO
64141-6711.
MINIMUM INITIAL INVESTMENTS
In the case of each Fund other than Government Income, Municipal Income, the
Global Income and High Yield Funds, the minimum initial investment is $50,000
in Institutional Shares of a Fund alone or in combination with Institutional
Shares of any other mutual fund sponsored by Goldman Sachs and designated as
an eligible fund for this purpose and the corresponding class of any portfolio
of the Goldman Sachs Money Market Funds. The minimum investment requirement
may be waived for current and former officers, partners, directors or
employees of Goldman Sachs or any of its affiliates or for other investors at
the discretion of the Trust's officers. No minimum amount is required for
subsequent investments.
In the case of the Government Income, Municipal Income, Global Income and
High Yield Funds, the minimum initial investment is $1,000,000 in
Institutional Shares of a Fund alone or in combination with other assets under
the management of GSAM and its affiliates. Institutional Shares of the
Government Income, Municipal Income, Global Income and High Yield Funds are
offered to (a) banks, trust companies or other types of depository
institutions investing for their own account or on behalf of their clients;
(b) pension and profit sharing plans, pension funds and other company-
sponsored benefit plans; (c) qualified non-profit organizations, charitable
trusts, foundations and endowments; (d) any state, county, city or any
instrumentality, department, authority or agency thereof; (e) corporations and
other for-profit business organizations with assets of at least $100 million
or publicly traded securities outstanding; (f) "wrap" accounts for the benefit
of clients of broker-dealers, financial institutions or financial planners,
provided that they have entered into an agreement with GSAM specifying
aggregate minimums and certain operating policies and standards; (g)
registered investment advisers who have entered into an agreement with GSAM
specifying aggregate minimums and certain operating policies and standards;
and (h) accounts over which GSAM or its advisory affiliates have investment
discretion. The minimum investment requirement may be waived at the discretion
of the Trust's officers. No minimum amount is required for subsequent
investments.
OTHER PURCHASE INFORMATION
Institutional Shares of the Global Income Fund will be issued and dividends
will begin to be paid with respect to dividends which accrue on or after the
purchase of Institutional Shares. For the other Funds, the following applies:
PURCHASE BY FEDERAL FUNDS WIRE OR ACH TRANSFER. If a purchase order is
received by Goldman Sachs by 3:00 p.m. Chicago time and payment is made by
wire transfer or ACH transfer, shares will be
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<PAGE>
issued and dividends will begin to accrue on the purchased shares on the
later of (i) the Business Day after receipt by Goldman Sachs of a purchase
order or (ii) the day of receipt of a federal funds wire or an ACH transfer
by State Street.
PURCHASE BY CHECK OR FEDERAL RESERVE DRAFT. If a check or Federal Reserve
draft is received by Goldman Sachs by 3:00 p.m. Chicago time, shares will
be issued and dividends will begin to accrue on the purchased shares on the
Business Day after the date payment is received.
Banks, trust companies or other institutions through which investors acquire
Institutional Shares may impose charges in connection with transactions in
Institutional Shares. Such institutions should be consulted for information
regarding such charges.
The Funds reserve the right to redeem the Institutional Shares of any
Institutional Shareholder whose account balance is less than $50 as a result
of earlier redemptions. Such redemptions will not be implemented if the value
of an Institutional Shareholder's account falls below the minimum account
balance solely as a result of market conditions. A Fund will give sixty (60)
days' prior written notice to Institutional Shareholders whose Institutional
Shares are being redeemed to allow them to purchase sufficient additional
Institutional Shares of a Fund to avoid such redemption.
The Funds and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by
a particular purchaser (or group of related purchasers). This may occur, for
example, when a purchaser or group of purchasers' pattern of frequent
purchases, sales or exchanges of Institutional Shares of a Fund is evident, or
if purchases, sales or exchanges are, or a subsequent abrupt redemption might
be, of a size that would disrupt management of a Fund.
In the sole discretion of Goldman Sachs, a Fund may accept securities
instead of cash for the purchase of shares of the Fund. Such purchases will be
permitted only if the Investment Adviser determines that any securities
acquired in this manner are consistent with the Fund's investment objectives,
restrictions and policies and are desirable investments for the Fund.
EXCHANGE PRIVILEGE
Institutional Shares of a Fund may be exchanged for (i) Institutional Shares
of any other mutual fund sponsored by Goldman Sachs and designated as an
eligible fund for this purpose and (ii) the corresponding class of any Goldman
Sachs Money Market Fund at the net asset value next determined either by
writing to Goldman Sachs, Attention: Goldman Sachs Fixed Income Funds--Name of
Fund and Class of shares, c/o GSAM Shareholders Services, 4900 Sears Tower,
Chicago, Illinois 60606 or, if previously elected in the Fund's Account
Information Form, by telephone at 800-621-2550 (7:00 a.m. to 5:30 p.m. Chicago
time). A shareholder should obtain and read the prospectus relating to any
other fund and its shares and consider its investment objective, policies and
applicable fees before making an exchange. Under the telephone exchange
privilege, Institutional Shares may be exchanged among accounts with different
names, addresses and social security or other taxpayer identification numbers
only if the exchange instructions are in writing and received in accordance
with the procedures set forth under "Redemption of Institutional Shares."
46
<PAGE>
In an effort to prevent unauthorized or fraudulent exchanges by telephone,
Goldman Sachs employs reasonable procedures as set forth under "Redemption of
Institutional Shares" to confirm that such instructions are genuine. In times
of drastic economic or market changes, the telephone exchange privilege may be
difficult to implement. For federal income tax purposes, an exchange is
treated as a redemption of the Institutional Shares surrendered in the
exchange, on which an investor may be subject to tax, followed by a purchase
of Institutional Shares, or the corresponding class of any Goldman Sachs Money
Market Fund received in the exchange. Shareholders should consult their own
tax advisers concerning the tax consequences of an exchange.
Each exchange which represents an initial investment in a Fund must satisfy
the minimum investment requirements of the fund into which the Institutional
Shares are being exchanged, except that this requirement may be waived at the
discretion of the officers of the Trust. Exchanges are available only in
states where exchanges may legally be made. The exchange privilege may be
modified or withdrawn at any time on sixty (60) days' written notice to
Institutional Shareholders and is subject to certain limitations. See
"Purchase of Institutional Shares."
REDEMPTION OF INSTITUTIONAL SHARES
The Funds will redeem their Institutional Shares upon request of an
Institutional Shareholder on any Business Day at the net asset value next
determined after the receipt by the Transfer Agent of such request in proper
form. See "Net Asset Value." If Institutional Shares to be redeemed were
recently purchased by check, a Fund may delay transmittal of redemption
proceeds until such time as it has assured itself that good funds have been
collected for the purchase of such Institutional Shares. This may take up to
fifteen (15) days. Redemption requests may be made by writing to or calling
the Transfer Agent at the address or telephone number set forth on the back
cover page of this Prospectus. An Institutional Shareholder may request
redemptions by telephone if the optional telephone redemption privilege is
elected on the Account Information Form accompanying this Prospectus. It may
be difficult to implement redemptions by telephone in times of drastic
economic or market changes.
In an effort to prevent unauthorized or fraudulent redemption or exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. Among other
things, any redemption request that requires money to go to an account or
address other than that designated on the Account Information Form must be in
writing and signed by an authorized person designated on the Account
Information Form. Any such written request is also confirmed by telephone with
both the requesting party and the designated bank account to verify
instructions. Exchanges among accounts with different names, addresses and
social security or other taxpayer identification numbers must be in writing
and signed by an authorized person designated on the Account Information Form.
Other procedures may be implemented from time to time. If reasonable
procedures are not implemented, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. In all other cases, neither the
Funds, the Trust nor Goldman Sachs will be responsible for the authenticity of
redemption or exchange instructions received by telephone.
Written requests for redemptions must be signed by each Institutional
Shareholder whose signature has been guaranteed by a bank, a securities broker
or dealer, a credit union having authority to issue signature guarantees, a
savings and loan association, a building and loan association, a cooperative
bank, a federal savings bank or association, a national securities exchange, a
registered securities association or a clearing agency, provided that
47
<PAGE>
such institution satisfies the standards established by the Transfer Agent. If
Goldman Sachs receives a redemption request by 3:00 p.m. Chicago time, the
Institutional Shares of each Fund (other than Global Income Fund) to be
redeemed earn dividends declared on the day the request is received.
The Fund will arrange for the proceeds of redemptions effected by any means
to be wired as federal funds to the bank account designated in the
Institutional Shareholder's Account Information Form or, if the shareholder
elects in writing, by check. Redemption proceeds paid by wire transfer will
normally be wired on the next Business Day in federal funds (for a total one-
day delay), but may be paid up to three (3) Business Days after receipt of a
properly executed redemption request. Wiring of redemption proceeds may be
delayed one additional Business Day if the Federal Reserve Bank is closed on
the day redemption proceeds would ordinarily be wired. Redemption proceeds
paid by check will normally be mailed to the address of record within three
(3) Business Days of receipt of a properly executed redemption request. In
order to change the bank designated on the Account Information Form to receive
redemption proceeds, a written request must be received by the Transfer Agent.
This request must be signature guaranteed as set forth above. Further
documentation may be required for executors, trustees or corporations. Once
wire transfer instructions have been given by Goldman Sachs, neither the
Funds, the Trust nor Goldman Sachs assumes any further responsibility for the
performance of intermediaries or the Institutional Shareholder's bank in the
transfer process. If a problem with such performance arises, the Institutional
Shareholder should deal directly with such intermediaries or bank.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by Goldman Sachs. The request
for such redemption will not be considered to have been received in proper
form until such additional documentation has been received.
----------------
48
<PAGE>
APPENDIX
GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON ACCOUNT INFORMATION FORM
You are required by law to provide a Fund with your correct Taxpayer
Identification Number (TIN), regardless of whether you file tax returns.
Failure to do so may subject you to penalties. Failure to provide your correct
TIN and to sign your name in the Certification section of the Account
Information Form could result in withholding of 31% by a Fund for the federal
backup withholding tax on distributions, redemptions, exchanges and other
payments relating to your account.
Any tax withheld may be credited against taxes owed on your federal income
tax return.
If you do not have a TIN, you should apply for one immediately by contacting
your local office of the Social Security Administration or the Internal
Revenue Service (IRS). Backup withholding could apply to payments relating to
your account while you are awaiting receipt of a TIN.
Special rules apply for certain entities. For example, for an account
established under a Uniform Gifts or Transfers to Minors Act, the TIN of the
minor should be furnished.
If you have been notified by the IRS that you are subject to backup
withholding because you failed to report your interest and/or dividend income
on your tax return and you have not been notified by the IRS that such
withholding should cease, you must cross out item (2) in the Certification
section of the Account Information Form.
If you are an exempt recipient, you should furnish your TIN and certify your
exemption by signing the Certification section and writing "exempt" after your
signature. Exempt recipients include: corporations, tax-exempt pension plans
and IRA's, governmental agencies, financial institutions, registered
securities and commodities dealers and others.
If you are a nonresident alien or foreign entity, you must provide a
completed Form W-8 to the Fund in order to avoid backup withholding on certain
payments. Other payments to you may be subject to nonresident alien
withholding of up to 30%.
For further information regarding backup and nonresident alien withholding,
see Sections 3406, 1441 and 1442 of the Internal Revenue Code and consult your
tax adviser.
A-1
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS
MANAGEMENT, L.P.
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET
MANAGEMENT INTERNATIONAL
133 PETERBOROUGH COURT
LONDON, ENGLAND EC4A 2BB
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN
1776 HERITAGE DRIVE
NORTH QUINCY, MASSACHUSETTS 02171
TOLL FREE (IN U.S.) . . . . . . . . 800-621-2550
FIPROINST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS
FIXED INCOME FUNDS
- --------------------------------------------------------------------------------
PROSPECTUS
INSTITUTIONAL SHARES
LOGO GOLDMAN
SACHS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED JUNE 13, 1997
PROSPECTUS GOLDMAN SACHS FIXED INCOME FUNDS SERVICE SHARES
, 1997
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
Seeks a high level of current income, consistent with low volatility of
principal. The Fund invests primarily in adjustable rate mortgage pass-
through securities and other mortgage securities with periodic interest rate
resets, which are issued or guaranteed by the U.S. government, its agencies,
instrumentalities or sponsored enterprises.
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
Seeks a high level of current income and secondarily, in seeking current in-
come, may also consider the potential for capital appreciation. The Fund in-
vests primarily in securities issued or guaranteed by the U.S. government,
its agencies, instrumentalities or sponsored enterprises.
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
Seeks a high level of current income, consistent with relatively low vola-
tility of principal, that is exempt from regular federal income tax. The
Fund invests primarily in municipal securities.
GOLDMAN SACHS GOVERNMENT
INCOME FUND
Seeks a high level of current
income, consistent with
safety of principal. The Fund
invests primarily in
securities, including
mortgage-backed securities,
issued or guaranteed by the
U.S. government, its
agencies, instrumentalities
or sponsored enterprises.
GOLDMAN SACHS MUNICIPAL INCOME FUND
Seeks a high level of current income that is exempt from regular federal in-
come tax, consistent with preservation of capital. The Fund invests primar-
ily in municipal securities.
GOLDMAN SACHS CORE FIXED INCOME FUND
Seeks a total return consisting of capital appreciation and income that ex-
ceeds the total return of the Lehman Brothers Aggregate Bond Index. The Fund
invests primarily in fixed-income securities, including securities issued or
guaranteed by the U.S. government, its agencies, instrumentalities or spon-
sored enterprises, corporate securities, mortgage-backed securities and as-
set-backed securities.
GOLDMAN SACHS GLOBAL INCOME FUND
Seeks a high total return, emphasizing current income and, to a lesser ex-
tent, providing opportunities for capital appreciation. The Fund invests
primarily in a portfolio of high quality fixed-income securities of U.S. and
foreign issuers and foreign currencies.
GOLDMAN SACHS HIGH YIELD FUND
Seeks a high level of current income and, secondarily, capital appreciation.
The Fund invests primarily in fixed-income securities rated below investment
grade.
Goldman Sachs Funds Management, L.P. ("GSFM"), New York, New York, an
affiliate of Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment
adviser to the Adjustable Rate Government and Short Duration Government Funds.
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman Sachs, serves as investment adviser to the Short
Duration Tax-Free Government Income, Municipal Income, Core Fixed Income and
High Yield Funds. Goldman Sachs Asset Management International ("GSAMI"),
London, England, an affiliate of Goldman Sachs, serves as investment adviser to
the Global Income Fund. GSAM, GSFM and GSAMI are each referred to in this
Prospectus as the "Investment Adviser." Goldman Sachs serves as each Fund's
distributor and transfer agent.
SERVICE SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A FUND INVOLVES INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
(continued on next page)
<PAGE>
(cover continued)
THE ADJUSTABLE RATE GOVERNMENT, SHORT DURATION GOVERNMENT AND GOVERNMENT
INCOME FUNDS' NET ASSET VALUES AND YIELDS ARE NOT GUARANTEED BY THE U.S.
GOVERNMENT OR BY ITS AGENCIES, INSTRUMENTALITIES OR SPONSORED ENTERPRISES.
THE CORE FIXED INCOME, GLOBAL INCOME AND HIGH YIELD FUNDS MAY INVEST IN
SECURITIES OF FOREIGN ISSUERS AND FOREIGN CURRENCIES THAT ENTAIL CERTAIN RISKS
NOT CUSTOMARILY ASSOCIATED WITH INVESTING IN U.S. DOLLAR-DENOMINATED FIXED-
INCOME SECURITIES. IN PARTICULAR, THE SECURITIES MARKETS OF EMERGING MARKET
COUNTRIES ARE LESS LIQUID, ARE SUBJECT TO GREATER PRICE VOLATILITY, HAVE
SMALLER MARKET CAPITALIZATIONS, HAVE LESS GOVERNMENT REGULATION AND ARE NOT
SUBJECT TO AS EXTENSIVE AND FREQUENT ACCOUNTING, FINANCIAL AND OTHER REPORTING
REQUIREMENTS AS THE SECURITIES MARKETS OF MORE DEVELOPED COUNTRIES.
THE HIGH YIELD FUND INVESTS PRIMARILY IN HIGH YIELD, FIXED-INCOME SECURITIES
RATED BELOW INVESTMENT GRADE THAT ARE CONSIDERED SPECULATIVE AND GENERALLY
INVOLVE GREATER PRICE VOLATILITY AND GREATER RISK OF LOSS OF PRINCIPAL AND
INTEREST THAN INVESTMENTS IN HIGHER RATED FIXED-INCOME SECURITIES.
INVESTORS SHOULD CONSIDER THE RISKS ASSOCIATED WITH INVESTMENT IN A FUND
INVESTING IN FOREIGN AND HIGH YIELD SECURITIES. THE FUNDS MAY NOT BE SUITABLE
FOR ALL INVESTORS. SEE "DESCRIPTION OF SECURITIES" AND "RISK FACTORS."
This Prospectus provides information about Goldman Sachs Trust (the "Trust")
and the Funds that a prospective investor should understand before investing.
This Prospectus should be retained for future reference. A Statement of
Additional Information (the "Additional Statement"), dated May 1, 1997,
containing further information about the Trust and the Funds which may be of
interest to investors, has been filed with the Securities and Exchange
Commission ("SEC"), is incorporated herein by reference in its entirety, and
may be obtained without charge from Service Organizations (as defined herein)
or Goldman Sachs by calling the telephone number, or writing to one of the
addresses, listed on the back cover of this Prospectus. The SEC maintains a
Web site (http://www.sec.gov) that contains the Additional Statement and other
information regarding the Trust.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights..................... 1
Fees and Expenses................... 7
Financial Highlights................ 9
Investment Objectives and Policies.. 13
Description of Securities........... 20
Risk Factors........................ 27
Investment Techniques............... 30
Investment Restrictions............. 34
Portfolio Turnover.................. 34
Management.......................... 35
Dividends........................... 38
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Net Asset Value....................................................... 39
Performance Information............................................... 40
Shares of the Trust................................................... 41
Taxation.............................................................. 41
Additional Information................................................ 43
Additional Services................................................... 44
Reports to Shareholders............................................... 44
Purchase of Service Shares............................................ 45
Exchange Privilege.................................................... 46
Redemption of Service Shares.......................................... 47
Appendix.............................................................. A-1
</TABLE>
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information contained in
this Prospectus and is qualified in its entirety by the more detailed
information contained herein.
WHAT IS THE GOLDMAN SACHS TRUST?
The Goldman Sachs Trust is an open-end management investment company that
offers its shares in several investment funds (mutual funds). Each Fund
pools the monies of investors by selling its shares to the public and
investing these monies in a portfolio of securities designed to achieve that
Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS?
Each Fund has distinct investment objectives and policies. There can be no
assurance that a Fund's objectives will be achieved. For a complete
description of each Fund's investment objectives and policies, see
"Investment Objectives and Policies," "Description of Securities" and
"Investment Techniques."
1
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
INTEREST
INVESTMENT RATE
FUND NAME OBJECTIVES DURATION SENSITIVITY INVESTMENT SECTOR CREDIT QUALITY OTHER INVESTMENTS
- -------------- ------------------ ------------------- ------------ --------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
ADJUSTABLE A high level of Target = 6-month 9-month note At least 65% of U.S. Government Fixed-rate
RATE current income, to 1-year total assets in Securities mortgage
GOVERNMENT consistent with U.S. Treasury securities issued or pass-through
FUND low volatility Security guaranteed by the securities and
of principal. Maximum = 2 years U.S. government, repurchase
its agencies, agreements
instrumentalities collateralized by
or sponsored U.S. Government
enterprises Securities.
("U.S. Government
Securities'')
that are adjustable
rate mortgage
pass-through
securities and
other mortgage
securities with
periodic interest
rate resets.
--------------------------------------------------------------------------------------------
SHORT DURATION A high level of Target = 2-year 2-year bond At least 65% of U.S. Government Mortgage pass-
GOVERNMENT current income, U.S. Treasury total assets in Securities through
FUND and secondarily, Security plus U.S. Government securities and
in seeking current or minus .5 years Securities other securities
income, may Maximum = 3 years and repurchase representing an
also consider agreements interest in or
the potential collateralized collateralized
for capital by such securities. by mortgage loans.
appreciation.
--------------------------------------------------------------------------------------------
SHORT DURATION A high level of Target = Lehman 3-year bond At least 80% of Minimum = BBB/Baa U.S. Government
TAX-FREE current income, Brothers net assets in Securities
FUND consistent with 3-year Municipal municipal securities. and repurchase
low volatility Bond Index agreements
of principal, plus or minus collateralized
that is exempt .5 years by such securities.
from regular Maximum = 4 years
federal
income tax.
--------------------------------------------------------------------------------------------
GOVERNMENT A high level of Target = Lehman 5-year bond At least 65% of U.S. Government Non-government
INCOME current income, Brothers Mutual assets in U.S. Securities and mortgage pass-
FUND consistent with Fund Government/ Government non-U.S. through securities,
safety of Mortgage Index Securities, including Government asset-backed
principal. plus or minus mortgage-backed Securities rated securities,
1 year U.S. Government AAA/Aaa corporate
Maximum = Securities. fixed-income
6 years securities and
repurchase
agreements
collateralized by
U.S. Government
Securities.
<CAPTION>
FUND NAME BENCHMARK
- --------------- -----------------
<S> <C>
ADJUSTABLE 6-month and
RATE 1-Year U.S.
GOVERNMENT Treasury Security
FUND
--------------------------------------------------------------------------------------------
SHORT DURATION 2-Year U.S.
GOVERNMENT Treasury Security
FUND
--------------------------------------------------------------------------------------------
SHORT DURATION Lehman Brothers
TAX-FREE 3-Year Municipal
FUND Bond Index
--------------------------------------------------------------------------------------------
GOVERNMENT Lehman Brothers
INCOME Mutual Fund
FUND Government/
Mortgage Index
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
INTEREST
INVESTMENT RATE
FUND NAME OBJECTIVES DURATION SENSITIVITY INVESTMENT SECTOR CREDIT QUALITY
- ----------- --------------------- -------------------- ------------ ---------------------- ---------------------
<S> <C> <C> <C> <C> <C>
CORE FIXED Total return Target = Lehman 5-year bond At least 65% of Minimum = BBB/Baa
INCOME FUND consisting Brothers assets in fixed-income Minimum for
of capital Aggregate Bond securities, including non-dollar securities
appreciation Index plus or U.S. Government = AA/Aa
and income that minus 1 year Securities, corporate,
exceeds the total Maximum = 6 years mortgage-backed
return of the and asset-backed
Lehman Brothers securities.
Aggregate Bond
Index.
--------------------------------------------------------------------------------------------
MUNICIPAL A high level of Target = Lehman 15-year bond At least 80% of Minimum =
INCOME current income Brothers 15-year net assets in BBB/Baa
FUND that is exempt Municipal Bond municipal securities. Average = AA/Aa
from regular Index plus
federal income or minus 1 year
tax, consistent Maximum = 12 years
with preservation
of capital.
--------------------------------------------------------------------------------------------
GLOBAL A high total return, Target = J.P. Morgan 6-year bond Securities of Minimum = AA/Aa
INCOME emphasizing current Global Government U.S. and foreign or A if sovereign
FUND income, and, to Bond Index governments and issuer
a lesser extent, (hedged) plus or corporations. At least 50% =
providing minus 2.5 years AAA/Aaa
opportunities Maximum = 7.5 years
for capital
appreciation.
--------------------------------------------------------------------------------------------
HIGH YIELD A high level of Target = Lehman 6-year bond At least 65% of At least 65% =
FUND current income Brothers High assets in fixed- BB/Ba or below
and, secondarily, Yield Bond Index income securities
capital appreciation. plus or minus rated below
2.5 years investment grade,
Maximum =7.5 years including U.S. and
non-U.S. dollar
corporate debt,
foreign
government
securities,
convertible
securities
and preferred stock
<CAPTION>
FUND NAME OTHER INVESTMENTS BENCHMARK
- ------------ ---------------------- ---------------
<S> <C> <C>
CORE FIXED Foreign fixed- Lehman Brothers
INCOME FUND income, Aggregate Bond
municipal and Index
convertible
securities,
foreign currencies
and repurchase
agreements
collateralized
by U.S.
Government
Securities.
--------------------------------------------------------------------------------------------
MUNICIPAL U.S. Government Lehman Brothers
INCOME Securities and 15-year
FUND repurchase Municipal
agreements Bond Index
collateralized by
such securities.
--------------------------------------------------------------------------------------------
GLOBAL Mortgage and J.P. Morgan
INCOME asset-backed Global
FUND securities, foreign Government
currencies and Bond Index
repurchase (hedged)
agreements
collateralized by
U.S. Government
Securities or
certain foreign
government securities.
--------------------------------------------------------------------------------------------
HIGH YIELD Mortgage-backed Lehman Brothers
FUND and asset-backed High Yield
securities, U.S. Bond Index
Government
Securities,
investment grade
corporate fixed-
income securities,
structured
securities,
foreign currencies
and repurchase
agreements
collateralized by
U.S. Government
Securities.
</TABLE>
3
<PAGE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
Each Fund's share price will fluctuate with market, economic and, with
respect to the Core Fixed Income, Global Income and High Yield Funds,
foreign exchange conditions, so that an investment in any of the Funds may
be worth more or less when redeemed than when purchased. None of the Funds
should be relied upon as a complete investment program. There can be no
assurance that a Fund's investment objectives will be achieved. See "Risk
Factors."
Interest Rate Risk. When interest rates decline, the market value of
fixed-income securities tends to increase. Conversely, when interest rates
increase, the market value of fixed-income securities tends to decline.
Volatility of a security's market value will differ depending upon the
security's duration, the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed-income securities are
subject to the risk that the issuer could default on its obligations and a
Fund could sustain losses on such investments. A default could impact both
interest and principal payments.
Call Risk and Extension Risk. Fixed-income securities may be subject to
both call risk and extension risk. Call risk (i.e., where the issuer
exercises its right to pay principal on an obligation earlier than
scheduled) causes cash flow to be returned earlier than expected. This
typically results when interest rates have declined and a Fund will suffer
from having to reinvest in lower yielding securities. Extension risk (i.e.,
where the issuer exercises its right to pay principal on an obligation later
than scheduled) causes cash flows to be returned later than expected. This
typically results when interest rates have increased and a Fund will suffer
from the inability to invest in higher yielding securities. The investment
characteristics of Mortgage-Backed Securities (including adjustable rate
mortgage securities) and Asset-Backed Securities differ from those of
traditional fixed-income securities because they generally have both call
risk (also known as prepayment risk) and extension risk.
Tax Risk of Municipal Securities. Due to Municipal Securities' tax-exempt
status, their yields and market values may be more adversely impacted by
changes in tax rates and policies than taxable fixed-income securities.
Risks of investing in non-investment grade fixed-income securities. Non-
investment grade fixed-income securities (commonly referred to as "junk
bonds") are subject to greater volatility and risk of loss and are less
liquid than securities which are perceived to be of higher credit quality.
Such securities, also referred to as high yield securities, are considered
to be speculative by traditional investment standards. High yield securities
are subject to increased risk of an issuer's inability to meet principal and
interest payments. The High Yield Fund may invest in securities which are in
default at the time of investment. The market for non-investment grade
securities tends to be concentrated in a limited number of market makers,
which may affect liquidity. In addition, the market price of such securities
tends to reflect individual corporate developments to a greater extent than
that of higher rated securities which react primarily to the general level
of interest rates.
Foreign Risks. Investments in securities of foreign issuers and currencies
involve risks that are different from those associated with investments in
domestic securities. The risks associated with foreign investments and
currencies include changes in relative currency exchange rates, political
and economic developments, the imposition of exchange controls, confiscation
and other governmental restrictions. In addition, the securities
4
<PAGE>
markets of foreign countries are generally less liquid and subject to
greater price volatility. To the extent that the Core Fixed Income, Global
Income and High Yield Funds invest in emerging markets and countries, these
risks may be heightened.
Other. A Fund's use of certain investment techniques, including
derivatives, forward contracts, options, futures and swap transactions, will
subject the Fund to greater risk than funds that do not employ such
techniques.
Non-Diversification. Global Income Fund is a "non-diversified" fund as
defined under the Investment Company Act of 1940, as amended (the "Act"),
and is, therefore, subject only to certain federal tax diversification
requirements (to which the other Funds are also subject), in addition to the
policies adopted by the Investment Adviser. To the extent that the Fund is
not diversified under the Act, it will be more susceptible to adverse
developments affecting any single issuer of portfolio securities. See
"Investment Restrictions."
WHO MANAGES THE FUNDS?
Goldman Sachs Funds Management, L.P. serves as the Investment Adviser to
the Adjustable Rate Government and Short Duration Government Funds. Goldman
Sachs Asset Management serves as Investment Adviser to the Short Duration
Tax-Free Government Income, Municipal Income, Core Fixed Income and High
Yield Funds. Goldman Sachs Asset Management International serves as
Investment Adviser to the Global Income Fund. As of , 1997, the
Investment Advisers, together with their affiliates, acted as investment
adviser, administrator or distributor for assets in excess of $ billion.
WHO DISTRIBUTES THE FUNDS' SHARES?
Goldman Sachs acts as distributor of each Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
The Funds do not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares, and
may establish other requirements such as a minimum account balance.
HOW DO I PURCHASE SERVICE SHARES?
Customers of Service Organizations may invest in Service Shares only
through their Service Organizations. Service Shares of a Fund are purchased
by Service Organizations through Goldman Sachs at the current net asset
value without any sales load. See "Purchase of Service Shares."
ADDITIONAL SERVICES. The Trust, on behalf of the Funds, has adopted a
Service Plan with respect to the Service Shares which authorizes a Fund to
compensate Service Organizations for providing account administration and
shareholder liaison services to their customers who are the beneficial
owners of such Shares. The Trust, on behalf of the Funds, will enter into
agreements with each Service Organization which will provide for
compensation to the Service Organization in an amount up to 0.50% (on an
annualized basis) of the average daily net assets of the Services Shares of
the Funds attributable to or held in the name of the Service Organization
for its customers. See "Additional Services."
5
<PAGE>
HOW DO I SELL MY SERVICE SHARES?
You may redeem Service Shares upon request on any Business Day, as defined
under "Additional Information," at the net asset value next determined after
receipt of such request in proper form. See "Redemption of Service Shares."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME
FUND DIVIDENDS
---- ------------------ CAPITAL GAINS
DECLARED PAID DISTRIBUTION
------------------ -------------
<S> <C> <C> <C>
Adjustable Rate Government.................. Daily Monthly Annually
Short Duration Government .................. Daily Monthly Annually
Short Duration Tax-Free..................... Daily Monthly Annually
Government Income........................... Daily Monthly Annually
Municipal Income............................ Daily Monthly Annually
Core Fixed Income........................... Daily Monthly Annually
Global Income .............................. Monthly Monthly Annually
High Yield.................................. Daily Monthly Annually
</TABLE>
Recordholders of Service Shares may receive dividends in additional
Service Shares of the Fund in which you have invested or you may elect to
receive cash. For further information concerning dividends, see "Dividends."
6
<PAGE>
FEES AND EXPENSES (SERVICE SHARES)
<TABLE>
<CAPTION>
ADJUSTABLE RATE SHORT DURATION GOVERNMENT MUNICIPAL CORE FIXED GLOBAL HIGH
GOVERNMENT GOVERNMENT SHORT DURATION INCOME INCOME INCOME INCOME YIELD
FUND/1/ FUND TAX-FREE FUND FUND/1/ FUND/1/ FUND FUND FUND/1/
--------------- -------------- -------------- ---------- --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge Im-
posed on Purchases....... none none none none none none none none
Maximum Sales Charge Im-
posed on Reinvested Divi-
dends.................... none none none none none none none none
Redemption Fees........... none none none none none none none none
Exchange Fees............. none none none none none none none none
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average daily
net assets)
Management Fees (after ap-
plicable limita-
tions)/2/................ 0.40% 0.40% 0.40% 0.25% 0.55% 0.40% 0.59% 0.65%
Service Fees*............. 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Other Expenses (after ap-
plicable limita-
tions)/3/................ 0.11% 0.05% 0.05% 0.00% 0.05% 0.05% 0.06% 0.05%
---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES (AFTER FEE AND
EXPENSE LIMITA-
TIONS)/4/............... 1.01% 0.95% 0.95% 0.75% 1.10% 0.95% 1.15% 1.20%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
EXAMPLE
You would pay the following expenses on a hypothetical $1,000 investment
assuming (i) a 5% annual return and (ii) redemption at the end of each time
period.
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Adjustable Rate Government...................... $10 $32 $56 $124
Short Duration Government....................... $10 $30 $53 $117
Short Duration Tax-Free......................... $10 $30 $53 $117
Government Income............................... $ 8 $24 $42 $ 93
Municipal Income................................ $11 $35 $61 $134
Core Fixed Income............................... $10 $30 $53 $117
Global Income................................... $12 $37 $63 $140
High Yield...................................... $12 $38 N/A N/A
</TABLE>
- --------
/1/Based on estimated amounts for the current fiscal year for the Adjustable
Rate Government Government Income, Municipal Income and High Yield Funds.
/2/The Investment Advisers have voluntarily agreed that a portion of the
management fee would not be imposed on the Short Duration Government,
Government Income, Global Income and High Yield Funds equal to .10%,
.40%, .31% and .05%, respectively. Without such limitations,
management fees would be .50%, .65%, .90% and .70% of each
Fund's average daily net assets, respectively.
/3/The Investment Advisers voluntarily have agreed to reduce or limit certain
other expenses (excluding management fees, service fees, taxes, interest
and brokerage fees and litigation, indemnification and other extraordinary
expenses (and transfer agency fees in the case of the Global Income and
High Yield Funds)) to the extent such expenses exceed .05%, .05%, .00%,
.05%, .05%, .06% and .01% of the average daily net assets of the Short
Duration Government, Short Duration Tax-Fee, Government Income, Municipal
Income, Core Fixed Income, Global Income and High Yield Funds,
respectively.
/4/Without.the limitations described above, "Other Expenses" and "Total
Operating Expenses" of each Fund (other than Adjustable Rate Government,
Government Income, Municipal Income and High Yield Funds) for the fiscal
year ended October 31, 1996 would have been as follows:
7
<PAGE>
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Short Duration Government.................................... .21% 1.21%
Short Duration Tax-Free...................................... .61% 1.51%
Core Fixed Income............................................ .43% 1.33%
Global Income................................................ .21% 1.61%
</TABLE>
In addition, without the limitations described above, "Other Expenses" and
"Total Operating Expenses" for the Government Income, Municipal Income and
High Yield Funds the current fiscal year are estimated to be:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Government Income............................................ .74% 1.89%
Municipal Income............................................. .50% 1.55%
High Yield................................................... .60% 1.80%
</TABLE>
* Service Organizations may charge other fees to their customers who are
beneficial owners of Service Shares in connection with their customer
accounts. Due to the service fees, a long-term shareholder may pay more than
the economic equivalent of the maximum front- end sales charge permitted
under the NASD's rules regarding investment companies. See "Additional
Services."
The Investment Advisers have no current intention of modifying or
discontinuing any of the limitations set forth above but may do so in the
future at their discretion. The information set forth in the foregoing table
and hypothetical example relates only to Service Shares of the Funds. The
Short Duration Government Fund, Short Duration Tax-Free Fund and Core Fixed
Income Fund also offer Institutional Shares, Administration Shares, Class A
Shares, Class B Shares and Class C Shares; Adjustable Rate Government Fund
also offers Institutional Shares, Administration Shares and Class A Shares;
and Government Income, Municipal Income, Global Income and High Yield Funds
also offer Institutional Shares, Class A Shares, Class B Shares and Class C
Shares. The other classes of the Funds are subject to different fees and
expenses (which affect performance), have different minimum investment
requirements and are entitled to different services. Information regarding any
other class of the Funds may be obtained from your sales representative or
from Goldman Sachs by calling the number on the back cover page of this
Prospectus.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of a Fund that an investor will bear directly or
indirectly. The information on the fees and expenses included in the table and
the hypothetical example above are based on each Fund's fees and expenses
(actual or estimated) and should not be considered as representative of past
or future expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, a Fund's
actual performance will vary and may result in an actual return greater or
less than 5%. See "Management--Investment Advisers" and "Additional Services."
8
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of each Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that a Fund's
investment objectives will be achieved.
A Fund's duration approximates its price sensitivity to changes in interest
rates. Maturity measures the time until final payment is due; it takes no
account of the pattern of a security's cash flows over time. In computing
portfolio duration, a Fund will estimate the duration of obligations that are
subject to prepayment or redemption by the issuer taking into account the
influence of interest rates on prepayments and coupon flows. This method of
computing duration is known as "option-adjusted" duration. A Fund will not be
limited as to its maximum weighted average portfolio maturity or the maximum
stated maturity with respect to individual securities unless otherwise noted.
A Fund will deem a security to have met its minimum credit rating
requirement if the security receives the minimum required long-term rating (or
the equivalent short-term credit rating) at the time of purchase from at least
one rating organization (including, but not limited to, Standard & Poor's
Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's")) even
though it has been rated below the minimum rating by one or more other rating
organizations, or, if unrated by a rating organization, is determined by the
Investment Adviser to be of comparable quality. If a security satisfies a
Fund's minimum rating criteria at the time of purchase and is subsequently
downgraded below such rating, the Fund will not be required to dispose of such
security. If a downgrade occurs, the Investment Adviser will consider what
action, including the sale of such security, is in the best interest of a Fund
and its shareholders.
The Investment Adviser will have access to the research of, and proprietary
technical models developed by, Goldman Sachs and will apply quantitative and
qualitative analysis in determining the appropriate allocations among the
categories of issuers and types of securities.
ADJUSTABLE RATE GOVERNMENT FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with low volatility of principal.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be in a range approximately equal to that of a six-month to one-
year U.S. Treasury security. In addition, under normal interest rate
conditions, the Fund's maximum duration will not exceed two years. The
approximate interest rate sensitivity of the Fund is comparable to a nine-
month note.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in U.S. Government Securities that are adjustable rate
mortgage pass-through securities and other U.S. Government Securities. The
remainder of the Fund's assets (up to 35%) may be invested in other U.S.
Government Securities, including mortgage pass-through securities, other
securities representing an interest in or collateralized by adjustable rate
and fixed rate mortgage loans ("Mortgage-Backed Securities") and repurchase
agreements collateralized by U.S. Government Securities. Substantially all of
the Fund's assets will be invested in U.S. Government Securities. 100% of the
Fund's portfolio will be invested in U.S. dollar-denominated securities.
13
<PAGE>
CREDIT QUALITY. The Fund invests in U.S. Government Securities and
repurchase agreements collateralized by such securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
SHORT DURATION GOVERNMENT FUND
OBJECTIVE. The Fund's investment objective is to provide a high level of
current income. Secondarily, the Fund may, in seeking current income, also
consider the potential for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the two-year U.S.
Treasury security, plus or minus .5 years. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed three years. The
approximate interest rate sensitivity of the Fund is comparable to a two-year
bond.
INVESTMENT SECTOR. The Fund invests, under normal market conditions, at
least 65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. Substantially all of the Fund's
assets will be invested in U.S. Government Securities. 100% of the Fund's
portfolio will be invested in U.S. dollar-denominated securities.
CREDIT QUALITY. The Fund invests in U.S. Government Securities and
repurchase agreements collateralized by such securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
SHORT DURATION TAX-FREE FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with relatively low volatility of
principal, that is exempt from regular federal income tax.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
three-year Municipal Bond Index, plus or minus .5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
four years. The approximate interest rate sensitivity of the Fund is
comparable to a three-year bond.
INVESTMENT SECTOR. The Fund invests, under normal conditions, at least 80%
of its net assets in fixed-income securities issued by or on behalf of states,
territories and possessions of the United States (including the District of
Columbia) and the political subdivisions, agencies and instrumentalities
thereof ("Municipal
14
<PAGE>
Securities"), the interest on which is exempt from regular federal income tax
(i.e., excluded from gross income for federal income tax purposes), and is not
a tax preference item under the federal alternative minimum tax. Under normal
circumstances, the Fund's investments in private activity bonds and taxable
investments will not exceed, in the aggregate, 20% of the Fund's net assets.
The interest from certain private activity bonds (including the Fund's
distributions of such interest) may be a preference item for purposes of the
federal alternative minimum tax. 100% of the Fund's portfolio will be invested
in U.S. dollar-denominated securities.
CREDIT QUALITY. The Municipal Securities in which the Fund invests will be
rated, at the time of investment, at least BBB by S&P or Baa by Moody's.
Municipal Securities rated BBB or Baa are considered medium-grade obligations
with speculative characteristics, and adverse economic conditions or changing
circumstances may weaken their issuers' capability to pay interest and repay
principal. The credit rating assigned to Municipal Securities by these rating
organizations or by the Investment Adviser may reflect the existence of
guarantees, letters of credit or other credit enhancement features available
to the issuers or holders of such Municipal Securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), interest rate
swaps, floors, caps and collars. The Fund may also employ other investment
techniques to seek to enhance returns, such as lending portfolio securities
and entering into repurchase agreements and other investment practices
described under "Investment Techniques."
While the Fund, under normal market conditions, invests substantially all of
its assets in Municipal Securities, the recognition of certain accrued market
discount income (if the Fund acquires Municipal Securities or other
obligations at a market discount), income from investments other than
Municipal Securities and any capital gains generated from the disposition of
investments, will result in taxable income. In addition to federal income tax,
shareholders may be subject to state, local or foreign taxes on distributions
of such income received from the Fund. See "Description of Securities."
GOVERNMENT INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income, consistent with safety of principal.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
Mutual Fund Government/Mortgage Index, plus or minus one year. In addition,
under normal interest rate conditions, the Fund's maximum duration will not
exceed six years. The approximate interest rate sensitivity of the Fund is
comparable to a five-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. The remainder of the Fund's
assets may be invested in non-government securities such as privately issued
Mortgage-Backed Securities, Asset-Backed Securities and corporate securities.
100% of the Fund's portfolio will be invested in U.S. dollar-denominated
securities.
CREDIT QUALITY. The Fund's non-U.S. Government Securities will be rated, at
the time of investment, AAA by S&P or Aaa by Moody's.
15
<PAGE>
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices described under
"Investment Techniques."
MUNICIPAL INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income that is exempt from regular federal income tax,
consistent with preservation of capital.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
fifteen-year Municipal Bond Index, plus or minus one year. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
twelve years. The approximate interest rate sensitivity of the Fund is
comparable to a fifteen-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
80% of its net assets in Municipal Securities, the interest on which is exempt
from regular federal income tax (i.e., excluded from gross income for federal
income tax purposes). The Fund may invest up to 100% of its net assets in
private activity bonds, the interest from certain of which (including the
Fund's distributions of such interest) may be a preference item for purposes
of the federal alternative minimum tax. 100% of the Fund's portfolio will be
invested in U.S. dollar-denominated securities.
CREDIT QUALITY. Under normal market conditions, the weighted average credit
quality of the Fund's portfolio will be equivalent to that of securities rated
AA by S&P or Aa by Moody's. All securities purchased by the Fund will be
rated, at the time of investment, at least BBB by S&P or Baa by Moody's.
Fixed-income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions
or changing circumstances may weaken their issuers' capability to pay interest
and repay principal. The credit rating assigned to Municipal Securities by
these rating organizations or by the Investment Adviser may reflect the
existence of guarantees, letters of credit or other credit enhancement
features available to the issuers or holders of such Municipal Securities.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund and to seek to enhance returns.
These techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), interest rate
swaps, interest rate floors, caps and collars. The Fund may also employ other
investment techniques to seek to enhance returns, such as lending portfolio
securities and entering into repurchase agreements and other investment
practices described under "Investment Techniques."
While the Fund, under normal market conditions, invests substantially all of
its assets in Municipal Securities, the recognition of certain accrued market
discount income (if the Fund acquires Municipal Securities or other
obligations at a market discount), income from investments other than
Municipal Securities and any capital gains generated from the disposition of
investments, will result in taxable income. In addition to federal income tax,
shareholders may be subject to state, local or foreign taxes on distributions
of such income received from the Fund. See "Description of Securities."
16
<PAGE>
CORE FIXED INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
total return consisting of capital appreciation and income that exceeds the
total return of the Lehman Brothers Aggregate Bond Index (the "Index").
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
Aggregate Bond Index, plus or minus one year. In addition, under normal
interest rate conditions, the Fund's maximum duration will not exceed six
years. The approximate interest rate sensitivity of the Fund is comparable to
a five-year bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in fixed-income securities, including U.S. Government
Securities, corporate debt securities, Mortgage-Backed Securities, and Asset-
Backed Securities. The Fund may invest up to 25% of its total assets in
obligations of domestic and foreign issuers which are denominated in
currencies other than the U.S. dollar, 10% of which may be invested in issuers
in countries with emerging markets and economies. A number of investment
strategies will be used to achieve the Fund's investment objective, including
market sector selection, determination of yield curve exposure, and issuer
selection. In addition, the Investment Adviser will attempt to take advantage
of pricing inefficiencies in the fixed-income markets.
The Index currently includes U.S. Government Securities and fixed-rate,
publicly issued, U.S. dollar-denominated fixed-income securities rated at
least BBB or Baa or in their equivalent ratings category by S&P or Moody's.
The securities currently included in the Index have at least one year
remaining to maturity; have an outstanding principal amount of at least $100
million; and are issued by the following types of issuers, with each category
receiving a different weighting in the Index: U.S. Treasury; agencies,
authorities or instrumentalities of the U.S. government; issuers of Mortgage-
Backed Securities; utilities; industrial issuers; financial institutions;
foreign issuers; and issuers of Asset-Backed Securities. The Index is a
trademark of Lehman Brothers. Inclusion of a security in the Index does not
imply an opinion by Lehman Brothers as to its attractiveness or
appropriateness for investment. Although Lehman Brothers obtains factual
information used in connection with the Index from sources which it considers
reliable, Lehman Brothers claims no responsibility for the accuracy,
completeness or timeliness of such information and has no liability to any
person for any loss arising from results obtained from the use of the Index
data.
CREDIT QUALITY. All U.S. dollar-denominated fixed-income securities
purchased by the Fund will be rated, at the time of investment, at least BBB
by S&P or Baa by Moody's. The non-U.S. dollar-denominated fixed-income
securities in which the Fund may invest will be rated, at the time of
investment, at least AA by S&P or Aa by Moody's. Fixed-income securities rated
BBB or Baa are considered medium-grade obligations with speculative
characteristics, and adverse economic conditions or changing circumstances may
weaken their issuers' capability to pay interest and repay principal.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign currencies and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to
17
<PAGE>
hedge against currency exchange rate fluctuations or to seek to increase total
return. The Fund may invest in custodial receipts, Municipal Securities and
convertible securities. The Fund may also employ other investment techniques
to seek to enhance returns, such as lending portfolio securities and entering
into mortgage dollar rolls, repurchase agreements and other investment
practices, described under "Investment Techniques."
GLOBAL INCOME FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high total return, emphasizing current income, and, to a lesser extent,
providing opportunities for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the J.P. Morgan Global
Government Bond Index (hedged), plus or minus 2.5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed
7.5 years. The approximate interest rate sensitivity of the Fund is comparable
to a six-year bond.
INVESTMENT SECTOR. The Fund invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and enters into
transactions in foreign currencies. Under normal market conditions, the Fund
will (i) have at least 30% of its total assets, after considering the effect
of currency positions, denominated in U.S. dollars and (ii) invest in
securities of issuers in at least three countries. The Fund may also invest up
to 10% of its total assets in issuers in countries with emerging markets and
economies. The Fund seeks to meet its investment objective by pursuing
investment opportunities in foreign and domestic fixed-income securities
markets and by engaging in currency transactions to seek to enhance returns
and to seek to hedge its portfolio against currency exchange rate
fluctuations.
The fixed-income securities in which the Fund may invest include: (i) U.S.
Government Securities and custodial receipts therefor; (ii) securities issued
or guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, instrumentalities or by supranational entities (i.e.,
international organizations designated or supported by governmental entities
to promote economic reconstruction or development, such as the World Bank);
(iii) corporate debt securities; (iv) certificates of deposit and bankers'
acceptances issued or guaranteed by, or time deposits maintained at, U.S. or
foreign banks (and their branches wherever located) having total assets of
more than $1 billion; (v) commercial paper and (vi) Mortgage-Backed and Asset-
Backed Securities.
CREDIT QUALITY. All securities purchased by the Fund will be rated, at the
time of investment, at least AA by S&P or Aa by Moody's. However, the Fund may
also invest in obligations of a sovereign issuer, denominated in the issuer's
own currency, rated at least A by S&P or Moody's. The Fund will invest at
least 50% of its total assets in securities rated, at the time of investment,
AAA by S&P or Aaa by Moody's.
OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign currencies and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use certain currency techniques to
seek to hedge against currency exchange rate fluctuations or to seek to
increase total return. While the Fund will have both long and short currency
positions, its net long and short foreign currency exposure will not exceed
the value
18
<PAGE>
of the Fund's total assets. To the extent that the Fund is fully invested in
foreign securities while also maintaining currency positions, it may be
exposed to greater combined risk. The Fund's net currency positions may expose
it to risks independent of its securities positions. The Fund may also employ
other investment techniques to seek to enhance returns, such as lending
portfolio securities and entering into mortgage dollar rolls, repurchase
agreements and other investment practices described under "Investment
Techniques."
The Fund may invest more than 25% of its total assets in the securities of
corporate and governmental issuers located in each of Canada, Germany, Japan,
and the United Kingdom as well as in the securities of U.S. issuers.
Concentration of the Fund's investments in such issuers will subject the Fund,
to a greater extent than if investment was more limited, to the risks of
adverse securities markets, exchange rates and social, political or economic
events which may occur in those countries. With respect to other countries,
not more than 25% of the Fund's total assets will be invested in securities of
issuers in any other foreign country.
HIGH YIELD FUND
OBJECTIVE. The Fund's investment objective is to provide investors with a
high level of current income. Secondarily, the Fund may, in seeking current
income, also consider the potential for capital appreciation.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers High
Yield Bond Index, plus or minus 2.5 years. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed 7.5 years. The
approximate interest rate sensitivity of the Fund is comparable to a 6-year
bond.
INVESTMENT SECTOR. The Fund invests, under normal circumstances, at least
65% of its total assets in high yield, fixed-income securities rated, at the
time of investment, below investment grade. Non-investment grade securities
are securities rated BB or below by S&P, Ba or below by Moody's, an equivalent
rating by another rating organization, or if unrated by a rating organization,
determined by the Investment Adviser to be of comparable quality. The Fund may
invest in all types of fixed-income securities, including senior and
subordinated corporate debt obligations (such as bonds, debentures, notes and
commercial paper), convertible and non-convertible corporate debt obligations,
and preferred stock. The Fund may invest up to 25% of its total assets in
obligations of domestic and foreign issuers (including securities of issuers
located in countries with emerging markets and economies) which are
denominated in currencies other than the U.S. dollar. Under normal market
conditions, the Fund may invest up to 35% of its total assets in investment
grade fixed-income securities, including U.S. Government Securities, Asset-
Backed and Mortgage-Backed Securities and corporate securities. The Fund may
also invest in common stocks, warrants, rights and other equity securities,
but will generally hold such equity investments only when debt or preferred
stock of the issuer of such equity securities is held by the Fund. A number of
investment strategies are used to seek to achieve the Fund's investment
objective, including market sector selection, determination of yield curve
exposure, and issuer selection. In addition, the Investment Adviser will
attempt to take advantage of pricing inefficiencies in the fixed-income
markets.
CREDIT QUALITY. The Fund invests primarily in high yield, fixed income
securities rated below investment grade. Non-investment grade securities
(commonly known as "junk bonds") tend to offer higher yields than higher rated
securities with similar maturities. Non-investment grade securities are,
however, considered speculative and generally involve greater price volatility
and greater risk of loss of principal and interest than higher rated
securities. See "Description of Securities." A description of the corporate
bond and preferred stock ratings is contained in Appendix B to the Additional
Statement.
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OTHER. The Fund may employ certain active management techniques to manage
the duration and term structure of the Fund, to seek to hedge its exposure to
foreign securities and to seek to enhance returns. These techniques include,
but are not limited to, the use of financial futures contracts, option
contracts (including options on futures), forward foreign currency exchange
contracts, currency options and futures, currency, mortgage and interest rate
swaps, and interest rate floors, caps and collars. Currency and interest rate
management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. It is expected that the Fund will use currency techniques to seek to
hedge against currency exchange rate fluctuations or to seek to increase total
return. The Fund may also employ other investment techniques to seek to
enhance returns, such as lending portfolio securities and entering into
repurchase agreements and other investment practices described under
"Investment Techniques."
DESCRIPTION OF SECURITIES
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. Government Securities. Generally, these
securities include U.S. Treasury obligations and obligations issued or
guaranteed by U.S. government agencies, instrumentalities or sponsored
enterprises which are supported by (a) the full faith and credit of the U.S.
Treasury (such as the Government National Mortgage Association ("Ginnie
Mae")), (b) the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Student Loan Marketing Association), (c) the discretionary
authority of the U.S. government to purchase certain obligations of the issuer
(such as the Federal National Mortgage Association ("Fannie Mae") and Federal
Home Loan Mortgage Corporation ("Freddie Mac")), or (d) only the credit of the
issuer. No assurance can be given that the U.S. government will provide
financial support to U.S. government agencies, instrumentalities or sponsored
enterprises in the future.
U.S. Government Securities also include Treasury receipts, zero coupon bonds
and other stripped U.S. Government Securities, where the interest and
principal components of stripped U.S. Government Securities are traded
independently. The most widely recognized program is the Separate Trading of
Registered Interest and Principal of Securities Program.
MORTGAGE-BACKED SECURITIES
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities
represent direct or indirect participations in, or are collateralized by and
payable from, mortgage loans secured by real property. Mortgagors can
generally prepay interest or principal on their mortgage whenever they choose.
Therefore, Mortgage-Backed Securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of
principal prepayments on the underlying loans. This can result in
significantly greater price and yield volatility than is the case with
traditional fixed-income securities. During periods of declining interest
rates, prepayments can be expected to accelerate, and thus impair a Fund's
ability to reinvest the returns of principal at comparable yields. Conversely,
in a rising interest rate environment, a declining prepayment rate will extend
the average life of many Mortgage-Backed Securities and prevent a Fund from
taking advantage of such higher yields.
FIXED RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans pay interest
at fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed-rate mortgage loans typically provide for monthly payments of
principal and interest in substantially equal installments for the term of the
mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain fixed-rate mortgage loans provide for a large final "balloon"
payment upon maturity.
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ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). The Adjustable Rate Government Fund
will primarily, and the Short Duration Government, Government Income, Core
Fixed Income, Global Income and High Yield Funds may, invest in ARMs, which
are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed coupon rates. ARMs generally provide for a fixed
initial mortgage interest rate for a set period. Thereafter, the interest
rates are subject to periodic adjustments based on changes to a designated
benchmark index.
ARMs allow a Fund to participate in increases in interest rates through
periodic increases in the securities' coupon rates. During periods of
declining interest rates, coupon rates may readjust downward resulting in
lower yields to a Fund. Therefore, the value of an ARM is unlikely to rise
during periods of declining interest rates to the same extent as fixed-rate
securities. Interest rate declines may result in accelerated prepayment of
mortgages with the result that proceeds from prepayments will be reinvested at
lower interest rates. During periods of rising interest rates, changes in the
coupon rate will lag behind changes in the market rate. ARMs are also
typically subject to maximum increases and decreases in the interest rate
adjustment which can be made on any one adjustment date, in any one year, or
during the life of the security. In the event of dramatic increases or
decreases in prevailing market interest rates, the value of a Fund's
investments in ARMs may fluctuate more substantially since these limits may
prevent the security from fully adjusting its interest rate to the prevailing
market rates.
U.S. GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. Certain Mortgage-
Backed Securities are issued or guaranteed by the U.S. government, its
agencies, instrumentalities or sponsored enterprises. Such issuers include,
but are not limited to, Ginnie Mae, Fannie Mae and Freddie Mac. See "U.S.
Government Securities."
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES. The Government Income, Core
Fixed Income, Global Income and High Yield Funds may invest in Mortgage-Backed
Securities issued or sponsored by non-governmental entities. Privately issued
Mortgage-Backed Securities are generally backed by pools of conventional
(i.e., non-government guaranteed or insured) mortgage loans. Since such
Mortgage-Backed Securities normally are not guaranteed by an entity having the
credit standing of Ginnie Mae, Fannie Mae or Freddie Mac, in order to receive
a high quality rating from the rating organizations (i.e., S&P or Moody's),
they normally are structured with one or more types of "credit enhancement."
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. The Adjustable Rate Government, Short Duration Government,
Government Income, Core Fixed Income, Global Income and High Yield Funds may
also invest in multiple class securities, including collateralized mortgage
obligations ("CMOs") and Real Estate Mortgage Investment Conduit ("REMIC")
pass-through or participation certificates. CMOs provide an investor with a
specified interest in the cash flow from a pool of underlying mortgages or of
other Mortgage-Backed Securities. CMOs are issued in multiple classes, each
with a specified fixed or floating interest rate and a final scheduled
distribution date. In most cases, payments of principal are applied to the CMO
classes in the order of their respective stated maturities, so that no
principal payments will be made on a CMO class until all other classes having
an earlier stated maturity date are paid in full. A REMIC is a CMO that
qualifies for special tax treatment under the Internal Revenue Code of 1986,
as amended (the "Code"), and invests in certain mortgages principally secured
by interests in real property and other permitted investments. The Funds do
not intend to purchase residual interests in REMICs.
STRIPPED MORTGAGE-BACKED SECURITIES. The Adjustable Rate Government, Short
Duration Government, Government Income, Core Fixed Income, Global Income and
High Yield Funds may invest in Stripped Mortgage-Backed Securities ("SMBS"),
which are derivative multiple class Mortgage-Backed Securities.
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SMBS are usually structured with two different classes; one that receives 100%
of the interest payments and the other that receives 100% of the principal
payments from a pool of mortgage loans. If the underlying mortgage loans
experience different than anticipated prepayments of principal, a Fund may
fail to fully recoup its initial investment in these securities. The market
value of the class consisting entirely of principal payments generally is
unusually volatile in response to changes in interest rates. The yields on a
class of SMBS that receives all or most of the interest from mortgage loans
are generally higher than prevailing market yields on other Mortgage-Backed
Securities because their cash flow patterns are more volatile and there is a
greater risk that the initial investment will not be fully recouped.
ASSET-BACKED SECURITIES
The Government Income, Core Fixed Income, Global Income and High Yield Funds
may invest in Asset-Backed Securities. The principal and interest payments on
Asset-Backed Securities are collateralized by pools of assets such as auto
loans, credit card receivables, leases, installment contracts and personal
property. Such asset pools are securitized through the use of special purpose
trusts or corporations. Principal and interest payments may be credit enhanced
by a letter of credit, a pool insurance policy or a senior/subordinated
structure.
MUNICIPAL SECURITIES
GENERAL. Municipal Securities in which the Short Duration Tax-Free and
Municipal Income Funds and, to a limited extent, the Core Fixed Income and
High Yield Funds, invest consist of bonds, notes, commercial paper and other
instruments (including participation interests in such securities) issued by
or on behalf of states, territories and possessions of the United States
(including the District of Columbia) and their political subdivisions,
agencies or instrumentalities, the interest on which, in the opinion of bond
counsel for the issuers or counsel selected by the Investment Adviser, is
exempt from regular federal income tax (i.e., excluded from gross income for
federal income tax purposes but not necessarily exempt from federal
alternative minimum tax or from state or local taxes). Such securities may pay
fixed, variable or floating rates of interest. Municipal Securities are often
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities such as bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works.
Other public purposes for which Municipal Securities may be issued include
refunding outstanding obligations, obtaining funds for general operating
expenses, and obtaining funds to lend to other public institutions and
facilities.
PRIVATE ACTIVITY BONDS. Municipal Securities also include "private activity
bonds" or industrial development bonds, which are issued by or on behalf of
public authorities to obtain funds for such projects as privately-operated
housing facilities, airport, mass transit or port facilities and sewage
disposal. In addition, proceeds of certain industrial development bonds are
used for constructing, equipping, repairing or improving privately operated
industrial or commercial facilities. The Short Duration Tax-Free and Municipal
Income Funds distributions attributable to the interest income from private
activity bonds may subject certain investors to the federal alternative
minimum tax.
MUNICIPAL LEASES AND CERTIFICATES OF PARTICIPATION. A municipal lease is an
obligation in the form of a lease or installment purchase which is issued by a
state or local government to acquire equipment and facilities. Certificates of
participation represent undivided interests in municipal leases, installment
purchase agreements or other instruments. The primary risk associated with
municipal lease obligations and certificates of participation is that the
governmental lessee will fail to appropriate funds to enable it to meet its
payment obligations under the lease. Although the obligations may be secured
by the leased equipment or facilities, the disposition of the
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property in the event of non-appropriation or foreclosure might prove
difficult, time consuming and costly, and result in a delay in recovering or
the failure to fully recover the Fund's original investment. To the extent
that a Fund invests in unrated municipal leases or participates in such
leases, the Trustees will monitor on an ongoing basis the credit quality
rating and risk of cancellation of such unrated leases. Certain municipal
lease obligations and certificates of participation may be deemed illiquid for
the purpose of a Fund's limitation on investments in illiquid securities.
PRE-REFUNDED MUNICIPAL SECURITIES. The interest and principal payments on
pre-refunded Municipal Securities are typically paid from the cash flow
generated from an escrow fund consisting of U.S. Government Securities. These
payments have been "pre-refunded" using the escrow fund.
INSURED SECURITIES. "Insured" Municipal Securities are those for which
scheduled payments of interest and principal are guaranteed by a private (non-
governmental) insurance company. The insurance entitles a Fund to receive only
the face or par value of the securities held by the Fund. The insurance does
not guarantee the market value of the Municipal Securities or the net asset
value of a Fund's shares.
AUCTION RATE SECURITIES. Auction rate Municipal Securities permit the holder
to sell the securities in an auction at par value at specified intervals. The
dividend or interest is typically reset by "Dutch" auction in which bids are
made by broker-dealers and other institutions for a certain amount of
securities at a specified minimum yield. The rate set by the auction is the
lowest interest or dividend rate that covers all securities offered for sale.
While this process is designed to permit auction rate securities to be traded
at par value, there is the risk that an auction will fail due to insufficient
demand for the securities. A Fund will take the time remaining until the next
scheduled auction date into account for purposes of determining the
securities' duration.
CORPORATE DEBT OBLIGATIONS
The Government Income, Core Fixed Income, Global Income and High Yield Funds
may invest in corporate debt obligations. In addition to obligations of
corporations, corporate debt obligations include securities issued by banks
and other financial institutions. Corporate debt obligations are subject to
the risk of an issuer's inability to meet principal and interest payments on
the obligations.
CONVERTIBLE SECURITIES
The Core Fixed Income and High Yield Funds may invest in convertible
securities, including debt obligations, and for High Yield Fund preferred
stock, of an issuer convertible at a stated exchange rate into common stock of
the issuer. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. As with all debt
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates
decline. However, when the market price of the common stock underlying a
convertible security exceeds the conversion price, the price of the
convertible security tends to reflect the market price of the underlying
common stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus
may not depreciate to the same extent as the underlying common stock.
Convertible securities in which a Fund invests are subject to the same rating
criteria as its other investments in fixed-income securities.
PREFERRED STOCK, WARRANTS AND RIGHTS
The High Yield Fund may invest in preferred stock, warrants and rights.
Preferred stocks are securities that represent an ownership interest providing
the holder with claims on the issuer's earnings and assets before
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common stock owners but after bond owners. Unlike debt securities, the
obligations of an issuer of preferred stock, including dividend and other
payment obligations, may not typically be accelerated by the holders of such
preferred stock on the occurrence of an event of default (such as a covenant
default or filing of a bankruptcy petition) or other non-compliance by the
issuer with the terms of the preferred stock. Often, however, on the
occurrence of any such event of default or non-compliance by the issuer,
preferred stockholders will be entitled to gain representation on the issuer's
board of directors or increase their existing board representation. In
addition, preferred stockholders may be granted voting rights with respect to
certain issues on the occurrence of any event of default.
Warrants and other rights are options to buy a stated number of shares of
common stock at a specified price at any time during the life of the warrant.
The holders of warrants and rights have no voting rights, receive no dividends
and have no rights with respect to the assets of the issuer.
FOREIGN INVESTMENTS
FOREIGN SECURITIES. The Global Income Fund will, and the Core Fixed Income
and High Yield Funds may, invest in fixed-income securities of foreign issuers
denominated in any currency. However, the Core Fixed Income and High Yield
Funds will limit their investments in non-U.S. dollar-denominated fixed-income
securities to 25% of their total assets. This may offer potential benefits
that are not available from investing exclusively in U.S. dollar-denominated
domestic issues. Foreign countries may have economic policies or business
cycles different from those of the U.S. and markets for foreign fixed-income
securities do not necessarily move in a manner parallel to U.S. markets.
Investing in the securities of foreign issuers involves risks that are not
typically associated with investing in fixed-income securities of domestic
issuers quoted in U.S. dollars. Such investments may be affected by changes in
currency rates, changes in foreign or U.S. laws or restrictions applicable to
such investments and in exchange control regulations (e.g., currency
blockage). A decline in the exchange rate of the currency (i.e., weakening of
the currency against the U.S. dollar) in which a portfolio security is quoted
or denominated relative to the U.S. dollar would reduce the value of the
portfolio security. In addition, if the currency in which a Fund receives
dividends, interest or other payments declines in value against the U.S.
dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends. In addition, clearance and
settlement procedures may be different in foreign countries and, in certain
markets, such procedures have on occasion been unable to keep pace with the
volume of securities transactions, making it more difficult to conduct such
transactions.
The Core Fixed Income, Global Income and High Yield Funds may invest in an
issuer domiciled in one country yet issuing the security in the currency of
another country. The Funds may also invest in debt securities denominated in
the European Currency Unit ("ECU"), which is a "basket" consisting of
specified amounts in the currencies of certain of the twelve member states of
the European Community. The specific amounts of currencies comprising the ECU
may be adjusted by the Council of Ministers of the European Community from
time to time to reflect changes in relative values of the underlying
currencies. In addition, the Funds may invest in securities denominated in
other currency "baskets."
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less
government regulation of foreign markets, companies and securities dealers
than in the U.S. Foreign securities markets may have substantially less volume
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than U.S. securities markets and securities of many foreign issuers may be
less liquid and more volatile than securities of comparable domestic issuers.
Furthermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation or confiscatory taxation, imposition of
withholding or other taxes on dividend or interest payments (or, in some cases
capital gains), limitations on the removal of funds or other assets of a Fund,
political or social instability or diplomatic developments which could affect
investments in those countries.
FOREIGN GOVERNMENT SECURITIES. The Core Fixed Income, Global Income and High
Yield Funds may invest in debt obligations of foreign governments and
governmental agencies, including those of emerging countries. Investment in
sovereign debt obligations involves special risks not present in debt
obligations of corporate issuers. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling
to repay principal or interest when due in accordance with the terms of such
debt, and a Fund may have limited recourse in the event of a default. Periods
of economic uncertainty may result in the volatility of market prices of
sovereign debt, and in turn a Fund's net asset value, to a greater extent than
the volatility inherent in debt obligations of U.S. issuers. A sovereign
debtor's willingness or ability to repay principal and pay interest in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's
policy toward international lenders and the political constraints to which a
sovereign debtor may be subject.
EMERGING MARKETS. The Core Fixed Income and Global Income Funds may invest
up to 10% and the High Yield Fund may invest up to 25% of their total assets
in securities of issuers located in countries with emerging economies or
securities markets ("emerging markets"). Political and economic structures in
many emerging markets may be undergoing significant evolution and rapid
development, and emerging markets may lack the social, political and economic
stability characteristic of more developed countries. As a result, the risks
relating to investments in foreign securities described above, including the
possibility of nationalization, expropriation and confiscatory taxation, may
be heightened. In addition, unanticipated political and social developments
may affect the value of the Fund's investments in emerging markets and the
availability to the Fund of additional investments in such countries. The
small size and inexperience of the securities markets in certain emerging
markets and the limited volume of trading in securities in those countries may
make the Fund's investments in such countries less liquid and more volatile
than investments in countries with more developed securities markets (such as
the U.S., Japan and most Western European countries). See the Additional
Statement for further information regarding a Fund's investments in emerging
markets.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers by the
Core Fixed Income, Global Income and High Yield Funds will usually involve
currencies of foreign countries, and because the Funds may have currency
exposure independent of their securities positions, the value of the assets of
a Fund as measured in U.S. dollars will be affected by changes in foreign
currency exchange rates. A Fund may, to the extent it invests in foreign
securities, purchase or sell forward foreign currency exchange contracts for
hedging purposes and to seek to protect against anticipated changes in future
foreign currency exchange rates. A Fund also may enter into such contracts to
seek to increase total return when the Investment Adviser anticipates that the
foreign currency will appreciate or depreciate in value, but securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio. When entered into to
seek to increase total return, forward foreign currency exchange contracts are
considered speculative. The Funds may also engage in cross-hedging by using
forward contracts in a currency different from that in which the hedged
security is denominated or quoted if the Investment Adviser determines that
there is a pattern of correlation between the two currencies. If a Fund enters
into a forward foreign currency exchange contract to buy foreign
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currency for any purpose or to sell foreign currency to seek to increase total
return, the Fund will be required to place cash or liquid assets in a
segregated account with the Fund's custodian in an amount equal to the value
of the Fund's total assets committed to the consummation of the forward
contract. A Fund will incur costs in connection with conversions between
various currencies. A Fund may hold foreign currency received in connection
with investments in foreign securities when, in the judgment of the Investment
Adviser, it would be beneficial to convert such currency into U.S. dollars at
a later date, based on anticipated changes in the relevant exchange rate.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's net asset value to fluctuate.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by the intervention of U.S.
or foreign governments or central banks, or the failure to intervene, or by
currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of a Fund's total assets, adjusted to
reflect the Fund's net position after giving effect to currency transactions,
is denominated or quoted in the currencies of foreign countries, the Fund will
be more susceptible to the risk of adverse economic and political developments
within those countries.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available for
currency instruments traded on an exchange. Such contracts are subject to the
risk that the counterparty to the contract will default on its obligations.
Since these contracts are not guaranteed by an exchange or clearinghouse, a
default on a contract would deprive a Fund of unrealized profits, transaction
costs or the benefits of a currency hedge or force the Fund to cover its
purchase or sale commitments, if any, at the current market price. A Fund will
not enter into forward foreign currency exchange contracts, currency swaps or
other privately negotiated currency instruments unless the credit quality of
the unsecured senior debt or the claims-paying ability of the counterparty is
considered to be investment grade by the Investment Adviser.
The Core Fixed Income, Global Income and High Yield Fund's use of foreign
currency management techniques in emerging markets may be limited. Due to the
limited market for these instruments in emerging markets, the Investment
Adviser does not currently anticipate that a significant portion of the Fund's
currency exposure in emerging markets, if any, will be covered by such
instruments. For a discussion of such instruments and the risks associated
with their use, see "Investment Objectives and Policies" in the Additional
Statement.
STRUCTURED SECURITIES
The Core Fixed Income, Global Income and High Yield Funds may invest in
structured securities. The value of the principal of and/or interest on such
securities is determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The
interest rate or the principal amount payable upon maturity or redemption may
be increased or decreased depending upon changes in the applicable Reference.
The terms of the structured securities may provide that in certain
circumstances no principal is due at maturity and, therefore, result in the
loss of a Fund's investment. Structured securities may be positively or
negatively indexed, so that appreciation of the Reference may produce an
increase or decrease in the interest rate or value of the security at
maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the
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value of the Reference. Consequently, structured securities may entail a
greater degree of market risk than other types of fixed-income securities.
Structured securities may also be more volatile, less liquid and more
difficult to accurately price than less complex securities.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon, deferred interest, and capital
appreciation bonds. These are securities issued at a discount from their face
value because interest payments are typically postponed until maturity. The
amount of the discount rate varies depending on factors including the time
remaining until maturity, prevailing interest rates, the security's liquidity
and the issuer's credit quality. These securities also may take the form of
debt securities that have been stripped of their interest payments. Each Fund
may also invest in pay-in-kind securities which are securities that have
interest payable by the delivery of additional securities. A portion of the
discount with respect to stripped tax-exempt securities or their coupons may
be taxable. The market prices of zero coupon, deferred interest, pay-in-kind
and capital appreciation bonds generally are more volatile than the market
prices of interest-bearing securities and are likely to respond to a greater
degree to changes in interest rates than interest-bearing securities having
similar maturities and credit quality. A Fund's investments in zero coupon,
deferred interest, pay-in-kind and capital appreciation bonds or stripped
securities may require the Fund to sell certain of its portfolio securities to
generate sufficient cash to satisfy certain income distribution requirements.
See "Taxation" in the Additional Statement.
RISK FACTORS
INTEREST RATE RISK. When interest rates decline, the market value of fixed-
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed-income securities tends to decline. Volatility of a
security's market value will differ depending upon the security's duration,
the issuer and the type of instrument.
DEFAULT RISK/CREDIT RISK. Investments in fixed-income securities are subject
to the risk that the issuer could default on its obligations and a Fund could
sustain losses on such investments. A default could impact both interest and
principal payments.
CALL RISK AND EXTENSION RISK. Fixed-income securities may be subject to both
call risk and extension risk. Call risk (i.e., where the issuer exercises its
right to pay principal on an obligation earlier than scheduled) causes cash
flow to be returned earlier than expected. This typically results when
interest rates have declined and a Fund will suffer from having to reinvest in
lower yielding securities. Extension risk (i.e., where the issuer exercises
its right to pay principal on an obligation later than scheduled) causes cash
flows to be returned later than expected. This typically results when interest
rates have increased and a Fund will suffer from the inability to invest in
higher yielding securities. Certain types of U.S. Government, Asset-Backed,
corporate, foreign, Mortgage-Backed and Municipal Securities have this call
and/or extension risk.
The investment characteristics of Mortgage-Backed Securities and Asset-
Backed Securities differ from those of traditional fixed-income securities
because they generally have both call risk (also known as prepayment risk) and
extension risk. Homeowners have the option to prepay their mortgage.
Therefore, the duration of a security backed by home mortgages can either
shorten (call risk) or lengthen (extension risk). Investors are exposed to the
fluctuating principal and interest payments associated with such securities.
In general, if interest
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rates on new mortgage loans fall sufficiently below the interest rates on
existing outstanding mortgage loans, the rate of prepayment would be expected
to increase. Conversely, if mortgage loan interest rates rise above the
interest rates on existing outstanding mortgage loans, the rate of prepayment
would be expected to decrease.
ARMs also have the risk of prepayments, which will have a greater impact on
the Adjustable Rate Government Fund. The rate of principal prepayments with
respect to ARMs has fluctuated in recent years. As with fixed-rate mortgage
loans, ARMs may be subject to a greater rate of principal repayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, ARMs could be subject to higher prepayment rates (than if
prevailing interest rates remain constant or increase) because the
availability of low fixed-rate mortgages may encourage mortgagors to refinance
their ARMs to "lock-in" a fixed-rate mortgage. Conversely, if prevailing
interest rates rise significantly, ARMs may prepay slower. As with fixed-rate
mortgages, ARM prepayment rates vary in both stable and changing interest rate
environments. There are certain ARMs where the homeowner's payments do not
fully cover interest, so the principal balance increases over time. These
"negative amortizing" ARMs may be subject to greater default risk.
DERIVATIVE MORTGAGE-BACKED SECURITIES. Because derivative Mortgage-Backed
Securities (such as principal-only (POs), interest-only (IOs) or inverse
floating rate securities) are more exposed to mortgage prepayments, they
generally involve a greater amount of risk. Small changes in prepayments can
significantly impact the cash flow and the market value of these securities.
The risk of faster than anticipated prepayments generally adversely affects
IOs, super floaters and premium priced Mortgage-Backed Securities. The risk of
slower than anticipated prepayments generally adversely affects POs, floating-
rate securities subject to interest rate caps, support tranches and discount
priced Mortgage-Backed Securities. In addition, particular derivative
securities may be leveraged such that their exposure (i.e., price sensitivity)
to interest rate and/or prepayment risk is magnified.
TAX RISK OF MUNICIPAL SECURITIES. Due to Municipal Securities' tax-exempt
status, their yields and market values may be more adversely impacted by
changes in tax rates and policies than taxable fixed-income securities.
Because interest income from Municipal Securities is not subject to regular
federal income taxation, the attractiveness of Municipal Securities in
relation to other investment alternatives is affected by changes in federal
income tax rates applicable to, or the continuing federal income tax-exempt
status of, such interest income. Any proposed or actual changes in such rates
or exempt status, therefore, can significantly affect the demand for and
supply, liquidity and marketability of Municipal Securities, which could in
turn affect a Fund's ability to acquire and dispose of Municipal Securities at
desirable yield and price levels.
RISKS OF INVESTING IN NON-INVESTMENT GRADE FIXED-INCOME SECURITIES. Non-
investment grade fixed-income securities are considered predominantly
speculative by traditional investment standards. In some cases, these
obligations may be highly speculative and have poor prospects for reaching
investment grade standing. Non-investment grade fixed-income securities and
unrated securities of comparable credit quality (commonly known as "junk
bonds") are subject to the increased risk of an issuer's inability to meet
principal and interest obligations. These securities, also referred to as high
yield securities, may be subject to greater price volatility due to such
factors as specific corporate developments, interest rate sensitivity,
negative perceptions of the junk bond markets generally and less secondary
market liquidity.
Non-investment grade fixed-income securities are often issued in connection
with a corporate reorganization or restructuring or as part of a merger,
acquisition, takeover or similar event. They are also issued by less
established companies seeking to expand. Such issuers are often highly
leveraged and generally less able than
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more established or less leveraged entities to make scheduled payments of
principal and interest in the event of adverse developments or business
conditions.
The market value of non-investment grade fixed-income securities tends to
reflect individual corporate developments to a greater extent than that of
higher rated securities which react primarily to fluctuations in the general
level of interest rates. As a result, a Fund's ability to achieve its
investment objectives may depend to a greater extent on the Investment
Adviser's judgment concerning the creditworthiness of issuers than funds which
invest in higher-rated securities. Issuers of non-investment grade fixed-
income securities may not be able to make use of more traditional methods of
financing and their ability to service debt obligations may be more adversely
affected than issuers of higher-rated securities by economic downturns,
specific corporate developments or the issuer's inability to meet specific
projected business forecasts. Negative publicity about the junk bond market
and investor perceptions regarding lower rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
A holder's risk of loss from default is significantly greater for non-
investment grade fixed-income securities than is the case for holders of other
debt securities because such non-investment grade securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by a Fund in defaulted securities poses
additional risk of loss should nonpayment of principal and interest continue
in respect of such securities. Even if such securities are held to maturity,
recovery by a Fund of its initial investment and any anticipated income or
appreciation is uncertain.
The secondary market for non-investment grade fixed-income securities is
concentrated in relatively few market makers and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as, and is more volatile than, the secondary market for higher-rated
securities. In addition, market trading volume for high yield fixed-income
securities is generally lower and the secondary market for such securities
could contract under adverse market or economic conditions, independent of any
specific adverse changes in the condition of a particular issuer. These
factors may have an adverse effect on the market price and a Fund's ability to
dispose of particular portfolio investments. A less liquid secondary market
also may make it more difficult for a Fund to obtain precise valuations of the
high yield securities in its portfolio.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities
and, therefore, may not fully reflect the true risks of an investment. In
addition, credit rating agencies may or may not make timely changes in a
rating to reflect changes in the economy or in the conditions of the issuer
that affect the market value of the security. Consequently, credit ratings are
used only as a preliminary indicator of investment quality. Investments in
non-investment grade and comparable unrated obligations will be more dependent
on the Investment Adviser's credit analysis than would be the case with
investments in investment-grade debt obligations. The Investment Adviser
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic conditions, its operating
history and the current trend of earnings. The Investment Adviser continually
monitors the investments in a Fund's portfolio and evaluates whether to
dispose of or to retain non-investment grade and comparable unrated securities
whose credit ratings or credit quality may have changed.
OTHER RISKS. Floating-rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced below market rates if a designated
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interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to lower prices in the event of an
unfavorable change in the spread between two designated interest rates.
Asset-Backed Securities present certain credit risks that are not presented
by Mortgage-Backed Securities because Asset-Backed Securities generally do not
have the benefit of a security interest in collateral that is comparable to
mortgage assets. There is the possibility that, in some cases, recoveries on
repossessed collateral may not be available to support payments on these
securities.
FOREIGN RISKS. See "Foreign Securities" for a description of the risks of
investing in foreign securities and currencies.
INVESTMENT TECHNIQUES
MORTGAGE DOLLAR ROLLS. The Adjustable Rate Government, Short Duration
Government, Government Income, Core Fixed Income and Global Income Funds may
enter into mortgage "dollar rolls" in which a Fund sells securities for
delivery in the current month and simultaneously contracts with the same
counterparty to repurchase substantially similar (same type, coupon and
maturity) but not identical securities on a specified future date. During the
roll period, the Fund loses the right to receive principal and interest paid
on the securities sold. However, the Fund would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase or fee income plus the interest earned
on the cash proceeds of the securities sold until the settlement date for the
forward purchase. Unless such benefits exceed the income, capital appreciation
and gain or loss due to mortgage prepayments that would have been realized on
the securities sold as part of the mortgage dollar roll, the use of this
technique will diminish the investment performance of the Fund. Successful use
of mortgage dollar rolls depends upon the Investment Adviser's ability to
predict correctly interest rates and mortgage prepayments. There is no
assurance that mortgage dollar rolls can be successfully employed. The Fund
will hold and maintain in a segregated account until the settlement date cash
or liquid assets in an amount equal to the forward purchase price. For
financial reporting and tax purposes, each Fund treats mortgage dollar rolls
as two separate transactions; one involving the purchase of a security and a
separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
OPTIONS ON SECURITIES AND SECURITIES INDICES. Each Fund may write (sell)
covered call and put options and purchase put and call options on any
securities in which it may invest or on any securities index composed of
securities in which it may invest. The writing and purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities
transactions. The use of options to seek to increase total return involves the
risk of loss if the Investment Adviser is incorrect in its expectation of
fluctuations in securities prices or interest rates. The successful use of
options for hedging purposes also depends in part on the ability of the
Investment Adviser to manage future price fluctuations and the degree of
correlation between the options and securities markets. If the Investment
Adviser is incorrect in its expectation of changes in securities prices or
determination of the correlation between the securities indices on which
options are written and purchased and the securities in a Fund's investment
portfolio, the investment performance of the Fund will be less favorable than
it would have been in the absence of such options transactions. The writing of
options could increase a Fund's portfolio turnover rate and, therefore,
associated brokerage commissions or spreads.
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OPTIONS ON FOREIGN CURRENCIES. The Core Fixed Income, Global Income and High
Yield Funds may, to the extent they invest in foreign securities, purchase and
sell (write) put and call options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of foreign portfolio
securities and against increases in the U.S. dollar cost of foreign securities
to be acquired. In addition, the Core Fixed Income, Global Income and High
Yield Funds may use options on currency to cross-hedge, which involves writing
or purchasing options on one currency to hedge against changes in exchange
rates for a different currency, if there is a pattern of correlation between
the two currencies. As with other kinds of option transactions, however, the
writing of an option on foreign currency will constitute only a partial hedge,
up to the amount of the premium received. If an option that a Fund has written
is exercised, the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of exchange rate
movements adverse to a Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs. In addition to purchasing put
and call options for hedging purposes, a Fund may purchase call or put options
on currency to seek to increase total return when the Investment Adviser
anticipates that the currency will appreciate or depreciate in value, but the
securities quoted or denominated in that currency do not present attractive
investment opportunities and are not held in the Fund's portfolio. When
purchased or sold to seek to increase total return, options on currencies are
considered speculative. Options on foreign currencies to be written or
purchased by the Funds will be traded on U.S. and foreign exchanges or over-
the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To seek to increase
total return, to hedge against changes in interest rates or securities prices,
or in the case of the Core Fixed Income, Global Income and High Yield Funds,
currency exchange rates, a Fund may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on any of such futures
contracts. Each Fund may also enter into closing purchase and sale
transactions with respect to any such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), foreign currencies, in the case of the Core Fixed Income, Global
Income and High Yield Funds, securities indices and other financial
instruments and indices. A Fund will engage in futures and related options
transactions for bona fide hedging purposes as defined in regulations of the
Commodity Futures Trading Commission or to seek to increase total return to
the extent permitted by such regulations. A Fund may not purchase or sell
futures contracts or purchase or sell related options to seek to increase
total return, except for closing purchase or sale transactions, if immediately
thereafter the sum of the amount of initial margin deposits and premiums paid
on a Fund's outstanding positions in futures and related options entered into
for the purpose of seeking to increase total return would exceed 5% of the
market value of a Fund's net assets. These transactions involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
segregate and maintain cash or liquid assets with a value equal to the amount
of the Fund's obligations.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Techniques--Futures Contracts and Options on Futures Contracts" in
the Additional Statement. Thus, while a Fund may benefit from the use of
futures and options on futures, unanticipated changes in interest rates,
securities prices or currency exchange rates may result in a poorer overall
performance than if the Fund had not entered into any futures contracts or
options transactions. Because perfect correlation between a futures position
and portfolio position which is intended to be protected is impossible to
achieve, the desired protection may not be obtained and a Fund may be exposed
to risk of loss. The loss incurred by a Fund in entering into futures
contracts and in writing call options on futures is potentially unlimited and
may exceed the amount of the premium received. Futures markets are highly
volatile and the use of futures may increase the volatility of a Fund's net
asset value. The profitability of a Fund's trading in futures
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to seek to increase total return depends upon the ability of the Investment
Adviser to correctly analyze the futures markets. In addition, because of the
low margin deposits normally required in futures trading, a relatively small
price movement in a futures contract may result in substantial losses to a
Fund. Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single
day.
CURRENCY SWAPS. The Core Fixed Income, Global Income and High Yield Funds
may enter into currency swaps for hedging purposes or to seek to increase
total return. Currency swaps involve the exchange by a Fund with another party
of their respective rights to make or receive payments in specified
currencies. Currency swaps usually involve the delivery of a gross payment
stream in one designated currency in exchange for the gross payment stream in
another designated currency. Therefore, the entire payment stream under a
currency swap is subject to the risk that the other party to the swap will
default on its contractual delivery obligations. A Fund will not enter into
swap transactions unless the unsecured commercial paper, senior debt or
claims-paying ability of the other party thereto is rated either AA or A-1 or
better by S&P or Aa or P-1 or better by Moody's, or, if unrated by such rating
organizations, determined to be of comparable quality by the Investment
Adviser. The use of currency swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Investment Adviser is
incorrect in its forecasts of currency exchange rates, the investment
performance of a Fund would be less favorable than it would have been if this
investment technique were not used. The staff of the SEC currently take the
position that swaps are illiquid and thus subject to a Fund's limitation on
investments in illiquid securities.
RISKS OF DERIVATIVE TRANSACTIONS. A Fund's transactions, if any, in options,
futures, options on futures, swap transactions, interest rate caps, floors and
collars, structured securities, inverse floating-rate securities and currency
forward contracts involve certain risks, including a possible lack of
correlation between changes in the value of hedging instruments and the
portfolio assets being hedged, the potential illiquidity of the markets for
derivative instruments, the risks arising from the margin requirements and
related leverage factors associated with such transactions. The use of these
management techniques to seek to increase total return may be regarded as a
speculative practice and involves the risk of loss if the Investment Adviser
is incorrect in its expectation of fluctuations in securities prices, interest
rates or currency prices. A Fund's use of certain derivative transactions may
be limited by the requirements of the Code for qualification as a regulated
investment company.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. Each Fund may purchase when-
issued securities. When-issued transactions arise when securities are
purchased by a Fund with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous price and yield to
the Fund at the time of entering into the transaction. Each Fund may also
purchase securities on a forward commitment basis; that is, make contracts to
purchase securities for a fixed price at a future date beyond the customary
three-day settlement. A Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to settlement date,
cash or liquid assets in an amount sufficient to meet the purchase price.
Alternatively, each Fund may enter into offsetting contracts for the forward
sale of other securities that it owns. The purchase of securities on a when-
issued or forward commitment basis involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date. Although a
Fund would generally purchase securities on a when-issued or forward
commitment basis with the intention of acquiring securities for its portfolio,
a Fund may dispose of when-issued securities or forward commitments prior to
settlement if the Investment Adviser deems it appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES. A Fund may not invest more than 15% of
its net assets in illiquid investments, which includes securities (both
foreign and domestic) that are not readily marketable, swap
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transactions, certain SMBS, certain municipal leases and participation
interests, repurchase agreements maturing in more than seven days, time
deposits with a notice or demand period of more than seven days and certain
restricted securities, unless it is determined, based upon the continuing
review of the trading markets for a specific restricted security, that such
restricted security is eligible for resale under Rule 144A under the
Securities Act of 1933 and, therefore, is liquid. The Trustees have adopted
guidelines and delegated to the Investment Adviser the daily function of
determining and monitoring the liquidity of portfolio securities. The
Trustees, however, retain oversight focusing on factors such as valuation,
liquidity and availability of information and are ultimately responsible for
each determination. Investing in restricted securities eligible for resale
pursuant to Rule 144A may decrease the liquidity in a Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities. The purchase price and subsequent valuation of
restricted and illiquid securities normally reflect a discount, which may be
significant, from the market price of comparable securities for which a liquid
market exists.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with
dealers in U.S. Government Securities and member banks of the Federal Reserve
System which furnish collateral at least equal in value or market price to the
amount of their repurchase obligation. The Core Fixed Income, Global Income
and High Yield Funds may also enter into repurchase agreements involving
certain foreign government securities. If the other party or "seller"
defaults, a Fund might suffer a loss to the extent that the proceeds from the
sale of the underlying securities and other collateral held by the Fund in
connection with the related repurchase agreement are less than the repurchase
price. In addition, in the event of bankruptcy of the seller or failure of the
seller to repurchase the securities as agreed, a Fund could suffer losses,
including loss of interest on or principal of the security and costs
associated with delay and enforcement of the repurchase agreement. The
Trustees have reviewed and approved certain counterparties whom they believe
to be creditworthy and have authorized the Funds to enter into repurchase
agreements with such counterparties. In addition, each Fund, together with
other registered investment companies having management agreements with the
Investment Adviser, may transfer uninvested cash balances into a single joint
account, the daily aggregate balance of which will be invested in one or more
repurchase agreements.
TEMPORARY INVESTMENTS. Each Fund may, for temporary defensive purposes,
invest up to 100% of its total assets in (a) U. S. Government Securities or
(b) repurchase agreements collateralized by U.S. Government Securities. The
Short Duration Tax-Free and Municipal Income Funds may for temporary defensive
purposes depart from their stated investment objectives and invest more than
20% of its net assets in taxable investments. The High Yield Fund may for
temporary defensive purposes invest in investment grade securities.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, each Fund
may, with respect to no more than 5% of its net assets, engage in the
following techniques and investments: (i) portfolio securities lending, (ii)
mortgage swaps (other than Short Duration Tax-Free and Municipal Income Funds)
and interest rate swaps, caps, floors and collars, (iii) inverse floating-rate
securities, (iv) yield curve options, (v) other investment companies, (vi)
custodial receipts and (vii) with respect to the Short Duration Tax-Free and
Municipal Income Funds, tender option bonds and standby commitments. For more
information, see the Additional Statement.
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INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions that are described
in detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of a Fund cannot be changed without
approval of a majority of the outstanding shares of that Fund. Each Fund's
investment objectives and all policies not specifically designated as
fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in a Fund's investment objectives, shareholders
should consider whether that Fund still remains an appropriate investment in
light of their then current financial positions and needs.
The Short Duration Tax-Free and Municipal Income Funds' policy to invest,
under normal market conditions, at least 80% of its net assets in Municipal
Securities, the interest on which is exempt from regular federal income tax,
is fundamental and may not be changed without shareholder approval. For more
information on a Fund's investment restrictions, an investor should obtain the
Additional Statement.
NON-DIVERSIFICATION STATUS. Since the Global Income Fund is "non-
diversified" under the Act, it is subject only to certain federal tax
diversification requirements. Under federal tax laws, the Global Income Fund
may, with respect to 50% of its total assets, invest up to 25% of its total
assets in the securities of any issuer (except that this limitation does not
apply to U.S. Government Securities). With respect to the remaining 50% of the
Fund's total assets, (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer (other than the U.S. government),
and (2) the Fund may not acquire more than 10% of the outstanding voting
securities of any one issuer. These tests apply at the end of each quarter of
its taxable year and are subject to certain conditions and limitations under
the Code. Since the Global Income Fund is not diversified under the Act, it
will be more susceptible to adverse developments affecting any single issuer.
The Adjustable Rate Government, Short Duration Government, Short Duration Tax-
Free, Government Income, Municipal Income, Core Fixed Income and High Yield
Funds are, in addition to these tax diversification requirements, also subject
to the diversification requirements arising out of their diversified status
under the Act.
PORTFOLIO TURNOVER
Each Fund may engage in active short-term trading to benefit from yield
disparities among different issues of securities or among the markets for
fixed-income securities, or for other reasons. It is anticipated that the
portfolio turnover rate of each Fund will vary from year to year. It is
anticipated that the annual portfolio turnover rate for the High Yield Fund
will generally not exceed 150%. The portfolio turnover rate is computed by
dividing the lesser of the dollar amount of securities purchased or securities
sold (excluding all securities whose maturities at acquisition are one year or
less) by the average monthly value of such securities owned during the year. A
100% turnover rate would occur, for example, if all of the securities held by
a Fund were sold and replaced within one year. The Investment Adviser will not
consider the portfolio turnover rate a limiting factor in making investment
decisions for a Fund consistent with the Fund's investment objectives and
portfolio management policies. A high rate of portfolio turnover results in
increased transaction costs to a Fund. The portfolio turnover rate includes
the effect of entering into mortgage dollar rolls. See "Financial Highlights"
for a statement of each Fund's historical portfolio turnover rates.
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MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Advisers, distributor and transfer
agent. The officers of the Trust conduct and supervise each Fund's daily
business operations. The Additional Statement contains information as to the
identity of, and other information about, the Trustees and officers of the
Trust.
INVESTMENT ADVISERS
INVESTMENT ADVISERS. Goldman Sachs Funds Management, L.P., One New York
Plaza, New York, New York 10004, a Delaware limited partnership, which is an
affiliate of Goldman Sachs, serves as investment adviser to the Short Duration
Government and Adjustable Rate Government Funds. Goldman Sachs Funds
Management, L.P. registered as an investment adviser in 1990. Goldman Sachs
Asset Management, One New York Plaza, New York, New York 10004, a separate
operating division of Goldman Sachs, serves as the investment adviser to the
Short Duration Tax-Free, Government Income, Municipal Income, Core Fixed
Income and High Yield Funds. Goldman Sachs registered as an investment adviser
in 1981. Goldman Sachs Asset Management International, 133 Peterborough Court,
London EC4A 2BB, England, an affiliate of Goldman Sachs, serves as investment
adviser to the Global Income Fund. Goldman Sachs Asset Management
International became a member of the Investment Management Regulatory
Organization Limited in 1990 and registered as an investment adviser in 1991.
As of , 1997, GSAM, GSFM and GSAMI, together with their affiliates, acted
as investment adviser, administrator or distributor for assets in excess of
$ billion.
Under a Management Agreement with each Fund, the applicable Investment
Adviser, subject to the general supervision of the Trustees, provides day-to-
day advice as to the Fund's portfolio transactions. Goldman Sachs has agreed
to permit the Trust to use the name "Goldman Sachs" or a derivative thereof as
part of each Fund's name for as long as a Fund's Management Agreement is in
effect.
In performing its investment advisory services, each Investment Adviser,
while remaining ultimately responsible for the management of the Funds, is
able to draw upon the research and expertise of its affiliate offices for
portfolio decisions and management with respect to certain portfolio
securities. In addition, the Investment Advisers will have access to the
research of, and proprietary technical models developed by, Goldman Sachs and
may apply quantitative and qualitative analysis in determining the appropriate
allocations among the categories of issuers and types of securities.
Under the Management Agreement, each Investment Adviser also: (i) supervises
all non-advisory operations of each Fund that it advises; (ii) provides
personnel to perform such executive, administrative and clerical services as
are reasonably necessary to provide effective administration of each Fund;
(iii) arranges for at each Fund's expense (a) the preparation of all required
tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and statements of
additional information and (d) the preparation of reports to be filed with the
SEC and other regulatory authorities; (iv) maintains each Fund's records; and
(v) provides the Fund with office space and all necessary office equipment and
services.
ADJUSTABLE RATE GOVERNMENT AND SHORT DURATION GOVERNMENT FUNDS. The Funds'
portfolio manager is Jonathan A. Beinner. Mr. Beinner is a Vice President of
Goldman Sachs and Co-Head of GSAM's U.S. Fixed
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Income Department. Mr. Beinner joined the Investment Adviser in 1990 after
working in the trading and arbitrage group of Franklin Savings Association.
GOVERNMENT INCOME AND CORE FIXED INCOME FUNDS. The Funds' portfolio managers
are Jonathan A. Beinner and Richard C. Lucy. See above for information about
Mr. Beinner. Messrs. Beinner and Lucy each specialize in investing in a
particular type of security the Fund may hold. Mr. Lucy is a Vice President of
Goldman Sachs and Co-Head of GSAM's U.S. Fixed Income Department. Mr. Lucy
joined the Investment Adviser in 1992 after spending nine years managing fixed
income assets at Brown Brothers Harriman & Co.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS. The Funds' portfolio
managers are Benjamin S. Thompson and Elisabeth Schupf Lonsdale. Mr. Thompson
and Ms. Lonsdale each specialize in municipal securities. Mr. Thompson's
responsibilities include developing investment strategy and structuring
portfolios. Ms. Lonsdale is also responsible for GSAM's municipal credit
research. Mr. Thompson worked in the institutional sales and marketing group
at GSAM until he joined the fixed-income team in 1993. Prior to joining GSAM
in early 1992, Mr. Thompson worked in the Structured Finance Group of the
Chase Manhattan Bank. Before rejoining Goldman Sachs in 1995, Ms. Lonsdale was
a Director of Fitch Investors Service evaluating the credit ratings of tax-
backed issues. Prior to that, she worked for ten years in the Goldman Sachs
Municipal Finance Department.
GLOBAL INCOME FUND. The Fund's portfolio managers are Stephen Fitzgerald and
Andrew Wilson. Mr. Fitzgerald joined GSAMI in 1992 and is an Executive
Director and Chief Investment Officer for international fixed income. Prior to
1992, he spent two years managing multi-currency fixed-income and balanced
portfolios at Invesco MIM Limited, where he was a senior member of the
derivative products group. Mr. Wilson joined GSAMI in 1995 and is Executive
Director and Portfolio Manager for international fixed income. Prior to
joining GSAMI, he spent three years as an Assistant Director at Rothschild
Asset Management where he was responsible for managing global and
international bond portfolios, with specific focus on the U.S., Canadian,
Australian and Japanese economies. Prior to his employment at Rothschild, Mr.
Wilson spent seven years at the Reserve Bank of New Zealand, his most recent
position as Trading Manager of foreign reserves management. Mr. Wilson's
employment at the Reserve Bank at New Zealand also included a two year
assignment to the foreign investment unit at the Bank of England in London.
It is the responsibility of the Investment Adviser to make investment
decisions for a Fund and to place the purchase and sale orders for a Fund's
portfolio transactions in U.S. and foreign securities and currency markets.
Such orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Goldman Sachs or its affiliates. In
effecting purchases and sales of portfolio securities for the Funds, the
Investment Advisers will seek the best price and execution of a Fund's orders.
In doing so, where two or more brokers or dealers offer comparable prices and
execution for a particular trade, consideration may be given to whether the
broker or dealer provides investment research or brokerage services or sells
shares of any Goldman Sachs Fund. See the Additional Statement for a further
description of the Investment Advisers' brokerage allocation practices.
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As compensation for its services rendered and assumption of certain expenses
pursuant to separate Management Agreements, GSAM, GSFM and GSAMI are entitled
to the following fees, computed daily and payable monthly at the annual rates
listed below:
<TABLE>
<CAPTION>
FOR THE FISCAL
CONTRACTUAL YEAR ENDED
RATE* OCTOBER 31, 1996*
----------- ------------------
<S> <C> <C>
GSAM
- ----
Short Duration Tax-Free 0.40% 0.40%
Government Income 0.65% 0.25%
Municipal Income 0.55% 0.55%
Core Fixed Income 0.40% 0.40%
High Yield 0.70% N/A
GSFM
- ----
Short Duration Government 0.50% 0.40%
Adjustable Rate Government 0.40% 0.40%
GSAMI
- -----
Global Income 0.90% 0.59%
</TABLE>
- --------
* With respect to Government Income, Municipal Income and Global Income
Funds, a Management Agreement combining advisory and administration
services (and subadvisory services in the case of Global Income Fund) was
adopted effective April 30, 1997. The Management Agreements for the other
funds previously combined such services. The contractual rate set forth in
the table is the rate payable under the Management Agreements (and, in the
case of Global Income Fund, is identical to the aggregate advisory,
subadvisory and administration fee rate payable by the Fund under the
previously separate investment advisory, subadvisory and administration
agreements). For the fiscal year ended October 31, 1996, the annual rate
expressed is the combined advisory and administration fees paid (after
voluntary fee limitations). The difference, if any, between the stated fees
and the actual fees paid by the Funds reflects that the applicable
Investment Adviser did not charge the full amount of the fees to which it
would have been entitled. The Investment Advisers may discontinue or modify
such limitations in the future at their discretion, although they have no
current intention to do so.
The Investment Advisers to the Short Duration Government, Short Duration
Tax-Free, Core Fixed Income, Government Income, Municipal Income, Global
Income and High Yield Funds have voluntarily agreed to reduce or limit certain
"Other Expenses" of such Funds (excluding management fees, fees under service
and administration plans, taxes, interest and brokerage fees and litigation,
indemnification and other extraordinary expenses (and transfer agency fees in
the case of the Global Income and High Yield Funds) to the extent such
expenses exceed 0.05%, 0.05%, 0.05%, 0.00%, 0.05%, 0.06% and 0.01% per annum
of such Funds' average daily net assets, respectively. Such reductions or
limits, if any, are calculated monthly on a cumulative basis and may be
discontinued or modified by the applicable Investment Adviser in its
discretion at any time.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Advisers, Goldman Sachs and
their affiliates in the management of, or their interest in, other accounts
and other activities of Goldman Sachs may present conflicts of interest with
respect to a Fund or limit a Fund's investment activities. Goldman Sachs and
its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Funds and/or which
engage in and compete for transactions in the same types of securities,
currencies and instruments as the Funds. Goldman
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Sachs and its affiliates will not have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and in general it is not anticipated
that the Investment Advisers will have access to proprietary information for
the purpose of managing a Fund. The results of a Fund's investment activities,
therefore, may differ from those of Goldman Sachs and its affiliates and it is
possible that a Fund could sustain losses during periods in which Goldman
Sachs and its affiliates and other accounts achieve significant profits on
their trading for proprietary or other accounts. From time to time, a Fund's
activities may be limited because of regulatory restrictions applicable to
Goldman Sachs and its affiliates, and/or their internal policies designed to
comply with such restrictions. See "Management -- Activities of Goldman Sachs
and its Affiliates and Other Accounts Managed by Goldman Sachs" in the
Additional Statement for further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606 also serves as each Fund's
transfer agent (the "Transfer Agent") and as such performs various shareholder
servicing functions. Shareholders with inquiries regarding any Fund should
contact Goldman Sachs (as Transfer Agent) at the address or the telephone
number set forth on the back cover page of this Prospectus. Goldman Sachs is
not entitled to receive a fee from the Global Income Fund for transfer agency
services. Goldman Sachs is entitled to receive a fee from the Adjustable Rate
Government, Short Duration Government, Short Duration Tax-Free Government
Income, Municipal Income and Core Fixed Income Funds equal to each class'
proportionate share of the total transfer agency fees borne by the Fund. Such
fees are equal to the fixed per account charge of $12,000 per year plus $7.50
per account, together with out-of-pocket and transaction related expenses
(including those out-of-pocket expenses payable to servicing and/or sub-
transfer agents) applicable to Class A and B shares where applicable plus
0.04% of the average daily net assets of the other classes of the Funds.
Goldman Sachs is entitled to receive a fee from the High Yield Fund equal to
..04% of the average daily net assets of Institutional and Service shares.
DIVIDENDS
Each Fund (other than the Global Income Fund) will declare a daily dividend.
Such dividend will accrue to shareholders of record as of 3:00 p.m. Chicago
time, and will be paid monthly. The Global Income Fund will declare and pay
dividends monthly. Shares of Global Income Fund will be eligible for dividends
which accrue on or after the date such shares are purchased and will be paid
monthly. Over the course of the fiscal year, dividends accrued and paid will
constitute all or substantially all of the Funds' net investment income. From
time to time a portion of such dividends may constitute a return of capital.
In the case of Core Fixed Income, Global Income and High Yield Funds, net
loss, if any, from certain foreign currency transactions or instruments that
is otherwise taken into account in calculating net investment income or net
realized capital gains for accounting purposes may not be taken into account
in determining the amount of dividends to be declared and paid, with the
result that a portion of the Fund's dividends may be treated as a return of
capital, nontaxable to the extent of a shareholder's tax basis in his shares.
The Funds also intend that all net realized long-term and short-term capital
gains will be declared as a dividend at least annually. In determining amounts
of capital gains to be distributed, capital losses, including any available
capital loss carryovers from prior years will be offset against capital gains.
38
<PAGE>
A Fund's net investment income is determined on a daily basis (monthly in
the case of the Global Income Fund). On days on which net asset value is
calculated, such determination is made immediately prior to the calculation of
a Fund's net asset value as of 3:00 p.m. Chicago time. On days on which net
asset value is not calculated, such determination is made as of 3:00 p.m.
Chicago time.
Payment of dividends (other than the Global Income Fund) from net investment
income will be made on the last calendar day of each month in additional
shares of a Fund at the net asset value on such day, unless cash distributions
are elected, in which case, cash payment will be made on the first Business
Day of the succeeding month. In the case of Global Income Fund, reinvestment
of dividends from net investment income in additional shares of the Fund will
be made on the second to last Business Day of each month. Cash dividends will
be paid on or about the last Business Day of the month. Payment of dividends
with respect to capital gains, if any, when declared will be made in
additional shares of the Fund at the net asset value on the payment date,
unless cash distributions are elected. This election to receive dividends in
cash is initially made on the Account Information Form and may be changed upon
written notice to the Transfer Agent at any time prior to the record date for
a particular dividend or distribution. If cash dividends are elected with
respect to the Fund's monthly net investment income dividends, then cash
dividends must also be elected with respect to the non-long-term capital gains
component, if any, of the Fund's annual dividend.
At the time of an investor's purchase of shares of a Fund, a portion of the
net asset value per share may be represented by undistributed income (in the
case of the Global Income Fund) or realized or unrealized appreciation of any
Fund's portfolio securities. Therefore, subsequent distributions on such
shares from such income or realized appreciation may be taxable to the
investor even if the net asset value of the shares is, as a result of the
distributions, reduced below the cost of such shares and the distributions (or
portions thereof) represent a return of a portion of the purchase price.
NET ASSET VALUE
The net asset value per share of each class of a Fund is calculated by the
Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time) on each
Business Day (as such term is defined under "Additional Information")
immediately after the determination, if any, of the income to be declared as a
dividend (except in the case of the Global Income Fund). Net asset value per
share of each class is calculated by determining the net assets attributable
to each class and dividing by the number of outstanding shares of that class.
Each Fund's portfolio securities for which accurate market quotations are
readily available are valued on the basis of quotations, which may be
furnished by a pricing service or provided by dealers in such securities and
other portfolio securities are valued at fair value, based on yield
equivalents, a pricing matrix or other sources, under valuation procedures
established by the Trustees. Debt obligations with a remaining maturity of 60
days or less are valued at amortized cost. The Board of Trustees has
determined that the amortized cost of such securities approximates fair market
value.
39
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may publish yield, distribution rate and average
annual total return and the Short Duration Tax-Free and Municipal Income Funds
may publish its tax equivalent yield in advertisements and communications to
shareholders or prospective investors. Average annual total return is
determined by computing the average annual percentage change in value of
$1,000 invested at the maximum public offering price for specified periods
ending with the most recent calendar quarter, assuming reinvestment of all
dividends and distributions at net asset value. The total return calculation
assumes a complete redemption of the investment at the end of the relevant
period. Each Fund may also from time to time advertise total return on a
cumulative, average, year-by-year or other basis for various specified periods
by means of quotations, charts, graphs or schedules. In addition to the above,
each Fund may from time to time advertise its performance relative to certain
averages, performance rankings, indices, other information prepared by
recognized mutual fund statistical services and investments for which reliable
performance data is available.
Yield is computed by dividing net investment income earned during a recent
thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the
maximum offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semiannual) basis and then
annualized. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from
the net investment income determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, the Short Duration Tax-Free and Municipal Income Funds'
tax-free yield. Tax equivalent yield is calculated by dividing the Short
Duration Tax-Free Fund's tax-exempt yield by one minus a stated federal tax
rate.
Quotations of distribution rates are calculated by annualizing the most
recent distribution of net investment income for a monthly, quarterly or other
relevant period and dividing this amount by the net asset value per share or
maximum public offering price on the last day of the period for which the
distribution rates are being calculated.
Each Fund's yield, total return and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, the yield, total return and distribution
rate calculations with respect to each class of shares for the same period
will differ. See "Shares of the Trust."
The investment results of a Fund will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Funds may, in their discretion, from time to time,
make a list of their holdings available to investors upon request.
40
<PAGE>
SHARES OF THE TRUST
Each Fund is a series of the Goldman Sachs Trust, which was formed under the
laws of the state of Delaware on January 28, 1997. The Funds were formerly
series of Goldman Sachs Trust, a Massachusetts business trust, and were
reorganized into the Trust as of April 30, 1997. The Trustees have authority
under the Trust's Declaration of Trust to create and classify shares of
beneficial interest in separate series, without further action by
shareholders. Additional series may be added in the future. The Trustees also
have authority to classify or reclassify any series or portfolio of shares
into one or more classes.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable Fund available for distribution to such shareholders. All
shares are freely transferable and have no preemptive, subscription or
conversion rights. Shareholders are entitled to one vote per share, provided
that at the option of the Trustees, shareholders will be entitled to a number
of votes based upon the net asset values represented by their shares.
The Trust does not intend to hold annual meetings of shareholders. However,
pursuant to the Trust's By-Laws, the recordholders of at least 10% of the
shares outstanding and entitled to vote at a special meeting may require the
Trust to hold such special meeting of shareholders for any purpose and
recordholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting of
shareholders for the purpose of electing Trustees, if, at any time, less than
a majority of Trustees holding office at the time were elected by
shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Funds' shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Funds are reflected in
account statements from the Transfer Agent.
As of , 1997, the shareholders listed below owned beneficially and of
record 25% or more of the outstanding shares of such Fund: Short Duration
Government Fund--State Street Bank and Trust Company, P.O. Box 1992, Boston,
MA 02105-1992 (34.05%).
TAXATION
FEDERAL TAXES
Each Fund is treated as a separate entity for tax purposes, has elected or
intends to elect to be treated as a regulated investment company and intends
to qualify for such treatment for each taxable year under Subchapter M of the
Code. To qualify as such, a Fund must satisfy certain requirements relating to
the sources of its income, diversification of its assets and distribution of
its income to shareholders. As a regulated investment company, a Fund will not
be subject to federal income or excise tax on any net investment income and
net realized capital gains that are distributed to its shareholders in
accordance with certain timing requirements of the Code.
The Short Duration Tax-Free and Municipal Income Funds intend to satisfy
certain requirements of the Code so that it may distribute the tax-exempt
interest it receives as "exempt-interest dividends," as defined in
41
<PAGE>
the Code. If such requirements are satisfied, distributions of the Short
Duration Tax-Free and Municipal Income Funds that are attributable to interest
on tax-exempt obligations and that the Fund properly designates as exempt-
interest dividends will be exempt from regular federal income tax, although
all or a portion of such a distribution may be subject to the federal
alternative minimum tax and the entire distribution may be includable in the
tax base for determining taxability of social security or railroad retirement
benefits. Persons who are "substantial users" (or related persons to such
substantial users) of facilities financed by industrial development or certain
private activity bonds should consult their own tax advisers before purchasing
shares of the Short Duration Tax-Free and Municipal Income Funds. Interest on
indebtedness incurred or continued to purchase or carry shares of the Short
Duration Tax-Free and Municipal Income Funds is not deductible to the extent
attributable to the Short Duration Tax-Free or Municipal Income Funds'
distributions that are exempt-interest dividends.
Dividends paid by a Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to shareholders as ordinary income, except for any exempt-
interest dividends paid by Short Duration Tax-Free and Municipal Income Funds,
as described above. Dividends paid by a Fund from the excess of net long-term
capital gain over net short-term capital loss will be taxable as long-term
capital gains regardless of how long the shareholders have held their shares.
These tax consequences will apply regardless of whether distributions are
received in cash or reinvested in shares. Certain distributions paid by a Fund
in January of a given year may be taxable to shareholders as if received the
prior December 31. Shareholders will be informed annually about the amount and
character of distributions received from the Funds for federal income tax
purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution other than a daily dividend will pay a per
share price that includes the value of the anticipated distribution and will
be taxed on any taxable distribution even though the distribution represents a
return of a portion of the purchase price.
Redemptions and exchanges of shares are taxable events.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions (other than exempt-
interest dividends), redemptions and exchanges if they fail to furnish their
correct taxpayer identification number and certain certifications required by
the Internal Revenue Services or if they are otherwise subject to backup
withholding. Individuals, corporations and other shareholders that are not
U.S. persons under the Code are subject to different tax rules and may be
subject to non-resident alien withholding at the rate of 30% (or a lower rate
provided by an applicable tax treaty) on amounts treated as ordinary dividends
from the Funds.
The Core Fixed Income, Global Income and High Yield Funds may be subject to
foreign withholding or other foreign taxes on income or gain from certain
foreign securities. If more than 50% of the value of the total assets of
either Fund is comprised of stock or securities of foreign corporations at the
end of its taxable year and the applicable Fund so elects, that Fund's
shareholders will include in their gross incomes (in addition to dividends and
distributions they receive) their pro rata shares of qualified foreign taxes
paid by that Fund and may be entitled under the Code to claim foreign tax
credits or deductions with respect to such taxes. It is not expected that the
Core Fixed Income Fund will qualify to make this election. If either Fund
cannot or does not so elect, it may deduct these taxes in computing its
taxable income, if any.
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<PAGE>
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Funds, including exempt-
interest dividends. A state income (and possibly local income and/or
intangible property) tax exemption is generally available to the extent (if
any) a Fund's distributions are derived from interest on (or, in the case of
intangible property taxes, the value of its assets is attributable to) certain
U.S. government obligations and/or tax-exempt municipal obligations issued by
or on behalf of the particular state or a political subdivision thereof,
provided in some states that certain thresholds for holdings of such
obligations and/or reporting requirements are satisfied. For a further
discussion of certain tax consequences of investing in shares of the Funds,
see "Taxation" in the Additional Statement. Shareholders are urged to consult
their own tax advisers regarding specific questions as to federal, state and
local taxes as well as to any foreign taxes.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of a Fund means
the vote of the lesser of (i) 67% or more of the shares present at a meeting,
if the holders of more than 50% of the outstanding shares of the Fund are
present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
43
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ADDITIONAL SERVICES
The Trust, on behalf of the Funds, has adopted a Service Plan with respect
to the Service Shares which authorizes a Fund to compensate certain
institutions ("Service Organizations") for providing account administration
and personal and account maintenance services to their customers who are
beneficial owners of such Shares. The Trust, on behalf of the Funds, enters
into agreements with Service Organizations which purchase Service Shares on
behalf of their customers ("Service Agreements"). The Service Agreements
provide for compensation to the Service Organizations in an amount up to 0.50%
(on an annualized basis) of the average daily net assets of the Service Shares
of the Fund attributable to or held in the name of the Service Organization
for its customers; provided, however, that the fee paid for personal and
account maintenance services shall not exceed 0.25% of such average daily net
assets. The services provided by the Service Organizations may include acting,
directly or through an agent, as the sole shareholder of record, maintaining
account records for customers, processing orders to purchase, redeem or
exchange Service Shares for customers, responding to inquiries from
prospective and existing shareholders and assisting customers with investment
procedures.
For the fiscal year ended October 31, 1996, the Trust, on behalf of the
Short Duration Government, Short Duration Tax-Free and Core Fixed Income
Funds, paid the Service Organizations fees at the annual rate of 0.50% of each
Fund's average daily net assets attributable to Service Shares. No Service
Shares of the other Funds were outstanding during the period.
Holders of Service Shares of a Fund bear all expenses and fees paid to
Service Organizations for their services with respect to such Shares as well
as any other expenses which are directly attributable to such Shares.
Service Organizations may charge other fees to their customers who are the
beneficial owners of Service Shares in connection with their customer
accounts. These fees would be in addition to any amounts received by the
Service Organization under a Service Agreement and may affect the return
earned on an investment in the Fund. The Trust, on behalf of the Funds,
accrues payments made pursuant to a Service Agreement daily. All inquiries of
beneficial owners of Service Shares should be directed to such owners' Service
Organization.
REPORTS TO SHAREHOLDERS
Recordholders of Service Shares of the Funds will receive an annual report
containing audited financial statements and a semi-annual report. Each
recordholder of Service Shares will also be provided with a printed
confirmation for each transaction in its account and a monthly account
statement (quarterly in the case of Global Income Fund). A year-to-date
statement for any account will be provided to a Service Organization upon
request made to Goldman Sachs.
Service Organizations will be responsible for providing services similar to
those described above to their customers who are the beneficial owners of such
Shares. For example, Service Organizations are responsible for providing each
customer exercising investment discretion with monthly statements with respect
to such customer's account in lieu of an immediate confirmation of each
transaction.
44
<PAGE>
PURCHASE OF SERVICE SHARES
Customers of Service Organizations may invest in Service Shares only through
their Service Organizations. Service Shares may be purchased on any Business
Day by a Service Organization through Goldman Sachs at the net asset value per
share next determined after receipt of an order. No sales load will be
charged. If, by the close of regular trading on the New York Stock Exchange
(normally 3:00 p.m. Chicago time, 4:00 p.m. New York time), an order is
received from a Service Organization by Goldman Sachs, the price per share
will be the net asset value per share computed on the day the purchase order
is received. See "Net Asset Value." Purchases of Service Shares of the Funds
must be settled within three (3) Business Days of the receipt of a complete
purchase order. Payment of the proceeds of redemption of shares purchased by
check may be delayed for a period of time as described under "Redemption of
Service Shares."
The Service Organizations are responsible for the timely transmittal of
purchase orders to Goldman Sachs and payments to Northern or State Street. In
order to facilitate timely transmittal, the Service Organizations have
established times by which purchase orders and payments must be received by
them.
PURCHASE PROCEDURES APPLICABLE TO EACH FUND OTHER THAN THE GLOBAL INCOME FUND
Purchases of Service Shares by a Service Organization may be made by placing
an order with Goldman Sachs at 800-621-2550 and either wiring federal funds to
the Northern Trust Company ("Northern") as subcustodian for State Street Bank
and Trust Company ("State Street") on the next Business Day or initiating an
ACH transfer to ensure receipt by Northern on the next Business Day. Purchases
may also be made by a Service Organization by check (except that the Trust
will not accept a check drawn on a foreign bank or a third-party check) or
Federal Reserve draft made payable to Goldman Sachs Fixed Income Funds--Name
of Fund and Class of shares and should be directed to Goldman Sachs Fixed
Income Funds--Name of Fund and Class of shares c/o GSAM Shareholder Services,
4900 Sears Tower, Chicago, Illinois 60606.
PURCHASE PROCEDURES APPLICABLE TO THE GLOBAL INCOME FUND
Purchases of Service Shares may be made by a Service Organization placing an
order with Goldman Sachs at 800-621-2550 and either wiring federal funds to
State Street or initiating an ACH transfer. Purchases may also be made by a
Service Organization by check (except that the Trust will not accept a check
drawn on a foreign bank or a third-party check) or Federal Reserve draft made
payable to Goldman Sachs Fixed Income Funds--Name of Fund and Class of shares
and should be directed to Goldman Sachs Fixed Income Funds--Name of Fund and
Class of shares c/o National Financial Data Services, Inc., P.O. Box 419711,
Kansas City, MO 64141-6711.
OTHER PURCHASE INFORMATION
The Funds do not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares, and
may establish other requirements such as a minimum account balance. A Service
Organization may
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<PAGE>
effect redemptions of noncomplying accounts, and may impose a charge for any
special services rendered to its customers. Customers should contact their
Service Organization for further information concerning such requirements and
charges.
Service Shares of the Global Income Fund will be issued and dividends will
begin to be paid with respect to dividends which accrue on or after the
purchase of Service Shares. For the other Funds, the following applies:
PURCHASE BY FEDERAL FUNDS WIRE OR ACH TRANSFER. If a purchase order is
received from a Service Organization by Goldman Sachs by 3:00 p.m. Chicago
time and payment is made by wire transfer or ACH transfer, shares will be
issued and dividends will begin to accrue on the purchased shares on the
later of (i) the Business Day after receipt by Goldman Sachs of a purchase
order or (ii) the day of receipt of a federal funds wire or an ACH transfer
by State Street.
PURCHASE BY CHECK OR FEDERAL RESERVE DRAFT. If a check or Federal Reserve
draft is received by Goldman Sachs by 3:00 p.m. Chicago time, shares will
be issued and dividends will begin to accrue on the purchased shares on the
Business Day after the date payment is received.
The Funds reserve the right to redeem Service Shares of any Service
Organization whose account balance is less than $50 as a result of earlier
redemptions. Such redemptions will not be implemented if the value of such
shareholder's account falls below the minimum account balance solely as a
result of market conditions. A Fund will give sixty (60) days' prior written
notice to Service Organizations whose Service Shares are being redeemed to
allow them to purchase sufficient additional Service Shares to avoid such
redemption.
The Funds and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by
a particular purchaser (or group of related purchasers). This may occur, for
example, when a purchaser or a group of purchasers' pattern of frequent
purchases, sales or exchanges of Service Shares of a Fund is evident, or if
purchases, sales or exchanges are, or a subsequent abrupt redemption might be,
of a size that would disrupt management of a Fund.
In the sole discretion of Goldman Sachs, a Fund may accept securities
instead of cash for the purchase of shares of the Fund. Such purchases will be
permitted only if the Investment Adviser determines that any securities
acquired in this manner are consistent with the Fund's investment objectives,
restrictions and policies and are desirable investments for the Fund.
EXCHANGE PRIVILEGE
Service Shares of the Funds may be exchanged by a Service Organization for
(i) Service Shares of any other mutual fund sponsored by Goldman Sachs and
designated as an eligible fund for this purpose and (ii) the corresponding
class of any Goldman Sachs Money Market Fund at the net asset value next
determined either by
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<PAGE>
writing to Goldman Sachs, Attention: Goldman Sachs Fixed Income Funds--Name of
Fund and Class of Shares, c/o GSAM Shareholder Services, 4900 Sears Tower,
Chicago, Illinois 60606 or, if previously elected in the Fund's Account
Information Form, by telephone at 800-621-2550 (7:00 a.m. to 5:30 p.m. Chicago
time). A shareholder should obtain and read the prospectus relating to any
other fund and its shares and consider its investment objective, policies and
applicable fees before making an exchange. Service Shares acquired by
telephone exchange must be registered in the same name(s) and have the same
address as Service Shares of the Fund for which the exchange is being made.
In an effort to prevent unauthorized or fraudulent exchanges by telephone,
Goldman Sachs employs reasonable procedures as set forth under "Redemption of
Service Shares" to confirm that such instructions are genuine. In times of
drastic economic or market changes, the telephone exchange privilege may be
difficult to implement. For federal income tax purposes, an exchange is
treated as a redemption of the Service Shares surrendered in the exchange, on
which an investor may be subject to tax, followed by a purchase of Service
Shares, or the corresponding class of any Goldman Sachs Money Market Fund
received in the exchange. Shareholders should consult their own tax advisers
concerning the tax consequences of an exchange. Exchanges are available only
in states where exchanges may legally be made. The exchange privilege may be
modified or withdrawn at any time on sixty (60) days' written notice to
recordholders of Service Shares and is subject to certain limitations. See
"Purchase of Service Shares."
REDEMPTION OF SERVICE SHARES
The Funds will redeem their Service Shares upon request of the recordholder
of such Shares on any Business Day at the net asset value next determined
after the receipt by the Transfer Agent of such request in proper form. See
"Net Asset Value." If Service Shares to be redeemed were recently purchased by
check, a Fund may delay transmittal of redemption proceeds until such time as
it has assured itself that good funds have been collected for the purchase of
such Service Shares. This may take up to fifteen (15) days. Redemption
requests may be made by writing to or calling the Transfer Agent at the
address or telephone number set forth on the back cover page of this
Prospectus. A Service Organization may request redemptions by telephone if the
optional telephone redemption privilege is elected on the Account Information
Form. It may be difficult to implement redemptions by telephone in times of
drastic economic or market changes.
In an effort to prevent unauthorized or fraudulent redemption or exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Trust to confirm that such instructions are genuine. Among other
things, any redemption request that requires money to go to an account or
address other than that designated on the Account Information Form must be in
writing and signed by an authorized person designated on the Account
Information Form. Any such written request is also confirmed by telephone with
both the requesting party and the designated bank account to verify
instructions. Exchanges among accounts with different names, addresses and
social security or other taxpayer identification numbers must be in writing
and signed by an authorized person designated on the Account Information Form.
Other procedures may be implemented from time to time. If reasonable
procedures are not implemented, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. In all other cases, neither the
Funds, the Trust nor Goldman Sachs will be responsible for the authenticity of
redemption or exchange instructions received by telephone. If Goldman Sachs
receives a redemption request by 3:00 p.m. Chicago time, the Service Shares of
each Fund (other than Global Income Fund) to be redeemed earn dividends
declared on the day the request is received.
47
<PAGE>
The Funds will arrange for the proceeds of redemptions effected by any means
to be wired to the recordholder of Service Shares or, if the recordholder
elects in writing, by check. Redemption proceeds paid by wire transfer will
normally be wired on the next Business Day in federal funds (for a total one-
day delay), but may be paid up to three (3) days after receipt of a properly
executed redemption request. Wiring of redemption proceeds may be delayed one
additional Business Day if the Federal Reserve Bank is closed on the day
redemption proceeds would ordinarily be wired. Redemption proceeds paid by
check will normally be mailed to the address of record within three (3)
Business Days of receipt of a properly executed redemption request. Once wire
transfer instructions have been given by Goldman Sachs, neither the Funds, the
Trust nor Goldman Sachs assumes any further responsibility for the performance
of intermediaries or the customer's Service Organization in the transfer
process. If a problem with such performance arises, the customer should deal
directly with such intermediaries or Service Organizations.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by the Transfer Agent. The
request for such redemption will not be considered to have been received in
proper form until such additional documentation has been submitted to the
Transfer Agent by the recordholder of Service Shares.
Service Organizations are responsible for the timely transmittal of
redemption requests by their customers to the Transfer Agent. In order to
facilitate timely transmittal of redemption requests, Service Organizations
have established times by which redemption requests must be received by them.
Additional documentation may be required when deemed appropriate by a Service
Organization.
----------------
48
<PAGE>
APPENDIX
GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON ACCOUNT INFORMATION FORM
You are required by law to provide a Fund with your correct Taxpayer
Identification Number (TIN), regardless of whether you file tax returns.
Failure to do so may subject you to penalties. Failure to provide your correct
TIN and to sign your name in the Certification section of the Account
Information Form could result in withholding of 31% by a Fund for the federal
backup withholding tax on distributions, redemptions, exchanges and other
payments relating to your account.
Any tax withheld may be credited against taxes owed on your federal income
tax return.
If you do not have a TIN, you should apply for one immediately by contacting
your local office of the Social Security Administration or the Internal
Revenue Service (IRS). Backup withholding could apply to payments relating to
your account while you are awaiting receipt of a TIN.
Special rules apply for certain entities. For example, for an account
established under a Uniform Gifts or Transfers to Minors Act, the TIN of the
minor should be furnished.
If you have been notified by the IRS that you are subject to backup
withholding because you failed to report your interest and/or dividend income
on your tax return and you have not been notified by the IRS that such
withholding should cease, you must cross out item (2) in the Certification
section of the Account Information Form.
If you are an exempt recipient, you should furnish your TIN and certify your
exemption by signing the Certification section and writing "exempt" after your
signature. Exempt recipients include: corporations, tax-exempt pension plans
and IRA's, governmental agencies, financial institutions, registered
securities and commodities dealers and others.
If you are a nonresident alien or foreign entity, you must provide a
completed Form W-8 to the Fund in order to avoid backup withholding on certain
payments. Other payments to you may be subject to nonresident alien
withholding of up to 30%.
For further information regarding backup and nonresident alien withholding,
see Sections 3406, 1441 and 1442 of the Internal Revenue Code and consult your
tax adviser.
A-1
<PAGE>
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GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS
MANAGEMENT, L.P.
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET
MANAGEMENT INTERNATIONAL
133 PETERBOROUGH COURT
LONDON, ENGLAND EC4A 2BB
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN
1776 HERITAGE DRIVE
NORTH QUINCY, MASSACHUSETTS 02171
TOLL FREE (IN U.S.) . . . . . . . . 800-621-2550
FIPROSVC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS
FIXED INCOME FUNDS
- --------------------------------------------------------------------------------
PROSPECTUS
SERVICE SHARES
LOGO GOLDMAN
SACHS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY STATE.
SUBJECT TO COMPLETION -- JUNE 13, 1997
PART B
STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
GOLDMAN SACHS MUNICIPAL INCOME FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS HIGH YIELD FUND
(EACH A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is not a
prospectus. This Additional Statement describes each of the above-referenced
series of Goldman Sachs Trust. This Additional Statement should be read in
conjunction with the prospectus for the Institutional Shares of Goldman Sachs
Adjustable Rate Government Fund, Goldman Sachs Short Duration Government Fund,
Goldman Sachs Short Duration Tax-Free Fund, Goldman Sachs Government Income
Fund, Goldman Sachs Municipal Income Fund, Goldman Sachs Core Fixed Income Fund,
Goldman Sachs Global Income Fund and Goldman Sachs High Yield Fund, dated ____,
1997, as amended and/or supplemented from time to time (the "Prospectus"), which
may be obtained without charge from Goldman, Sachs & Co. by calling the
telephone number, or writing to one of the addresses, listed below.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Introduction B-3
<S> <C>
Other Investments and Practices B-10
Investment Restrictions B-53
Management B-70
Portfolio Transactions B-86
Shares of the Trust B-87
Net Asset Value B-92
Taxation B-93
Performance Information B-105
Other Information B-117
Financial Statements B-118
Appendix A 1-A
Appendix B 1-B
</TABLE>
The date of this Additional Statement is _______, 1997.
<PAGE>
<TABLE>
<S> <C>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN SACHS ASSET
ADVISER TO GOLDMAN SACHS MANAGEMENT INTERNATIONAL
SHORT DURATION TAX-FREE FUND, ADVISER TO GOLDMAN SACHS
GOLDMAN SACHS GOVERNMENT GLOBAL INCOME FUND
INCOME FUND, GOLDMAN SACHS 133 PETERBOROUGH COURT
MUNICIPAL INCOME FUND, LONDON EC4A 2BB, ENGLAND
GOLDMAN SACHS CORE FIXED
INCOME FUND AND GOLDMAN
SACHS HIGH YIELD FUND GOLDMAN, SACHS & CO.
ONE NEW YORK PLAZA DISTRIBUTOR
NEW YORK, NEW YORK 10004 85 BROAD STREET
NEW YORK, NY 10004
GOLDMAN SACHS FUNDS
MANAGEMENT, L.P.
ADVISER TO GOLDMAN SACHS GOLDMAN, SACHS & CO.
ADJUSTABLE RATE GOVERNMENT FUND TRANSFER AGENT
AND GOLDMAN SACHS SHORT DURATION 4900 SEARS TOWER
GOVERNMENT FUND CHICAGO, ILLINOIS 60606
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
</TABLE>
TOLL FREE (IN U.S.) .......800-621-2550
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") was formed under the laws of the
state of Delaware on January 28, 1997. The Trust is a successor to a
Massachusetts business trust that was merged with the Trust on April 30, 1997.
The Trust assumed its current name on March 22, 1991. The Trustees of the Trust
have authority under the Declaration of Trust to create and classify shares into
separate series and to classify and reclassify any series of shares into one or
more classes without further action by shareholders. Pursuant thereto, the
Trustees have created the following series, among others: Goldman Sachs
Adjustable Rate Government Fund ("Adjustable Rate Fund"), Goldman Sachs Core
Fixed Income Fund ("Core Fund"), Goldman Sachs Global Income Fund ("Global
Income Fund"), Goldman Sachs Government Income Fund ("Government Income Fund"),
Goldman Sachs Municipal Income Fund ("Municipal Income Fund"), Goldman Sachs
Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund"), Goldman Sachs
Short Duration Government Fund ("Short Duration Government Fund") and Goldman
Sachs High Yield Fund ("High Yield Fund") and 27 other series of shares.
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund, Short Duration Government
Fund and High Yield Fund are each sometimes referred to herein as a "Fund" and
collectively as the "Funds." Short Duration Government Fund, Short Duration
Tax-Free Fund and Core Fund are each authorized to issue six classes of shares:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares. Adjustable Rate Fund is authorized to issue
four classes of shares: Institutional Shares, Administration Shares, Service
Shares and Class A Shares. Government Income Fund, Municipal Income Fund,
Global Income Fund and High Yield Fund are authorized to issue five classes of
shares: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. Additional series may be added in the future from time to time.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Government Income Fund, Municipal Income Fund, Short Duration Tax-
Free Fund and High Yield Fund. Goldman Sachs Asset Management International
("GSAMI"), an affiliate of Goldman Sachs, serves as investment adviser to the
Global Income Fund. Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate
of Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI and GSFM are each sometimes
referred to herein as the "Adviser" and collectively herein as the "Advisers."
In addition, Goldman Sachs serves as each Fund's distributor and transfer agent.
Each Fund's custodian is State Street Bank and Trust Company.
Because each Fund's shares may be redeemed upon request of a
shareholder on any business day at net asset value, the Funds offer greater
liquidity than many competing investments, such as certificates of deposit and
direct investments in certain securities in which the respective Fund may
invest. However,
B-3
<PAGE>
unlike certificates of deposits, shares of the Funds are not insured by the
Federal Deposit Insurance Corporation.
The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of each Fund's investment objective and policies.
Investing in the Funds entails certain risks and there is no assurance that a
Fund will achieve its objective.
EXPERIENCED MANAGEMENT. Successfully creating and managing a
----------------------
diversified portfolio of securities requires professionals with extensive
experience. Goldman Sachs' highly skilled portfolio management team brings
together many years of experience in the analysis, valuation and trading of U.S.
and foreign fixed-income securities.
ADJUSTABLE RATE FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Fund and Short Duration Government Fund are both
designed for investors who seek a high level of high current income, relative
stability of principal and the high credit quality of securities issued or
guaranteed by the U.S. government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and accounting
burdens involved in direct investment.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short Duration Government Fund differently than the investments
normally purchased by such investors. Relative to U.S. Treasury and non-
fluctuating money market instruments, the market value of adjustable rate
mortgage securities in which Adjustable Rate and Short Duration Government Funds
may invest may be adversely affected by increases in market interest rates.
Conversely, decreases in market interest rates may result in less capital
appreciation for adjustable rate mortgage securities in relation to U.S.
Treasury and money market investments.
HIGH CURRENT INCOME. Adjustable Rate and Short Duration Government
-------------------
Funds seek a higher current yield than a money market fund or than that offered
by bank certificates of deposit and money market accounts. However, the
Adjustable Rate and Short Duration Government Funds do not maintain a constant
net asset value per share and are subject to greater fluctuations in the value
of their shares than a money market fund. Unlike bank certificates of deposit
and money market accounts, investments in shares of the Funds are not insured or
guaranteed by any government agency. Each of the Adjustable Rate and Short
Duration Government Funds seeks to provide such high current income without
sacrificing credit quality.
RELATIVE LOW VOLATILITY OF PRINCIPAL. Adjustable Rate Fund seeks to
-------------------------------------
minimize net asset value fluctuations by investing primarily in adjustable rate
mortgage pass-through securities and
B-4
<PAGE>
other mortgage securities with periodic interest rate resets, maintaining a
maximum duration of two years and a target duration equal to that of a six-month
to one-year U.S. Treasury security, and utilizing certain active management
techniques to seek to hedge interest rate risk. Short Duration Government Fund
seeks to minimize net asset value fluctuations by utilizing certain interest
rate hedging techniques and by maintaining a maximum duration of not more than
three years. The duration target of the Short Duration Government Fund is that
of the 2-year U.S. Treasury Security plus or minus .5 years. There is no
assurance that these strategies for the Adjustable Rate Fund and Short Duration
Government Fund will always be successful.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
-------------------------------------------
securities of the Government National Mortgage Association ("Ginnie Mae") and
other mortgage-backed securities may prefer professional management and
administration of their mortgage-backed securities portfolios. A well-
diversified portfolio of such securities emphasizing minimal fluctuation of net
asset value requires significant active management as well as significant
accounting and administrative resources. Members of Goldman Sachs' highly
skilled portfolio management team bring together many years of experience in the
analysis, valuation and trading of U.S. fixed-income securities.
GOVERNMENT INCOME FUND
Government Income Fund is designed for investors who seek the
relatively high current income, relative safety of principal and the high credit
quality of securities issued by the U.S. government or its agencies,
instrumentalities or sponsored enterprises, without incurring the administrative
and account burdens involved in direct investment.
Government Income Fund's overall returns are generally likely to move
in the same direction as interest rates. Therefore, when interest rates
decline, Government Income Fund's return is also likely to decline. In exchange
for accepting a higher degree of share price fluctuation, investors have the
potential to achieve a higher return from the Government Income Fund than from
shorter-term investments.
High Current Income. Government Income Fund is designed to have a
-------------------
higher current yield than a money market fund, since it can invest in longer-
term, higher yielding securities, and may utilize certain investment techniques
not available to a money market fund. Similarly, Government Income Fund's yield
is expected to exceed that offered by bank certificates of deposit and money
market accounts. However, Government Income Fund does not maintain a constant
net asset value per share and is subject to greater fluctuation in the value of
its shares than a money market fund. Unlike bank certificates of deposit and
money market accounts, investments in shares of Government Income Fund are not
insured or guaranteed by any government agency. Government Income Fund seeks
B-5
<PAGE>
to provide high current income without, however, sacrificing credit quality.
Liquidity. Because Government Income Fund's shares may be redeemed upon
---------
request of a shareholder on any business day at net asset value, Government
Income Fund offers greater liquidity than many competing investments such as
certificates of deposit and direct investments in certain securities in which
Government Income Fund may invest.
A Sophisticated Investment Process. Government Income Fund's
----------------------------------
investment process starts with a review of trends for the overall economy as
well as for different sectors of the U.S. government and mortgage-backed
securities markets. Goldman Sachs' portfolio managers then analyze yield
spreads, implied volatility and the shape of the yield curve. In planning the
Government Income Fund's portfolio investment strategies, the Adviser is able to
draw upon the economic and fixed-income research resources of Goldman Sachs.
The Adviser will use a sophisticated analytical process involving Goldman Sachs'
proprietary mortgage prepayment model and option-adjusted spread model to
structure and maintain the Government Income Fund's investment portfolio. In
determining the Government Income Fund's investment strategy and making market
timing decisions, the Adviser will have access to information from Goldman
Sachs' economists, fixed-income analysts and mortgage specialists.
Convenience of a Fund Structure. Government Income Fund eliminates
-------------------------------
many of the complications that direct ownership of U.S. government and mortgage-
backed securities entails. Government Income Fund automatically reinvests all
principal payments within the Fund and distributes only current income each
month, thereby conserving principal and eliminating the investor's need to
segregate and reinvest the principal portion of each payment on his own.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS
Short Duration Tax-Free Fund and Municipal Income Fund (the "Tax Exempt
Funds") are not money market funds. Each is designed for investors who seek the
tax benefits associated with investing in municipal securities and who are able
to accept greater risk with the possibility of higher returns than investors in
municipal money market funds. While municipal money market funds almost always
maintain a constant net asset value, they must meet stringent high quality
credit standards, their portfolios must be broadly diversified and their
portfolio securities must have remaining maturities of 397 days or less. An
example of an "eligible" investment for the Tax Exempt Funds is auction rate
municipal securities, which generally have higher yields than money market
municipal securities, but which typically are not eligible investments for
municipal money market funds.
In addition, unlike a municipal money market fund, the Tax Exempt
Funds' increased investment flexibility permits their portfolios to be more
easily adjusted to reflect the shape of the
B-6
<PAGE>
current yield curve as well as to respond to anticipated developments that might
affect the shape of the yield curve.
Investors who wish to invest in municipal securities may find that a
mutual fund structure offers some important advantages when compared to
investing in individual municipal securities, including:
. The ratings given to municipal securities by the rating
organizations are difficult to evaluate. For example, some
municipal securities with relatively low credit ratings have yields
comparable to municipal securities with much higher ratings. The
credit research professionals at Goldman Sachs closely follow
market events and are well positioned to judge current and expected
credit conditions of municipal issuers;
. Because of the relative inefficiency of the secondary market in
municipal securities, the value of an individual municipal security
is often difficult to determine. As such, investors may obtain a
wide range of different prices when asking for quotes from
different dealers. In addition, a dealer may have a large
inventory of a particular issue that it wants to reduce.
Obtaining the best overall prices can require extensive
negotiation, which is a function performed by the portfolio
manager;
. Market expertise is also an important consideration for municipal
investors, and because the Tax Exempt Funds take relatively large
positions in different securities, the Tax Exempt Funds may be able
to obtain more favorable prices in the municipal securities market
than investors with relatively small positions; and
. Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
designed to provide this diversification.
CORE FUND
Core Fund is designed for investors seeking a total return consisting
of both income and capital appreciation that exceeds the total return of the
Lehman Brothers Aggregate Bond Index, without incurring the administrative and
accounting burdens involved in direct investment. Such investors also prefer
liquidity, experienced professional management and administration, a
sophisticated investment process, and the convenience of a mutual fund
structure. Core Fund may be appropriate as part of a balanced investment
strategy consisting of stocks, bonds and cash or as a complement to positions in
other types of fixed-income investments.
B-7
<PAGE>
Core Fund's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fund's return is likely to increase. Conversely, when interest rates
increase, Core Fund's return is likely to decline. However, the Adviser
believes that, given the flexibility of managers to invest in a diversified
portfolio of securities, Core Fund's return is not likely to decline as quickly
as that of other fixed-income funds with a comparable average portfolio
duration. In exchange for accepting a higher degree of potential share price
fluctuation, investors have the opportunity to achieve a higher return from Core
Fund than from shorter-term investments.
A number of investment strategies will be used to achieve the Core
Fund's investment objective, including market sector selection, determination of
yield curve exposure, and issuer selection. In addition, the Adviser will
attempt to take advantage of pricing inefficiencies in the fixed-income markets.
Market sector selection is the underweighting or overweighting of one or more of
the five market sectors (i.e., U.S. Treasuries, U.S. government agencies,
corporate securities, mortgage-backed securities and asset-backed securities) in
which the Fund primarily invests. The decision to overweight or underweight a
given market sector is based on expectations of future yield spreads between
different sectors. Yield curve exposure strategy consists of overweighting or
underweighting different maturity sectors to take advantage of the shape of the
yield curve. Issuer selection is the purchase and sale of corporate securities
based on a corporation's current and expected credit standing. To take
advantage of price discrepancies between securities resulting from supply and
demand imbalances or other technical factors, the Fund may simultaneously
purchase and sell comparable, but not identical, securities. The Adviser will
have access to the research of, and proprietary technical models developed by,
Goldman Sachs and will apply quantitative and qualitative analysis in
determining the appropriate allocations among the categories of issuers and
types of securities.
A SOPHISTICATED INVESTMENT PROCESS. Core Fund will attempt to control
----------------------------------
its exposure to interest rate risk, including overall market exposure and the
spread risk of particular sectors and securities, through active portfolio
management techniques. Core Fund's investment process starts with a review of
trends for the overall economy as well as for different sectors of the fixed-
income securities markets. Goldman Sachs' portfolio managers then analyze
yield spreads, implied volatility and the shape of the yield curve. In planning
Core Fund's portfolio investment strategies, the Adviser is able to draw upon
the economic and fixed-income research resources of Goldman Sachs. The Adviser
will use a sophisticated analytical process including Goldman Sachs' proprietary
mortgage prepayment model and option-adjusted spread model to assist in
structuring and maintaining Core Fund's investment portfolio. In determining
Core Fund's investment strategy and making market timing decisions, the Adviser
will have
B-8
<PAGE>
access to input from Goldman Sachs' economists, fixed-income analysts and
mortgage specialists.
GLOBAL INCOME FUND
Global Income Fund is designed for investors seeking a combination of
high income, capital appreciation, stability of principal, experienced
professional management, flexibility and liquidity. However, investing in the
Fund involves certain risks and there is no assurance that the Fund will achieve
its investment objective.
In selecting securities for the Fund, portfolio managers consider such
factors as the security's duration, sector and credit quality rating as well as
the security's yield and prospects for capital appreciation. In determining the
countries and currencies in which the Fund will invest, the Fund's portfolio
mangers form opinions based primarily on the views of Goldman Sachs' economists
as well as information provided by securities dealers, including information
relating to factors such as interest rates, inflation, monetary and fiscal
policies, taxation, and political climate. The portfolio managers apply the
Black-Litterman Model (the "Model") to their views to develop a portfolio that
produces, in the view of the Adviser, the optimal expected return for a given
level of risk. The Model factors in the opinions of the portfolio managers,
adjusting for their level of confidence in such opinions, with the views implied
by an international capital asset pricing formula. The Model is also used to
maintain the level of portfolio risk within the guidelines established by the
Adviser.
High Income. Global Income Fund's portfolio managers will seek out
-----------
the highest yielding bonds in the global fixed-income market that meet the
Global Income Fund's credit quality standards and certain other criteria.
Capital Appreciation. Investing in the foreign bond markets offers
--------------------
the potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic strength.
However, there is a risk of capital depreciation as a result of unanticipated
interest rate and currency fluctuations.
Portfolio Management Flexibility. Global Income Fund is actively
--------------------------------
managed. The Fund's portfolio managers invest in countries that, in their
judgment, meet the Fund's investment guidelines and often have strong currencies
and stable economies and in securities that they believe offer favorable
performance prospects.
Relative Stability of Principal. Global Income Fund may be able to
-------------------------------
reduce principal fluctuation by investing in foreign countries with economic
policies or business cycles different from
B-9
<PAGE>
those of the United States and in foreign securities markets that do not
necessarily move in the same direction or magnitude as the U.S. market.
Investing in a broad range of U.S. and foreign fixed-income securities and
currencies reduces the dependence of the Fund's performance on developments in
any particular market to the extent that adverse events in one market are offset
by favorable events in other markets. The Fund's policy of investing primarily
in high quality securities may also reduce principal fluctuation. However,
there is no assurance that these strategies will always be successful.
Professional Management. Individual U.S. investors may prefer
-----------------------
professional management of their global bond and currency portfolios because a
well-diversified portfolio requires a large amount of capital and because the
size of the global market requires access to extensive resources and a
substantial commitment of time.
HIGH YIELD FUND
High Yield Fund's Investment Process. GSAM starts the investment
-------------------------------------
process with economic analysis based on research generated by the Goldman Sachs
Global Economic Research Group and others to determine broad growth trends,
industry-specific events and market forecasts. The market value of non-
investment grade fixed income securities tends to reflect individual
developments within a company to a greater extent than higher rated corporate
debt or Treasury bonds that react primarily to fluctuations in interest rates.
Therefore, determining the creditworthiness of issuers is critical. To that
end, the High Yield Fund's portfolio managers have access to Goldman, Sachs &
Co.'s highly regarded Credit Research and Global Investment Research
Departments, as well as analysis from the firm's High Yield Research Group, a
dedicated group of 14 professionals in the high yield and emerging market
corporate bond research area, consisting of industry and regional market
specialists. In addition, the Fund's portfolio managers may review the opinions
of the two largest independent credit rating agencies, Standard & Poor's Ratings
Group and Moody's Investors Services, Inc. High Yield Fund's portfolio managers
and credit analysts also conduct their own in-depth analysis of each issue
considered for inclusion in the Fund's portfolio. The portfolio managers and
credit analysts evaluate such factors as a company's competitive position, the
strength of its balance sheet, its ability to withstand economic downturns and
its potential to generate ample cash flow to service its debt. The ability to
accurately analyze a company's future cash flow by correctly anticipating the
impact of economic, industry-wide and specific events are critical to successful
high yield investing. GSAM's goal is to identify companies with the potential
to strengthen their balance sheets by increasing their earnings, reducing their
debt or effecting a turnaround. GSAM analyzes trends in a company's debt
picture (i.e., the level of its interest coverage) as well as new developments
in its capital structure on an ongoing basis. GSAM believes that this constant
reassessment is more
B-10
<PAGE>
valuable than relying on a "snapshot" view of a company's ability to service
debt at one or two points in time.
High Yield Fund's portfolio is diversified among different sectors and
industries on a global basis in an effort to reduce overall risk. While GSAM
will avoid excessive concentration in any one industry, the Fund's specific
industry weightings are the result of individual security selection. Emerging
market debt considered for the High Yield Fund's portfolio will be selected by
specialists knowledgeable about the political and economic structure of those
economies.
Return on and Risks of High Yield Securities. Over the past decade,
---------------------------------------------
high yield bonds have delivered consistently higher yields and total return (and
higher volatility) than either investment grade corporate bonds or U.S. Treasury
bonds. However, because these non-investment grade securities involve higher
risks in return for higher income, they are best suited to long-term investors
who are financially secure enough to withstand volatility and the risks
associated with such investments. See "Other Investments and Practices."
Different types of fixed income securities may react differently to changes in
the economy. High yield bonds, like stocks, tend to perform best when the
economy is strong, inflation is low and companies experience healthy profits,
which can lead to higher stock prices and higher credit ratings. Government
bonds are likely to appreciate more in a weaker economy when interest rates are
declining. In certain types of markets, adding some diversification in the high
yield asset class may help to increase returns and decrease overall portfolio
risk.
For high yield, non-investment grade securities, as for most
investments, there is a direct relationship between risk and return. Along with
their potential to deliver higher yields and greater capital appreciation than
most other types of fixed income securities, high yield securities are subject
to higher risk of loss, greater volatility and are considered speculative by
traditional investment standards. The most significant risk associated with
high yield securities is credit risk: the risk that the company issuing a high
yield security may have difficulty in meeting its principal and/or interest
payments on a timely basis. As a result, extensive credit research and
diversification are essential factors in managing risk in the high yield arena.
To a lesser extent, high yield bonds are also subject to interest rate risk:
when interest rates increase, the value of fixed income securities tends to
decline.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. government securities ("U.S. Government
Securities"), which are obligations issued or guaranteed by the U.S. government
and its agencies, instrumentalities or sponsored enterprises. Some U.S.
Government Securities (such as
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<PAGE>
Treasury bills, notes and bonds, which differ only in their interest rates,
maturities and times of issuance) are supported by the full faith and credit of
the United States of America. Others, such as obligations issued or guaranteed
by U.S. government agencies, instrumentalities or sponsored enterprises, are
supported either by (a) the full faith and credit of the U.S. government (such
as securities of the Small Business Administration), (b) the right of the issuer
to borrow from the Treasury (such as securities of Federal Home Loan Banks), (c)
the discretionary authority of the U.S. government to purchase the agency's
obligations (such as securities of Federal National Mortgage Association
("Fannie Mae")) or (d) only the credit of the issuer (such as securities of the
Financing Corporation). The U.S. government is under no legal obligation, in
general, to purchase the obligations of its agencies, instrumentalities or
sponsored enterprises. No assurance can be given that the U.S. government will
provide financial support to the U.S. government agencies, instrumentalities or
sponsored enterprises in the future.
U.S. Government Securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, or its agencies, instrumentalities or sponsored
enterprises. U.S. Government Securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a substantial secondary market, such participations are regarded as illiquid.
Each Fund may also purchase U.S. Government Securities in private placements,
subject to the Fund's limitation on investment in illiquid securities.
The Funds may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the separate trading of registered
interest and principal of securities program ("STRIPS").
CUSTODIAL RECEIPTS
Each Fund may acquire custodial receipts in respect of U.S. Government
Securities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). For certain securities law purposes, custodial receipts
are not considered U.S. Government Securities.
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
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<PAGE>
Adjustable Rate, Short Duration Government, Core, Global Income, High
Yield and Government Income Funds (collectively, the "Taxable Funds") may each
invest in mortgage loans and mortgage pass-through securities and other
securities representing an interest in or collateralized by adjustable and
fixed-rate mortgage loans ("Mortgage-Backed Securities").
GENERAL CHARACTERISTICS. Each mortgage pool underlying Mortgage-
-----------------------
Backed Securities consists of mortgage loans evidenced by promissory notes
secured by first mortgages or first deeds of trust or other similar security
instruments creating a first lien on owner occupied and non-owner occupied one-
unit to four-unit residential properties, multi-family (i.e., five or more)
properties, agriculture properties, commercial properties and mixed use
properties (the "Mortgaged Properties"). The Mortgaged Properties may consist
of detached individual dwelling units, multi-family dwelling units, individual
condominiums, townhouses, duplexes, triplexes, fourplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
The Mortgaged Properties may also include residential investment properties and
second homes.
The investment characteristics of adjustable and fixed rate Mortgage-
Backed Securities differ from those of traditional fixed-income securities. The
major differences include the payment of interest and principal on Mortgage-
Backed Securities on a more frequent (usually monthly) schedule, and the
possibility that principal may be prepaid at any time due to prepayments on the
underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed-income securities. As a result, a faster than expected
prepayment rate will reduce both the market value and the yield to maturity from
those which were anticipated. A prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity and market value.
To the extent that the Funds invest in Mortgage-Backed Securities, the Advisers
will seek to manage these potential risks by investing in a variety of Mortgage-
Backed Securities and by using certain hedging techniques.
ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). ARMs generally provide for a
---------------------------------------
fixed initial mortgage interest rate for a specified period of time.
Thereafter, the interest rates (the "Mortgage Interest Rates") may be subject to
periodic adjustment based on changes in the applicable index rate (the "Index
Rate"). The adjusted rate would be equal to the Index Rate plus a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some
mortgagors may find difficult to make. However, certain ARMs may provide that
the Mortgage Interest Rate may not be adjusted to a rate above an applicable
lifetime maximum rate or below an applicable lifetime minimum rate for such ARM.
Certain ARMs may also be subject to limitations on the maximum amount by which
the
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<PAGE>
Mortgage Interest Rate may adjust for any single adjustment period (the "Maximum
Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may provide instead or
as well for limitations on changes in the monthly payment on such ARMs.
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In
the event that a monthly payment is not sufficient to pay the interest accruing
on a Negatively Amortizing ARM, any such excess interest is added to the
principal balance of the loan, causing negative amortization, and will be repaid
through future monthly payments. It may take borrowers under Negatively
Amortizing ARMs longer periods of time to build up equity and may increase the
likelihood of default by such borrowers. In the event that a monthly payment
exceeds the sum of the interest accrued at the applicable Mortgage Interest Rate
and the principal payment which would have been necessary to amortize the
outstanding principal balance over the remaining term of the loan, the excess
(or "accelerated amortization") further reduces the principal balance of the
ARM. Negatively Amortizing ARMs do not provide for the extension of their
original maturity to accommodate changes in their Mortgage Interest Rate. As a
result, unless there is a periodic recalculation of the payment amount (which
there generally is), the final payment may be substantially larger than the
other payments. These limitations on periodic increases in interest rates and
on changes in monthly payments protect borrowers from unlimited interest rate
and payment increases.
There are two main categories of indices which provide the basis for
rate adjustments on ARMs: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year,
three-year and five-year constant maturity Treasury rates, the three-month
Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term
Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds, the
National Median Cost of Funds, the one-month, three-month, six-month or one-year
London Interbank Offered Rate, the prime rate of a specific bank or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury
rate, closely mirror changes in market interest rate levels. Others, such as
the 11th District Federal Home Loan Bank Cost of Funds index, tend to lag behind
changes in market rate levels and tend to be somewhat less volatile. The degree
of volatility in the market value of each Taxable Fund's portfolio and therefore
in the net asset value of each Taxable Fund's shares will be a function of the
length of the interest rate reset periods and the degree of volatility in the
applicable indices.
FIXED-RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans
-------------------------
included in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple
interest at fixed annual rates and have original terms to maturity ranging from
5 to 40 years. Fixed-Rate Mortgage Loans generally provide for monthly payments
of principal and interest in substantially equal installments for the term of
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<PAGE>
the mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain Fixed-Rate Mortgage Loans provide for a large final "balloon"
payment upon maturity.
LEGAL CONSIDERATIONS OF MORTGAGE LOANS. The following is a discussion
--------------------------------------
of certain legal and regulatory aspects of the mortgage loans in which the
Taxable Funds may invest. These regulations may impair the ability of a
mortgage lender to enforce its rights under the mortgage documents. These
regulations may adversely affect the Funds' investments in Mortgage-Backed
Securities (including those issued or guaranteed by the U.S. government, its
agencies or instrumentalities) by delaying the Funds' receipt of payments
derived from principal or interest on mortgage loans affected by such
regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
-----------
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate proceeds of the sale of foreclosed property may not equal the
amounts owed on the Mortgage-Backed Securities.
Furthermore, courts in some cases have imposed general equitable principles
upon foreclosure generally designed to relieve the borrower from the legal
effect of default and have required lenders to undertake affirmative and
expensive actions to determine the causes for the default and the
likelihood of loan reinstatement.
2. Rights of Redemption. In some states, after foreclosure of a mortgage
--------------------
loan, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property, which right may diminish the
mortgagee's ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may
also reduce the monthly payments due under such mortgage loan, change the
rate of interest, reduce the principal balance of the loan to the then-
current appraised value of the related mortgaged property, alter the
mortgage loan repayment schedule and grant priority of certain liens over
the lien of the mortgage loan. If a court relieves a borrower's obligation
to repay amounts otherwise due on a mortgage loan, the mortgage loan
servicer will not be required to advance such amounts, and any loss may be
borne by the holders of securities backed by such loans. In addition,
numerous federal and state consumer protection laws impose
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<PAGE>
penalties for failure to comply with specific requirements in connection
with origination and servicing of mortgage loans.
4. "Due-on-Sale" Provisions. Fixed-rate mortgage loans may contain a so-
------------------------
called "due-on-sale" clause permitting acceleration of the maturity of the
mortgage loan if the borrower transfers the property. The Garn-St. Germain
Depository Institutions Act of 1982 sets forth nine specific instances in
which no mortgage lender covered by that Act may exercise a "due-on-sale"
clause upon a transfer of property. The inability to enforce a "due-on-
sale" clause or the lack of such a clause in mortgage loan documents may
result in a mortgage loan being assumed by a purchaser of the property that
bears an interest rate below the current market rate.
5. Usury Laws. Some states prohibit charging interest on mortgage loans in
----------
excess of statutory limits. If such limits are exceeded, substantial
penalties may be incurred and, in some cases, enforceability of the
obligation to pay principal and interest may be affected.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. There are several types
------------------------------------------------
of guaranteed Mortgage-Backed Securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), other collateralized mortgage obligations and stripped
Mortgage-Backed Securities. The Taxable Funds are permitted to invest in other
types of Mortgage-Backed Securities that may be available in the future to the
extent consistent with their respective investment policies and objectives.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States authorized to guarantee the timely payment
of the principal of and interest on certificates that are based on and backed
by a pool of mortgage loans insured by the Federal Housing Administration ("FHA
Loans"), or guaranteed by the Veterans Administration ("VA Loans"), or by pools
of other eligible mortgage loans. In order to meet its obligations, Ginnie Mae
is authorized to borrow from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the U.S. Congress. Each Fannie Mae Certificate is
issued and guaranteed by Fannie Mae and represents an undivided interest in a
pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool consists of
residential mortgage loans ("Mortgage Loans") either previously owned by Fannie
Mae or purchased by it in connection with the formation of the Pool. The
Mortgage Loans may be either conventional Mortgage Loans (i.e., not insured or
guaranteed by any U.S. government agency) or Mortgage Loans that are either
insured by the FHA or guaranteed by the VA. However, the Mortgage Loans in
Fannie Mae Pools are
B-16
<PAGE>
primarily conventional Mortgage Loans. The lenders originating and servicing
the Mortgage Loans are subject to certain eligibility requirements established
by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Corporation ("Freddie
------------------------
Mac") is a publicly held U.S. government sponsored enterprise. The principal
activity of Freddie Mac currently is the purchase of first lien, conventional,
residential mortgage loans and participation interests in such mortgage loans
and their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a
group of mortgage loans or participations in mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one- to four-family residential properties
or multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac
Certificate group may include whole loans, participation interests in whole
loans, undivided interests in whole loans and participations comprising another
Freddie Mac Certificate group.
CONVENTIONAL MORTGAGE LOANS. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-
rate mortgage loans with original terms to maturity of between five and thirty
years. Substantially all of these mortgage loans are secured by first liens on
one- to four-family residential properties or multi-family projects. Each
mortgage loan must meet the applicable standards set forth in the law creating
Freddie Mac or Fannie Mae. A Freddie Mac Certificate
B-17
<PAGE>
group may include whole loans, participation interests in whole loans, undivided
interests in whole loans and participations comprising another Freddie Mac
Certificate group.
MORTGAGE PASS-THROUGH SECURITIES. The Taxable Funds may invest in
--------------------------------
government guaranteed mortgage pass-through securities ("Mortgage Pass-
Throughs"), that are fixed or adjustable rate Mortgage-Backed Securities which
provide for monthly payments that are a "pass-through" of the monthly interest
and principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans, net of any fees or other amounts paid to
any guarantor, administrator and/or servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in one
---------------------------
or more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate.
Generally, each certificate will evidence the specified interest of the holder
thereof in the payments of principal or interest or both in respect of the
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be
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<PAGE>
distributed pro rata to certificate-holders as principal of such mortgage loan
--- ----
when paid by the mortgagor in subsequent monthly payments or at maturity.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
---------------------------------------------------------------------
OBLIGATIONS. Each Taxable Fund may invest in multiple class securities
- -----------
including collateralized mortgage obligations ("CMOs") and REMIC Certificates
issued by U.S. government agencies, instrumentalities (such as Fannie Mae) and
sponsored enterprises (such as Freddie Mac) or, in the case of Core, Global and
Government Income Funds, by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class Mortgage-Backed
Securities represent direct ownership interests in, a pool of mortgage loans or
Mortgage-Backed Securities the payments on which are used to make payments on
the CMOs or multiple class Mortgage-Backed Securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class Mortgage-Backed Securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed Mortgage-Backed Securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution
B-19
<PAGE>
date. Principal prepayments on the Mortgage Loans or the Mortgage Assets
underlying the CMOs or REMIC Certificates may cause some or all of the classes
of CMOs or REMIC Certificates to be retired substantially earlier than their
final scheduled distribution dates. Generally, interest is paid or accrues on
all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class certificates ("PAC Certificates"), which are parallel pay
REMIC Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates, even
though all other principal payments and prepayments of the Mortgage Assets are
then required to be applied to one or more other classes of the Certificates.
The scheduled principal payments for the PAC Certificates generally have the
highest priority on each payment date after interest due has been paid to all
classes entitled to receive interest currently. Shortfalls, if any, are added to
the amount payable on the next payment date. The PAC Certificate payment
schedule is taken into account in calculating the final distribution date of
each class of PAC. In order to create PAC tranches, one or more tranches
generally must be created that absorb most of the volatility in the underlying
Mortgage Assets. These tranches tend to have market prices and yields that are
much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The Taxable Funds may invest in
-----------------------------------
Stripped Mortgage-Backed Securities ("SMBS"), which are derivative multi-class
mortgage securities, issued or guaranteed by the U.S. government, its agencies
or instrumentalities. Core Fund, Government Income Fund and Global Fund may
also invest in
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<PAGE>
privately-issued SMBS. Although the market for such securities is increasingly
liquid, privately-issued SMBS may not be readily marketable and will be
considered illiquid for purposes of each Fund's limitation on investments in
illiquid securities. The Adviser may determine that SMBS which are U.S.
Government Securities are liquid for purposes of each Fund's limitation on
investments in illiquid securities in accordance with procedures adopted by the
Board of Trustees. The market value of the class consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on a class of SMBS that receives all or most of the
interest from Mortgage Assets are generally higher than prevailing market yields
on other Mortgage-Backed Securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
RATINGS. The ratings assigned by a rating organization to Mortgage Pass-
-------
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things,
payment guarantees, letters of credit, pool insurance, subordination, or any
combination thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage
B-21
<PAGE>
Pass-Throughs, one or more classes of certificates may be subordinate
certificates which provide that the rights of the subordinate certificate-
holders to receive any or a specified portion of distributions with respect to
the underlying mortgage loans may be subordinated to the rights of the senior
certificate-holders. If so structured, the subordination feature may be
enhanced by distributing to the senior certificate-holders on certain
distribution dates, as payment of principal, a specified percentage (which
generally declines over time) of all principal payments received during the
preceding prepayment period ("shifting interest credit enhancement"). This will
have the effect of accelerating the amortization of the senior certificates
while increasing the interest in the trust fund evidenced by the subordinate
certificates. Increasing the interest of the subordinate certificates relative
to that of the senior certificates is intended to preserve the availability of
the subordination provided by the subordinate certificates. In addition,
because the senior certificate-holders in a shifting interest credit enhancement
structure are entitled to receive a percentage of principal prepayments which is
greater than their proportionate interest in the trust fund, the rate of
principal prepayments on the mortgage loans will have an even greater effect on
the rate of principal payments and the amount of interest payments on, and the
yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due to them and
will protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event that the Reserve Fund is depleted before
the subordinated amount is reduced to zero, senior certificate-holders will
nevertheless have a preferential right to receive current distributions from the
mortgage pool to the extent of the then outstanding subordinated amount. Unless
otherwise specified, until the subordinated amount is reduced to zero, on any
distribution date any amount otherwise distributable to the subordinate
certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--- ----
all certificate-holders
B-22
<PAGE>
in proportion to their respective outstanding interests in the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in addition to the
------------------------------
credit enhancement afforded by subordination, credit enhancement for Mortgage
Pass-Throughs may be provided by mortgage insurance, hazard insurance, by the
deposit of cash, certificates of deposit, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
VOLUNTARY ADVANCES. Generally, in the event of delinquencies in payments
------------------
on the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees
to make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
OPTIONAL TERMINATION. Generally, the servicer may, at its option with
--------------------
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
ASSET-BACKED SECURITIES
Core, Government Income, High Yield and Global Income Funds may invest in
asset-backed securities. Such securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During
periods of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, a Fund's ability to
maintain positions in such securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed
B-23
<PAGE>
securities. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in the underlying automobiles. Therefore, there is the possibility
that, in some cases, recoveries on repossessed collateral may not be available
to support payments on these securities.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, deferred interest and capital
appreciation bonds and pay-in-kind ("PIK") securities. Zero coupon, deferred
interest and capital appreciation bonds are debt securities issued or sold at a
discount from their face value and which do not entitle the holder to any
periodic payment of interest prior to maturity or a specified date. The
original issue discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, the liquidity of the security and
the perceived credit quality of the issuer. These securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interests in such stripped debt obligations or coupons. The market prices of
zero coupon, deferred interest, capital appreciation bonds and PIK securities
generally are more volatile than the market prices of interest bearing
securities and are likely to respond to a greater degree to changes in interest
rates than interest bearing securities having similar maturities and credit
quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds and deferred interest bonds, PIK securities are designed to give an
issuer flexibility in managing cash flow. PIK securities that are debt
securities can either be senior or subordinated debt and generally trade flat
(i.e., without accrued interest). The trading price of PIK debt securities
generally reflects the market value of the underlying debt plus an amount
representing accrued interest since the last interest payment.
Zero coupon, deferred interest, capital appreciation and PIK securities
involve the additional risk that, unlike securities that periodically pay
interest to maturity, a Fund will realize no cash until a specified future
payment date unless a portion of such securities is sold and, if the issuer of
such securities defaults, a Fund may obtain no return at all on its investment.
In addition, even though such securities do not provide for the payment of
current interest in cash, the Funds are nonetheless required to accrue income on
such investments for each taxable year and generally are required to distribute
such accrued amounts (net of deductible expenses, if any) to avoid being subject
to tax. Because no cash is generally received at the time of the accrual, a
Fund may be required to liquidate other portfolio securities to
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<PAGE>
obtain sufficient cash to satisfy federal tax distribution requirements
applicable to the Fund. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which each Fund may
invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at predesignated
periods in response to changes in the market rate of interest on which the
interest rate is based. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation. The absence of an unconditional
demand feature on variable and floating rate municipal securities exercisable
within seven days would, and the failure of the issuer or a third party to honor
its obligations under a demand or put feature might, require a variable or
floating rate obligation to be treated as illiquid for purposes of the Tax
Exempt Funds' limitation on illiquid investments.
Each Fund may invest in "leveraged" inverse floating rate debt instruments
("inverse floaters"), including "leveraged inverse floaters." The interest rate
on inverse floaters resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse floater, the greater
the volatility of its market value. Accordingly, the duration of an inverse
floater may exceed its stated final maturity. Certain inverse floaters may be
deemed to be illiquid securities for purposes of each Fund's limitation on
illiquid investments.
CORPORATE DEBT OBLIGATIONS
Core, Global Income, Government Income and High Yield Funds may invest in
corporate debt obligations, including obligations of industrial, utility and
financial issuers. Corporate debt obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
High Yield Securities. Bonds rated BB or below by Standard & Poor's
---------------------
Ratings Group (Standard & Poor's) or Ba or below by Moody's Investor Service,
Inc. ("Moody's") (or comparable rated and unrated securities) are commonly
referred to as "junk bonds" and are considered speculative; the ability of their
issuers to make principal and interest payments may be questionable. In some
cases, such bonds may be highly speculative, have poor prospects
B-25
<PAGE>
for reaching investment grade standing and be in default. As a result,
investment in such bonds will entail greater risks than those associated with
investment grade bonds (i.e., bonds rated AAA, AA, A or BBB by Standard and
Poor's or Aaa, Aa, A or Baa by Moody's). Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality debt securities, and the ability of a Fund to achieve its investment
objective may, to the extent of its investments in high yield securities, be
more dependent upon such creditworthiness analysis than would be the case if the
Fund were investing in higher quality securities. See Appendix B for a
description of the corporate bond and preferred stock ratings by Standard &
Poor's, Moody's, Fitch Investors Service Corp. and Duff & Phelps.
The amount of high yield, fixed income securities proliferated in the 1980s
and early 1990s as a result of increased merger and acquisition and leveraged
buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tends to reflect
those individual corporate developments to a greater extent than do those of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Issuers of such high yield securities may not be able
to make use of more traditional methods of financing and their ability to
service debt obligations may be more adversely affected than issuers of higher
rated securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These non-
investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the junk bond
market and investor perceptions regarding lower-rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which High Yield Fund
invests, the yields and prices of such securities may tend to fluctuate more
than those for higher-rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income
B-26
<PAGE>
securities fluctuate in response to the general level of interest rates.
Fluctuations in the prices of portfolio securities subsequent to their
acquisition will not affect cash income from such securities but will be
reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace such
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<PAGE>
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if the High Yield Fund experiences unexpected net
redemptions of the High Yield Fund's shares, it may be forced to sell its
higher-rated securities, resulting in a decline in the overall credit quality of
the High Yield Fund's portfolio and increasing the exposure of the High Yield
Fund to the risks of high yield securities. The High Yield Fund may also incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Funds may each invest
in obligations issued or guaranteed by United States and foreign banks
(Government Income Fund may only invest in U.S. dollar denominated securities).
Bank obligations, including without limitation time deposits, bankers'
acceptances and certificates of deposit, may be general obligations of the
parent bank or may be obligations only of the issuing branch pursuant to the
terms of the specific obligations or government regulation.
Banks are subject to extensive governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. Foreign banks are subject to different regulations and are
generally permitted to engage in a wider variety of activities than U.S. banks.
In addition, the profitability of the banking industry is largely dependent upon
the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
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
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<PAGE>
anticipation notes and construction loan notes. Tax anticipation notes are
issued to finance the working capital needs of governments. Generally, they are
issued in anticipation of various tax revenues, such as income, sales, property,
use and business taxes, and are payable from these specific future taxes.
Revenue anticipation notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under federal revenue sharing
programs. Bond anticipation notes are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the long-term bonds
then provide the funds needed for repayment of the notes. Tax and revenue
anticipation notes combine the funding sources of both tax anticipation notes
and revenue anticipation notes. Construction Loan Notes are sold to provide
construction financing. These notes are secured by mortgage notes insured by
the FHA; however, the proceeds from the insurance may be less than the economic
equivalent of the payment of principal and interest on the mortgage note if
there has been a default. The obligations of an issuer of municipal notes are
generally secured by the anticipated revenues from taxes, grants or bond
financing. An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or that
refinancing will be otherwise unavailable.
Tax-Exempt Commercial Paper. Issues of commercial paper typically
---------------------------
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by state and local governments and their agencies to finance working
capital needs of municipalities or to provide interim construction financing and
are paid from general revenues of municipalities or are refinanced with long-
term debt. In most cases, tax-exempt commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
Pre-Refunded Municipal Securities. The principal of and interest on pre-
---------------------------------
refunded Municipal Securities are no longer paid from the original revenue
source for the securities. Instead, the source of such payments is typically
an escrow fund consisting of U.S. Government Securities. The assets in the
escrow fund are derived from the proceeds of refunding bonds issued by the same
issuer as the pre-refunded Municipal Securities. Issuers of Municipal
Securities use this advance refunding technique to obtain more favorable terms
with respect to securities that are not yet subject to call or redemption by the
issuer. For example, advance refunding enables an issuer to refinance debt at
lower market interest rates, restructure debt to improve cash flow or eliminate
restrictive covenants in the indenture or other governing instrument for the
pre-refunded Municipal Securities. However, except for a change in the revenue
source from which principal and interest payments are made, the pre-refunded
Municipal Securities remain outstanding on their original terms until they
mature or are redeemed by the issuer. Pre-refunded Municipal Securities are
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<PAGE>
usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free, Municipal Income, High
----------------------
Yield, and Core Funds may each invest in certain types of Municipal Securities,
generally referred to as industrial development bonds (and referred to under
current tax law as private activity bonds), which are issued by or on behalf of
public authorities to obtain funds to provide privately operated housing
facilities, airport, mass transit or port facilities, sewage disposal, solid
waste disposal or hazardous waste treatment or disposal facilities and certain
local facilities for water supply, gas or electricity. Other types of
industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such
issues. A Tax Exempt Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fund's distributions of any tax-exempt interest it receives
from any source will be taxable for regular federal income tax purposes.
Tender Option Bonds. A tender option bond is a Municipal Security
-------------------
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term, tax-exempt rates. The bond is typically issued with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, which grants the security holders the option, at periodic
intervals, to tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the securities,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults or a significant downgrade in the credit
rating assigned to the issuer of the bond. The liquidity of a tender option bond
is a function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Fund's credit quality
requirements, to be inadequate and the bond would not otherwise be readily
marketable. The Tax Exempt Funds intend to invest in tender option bonds the
interest on which will, in the opinion of bond counsel, counsel for the issuer
of interests therein or counsel selected by the Adviser, be exempt from regular
federal income tax. However, because there can be no assurance that the
Internal Revenue Service (the "Service") will agree with such counsel's
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opinion in any particular case, there is a risk that a Tax Exempt Fund will not
be considered the owner of such tender option bonds and thus will not be
entitled to treat such interest as exempt from such tax. Additionally, the
federal income tax treatment of certain other aspects of these investments,
including the proper tax treatment of tender option bonds and the associated
fees in relation to various regulated investment company tax provisions is
unclear. The Tax Exempt Funds intend to manage their portfolio in a manner
designed to eliminate or minimize any adverse impact from the tax rules
applicable to these investments.
Auction Rate Securities. The Core, High Yield, Municipal Income and Short
-----------------------
Duration Tax-Free Funds may invest in auction rate securities. Auction rate
securities consist of auction rate Municipal Securities and auction rate
preferred securities issued by closed-end investment companies that invest
primarily in Municipal Securities (collectively, "auction rate securities").
Provided that the auction mechanism is successful, auction rate securities
usually permit the holder to sell the securities in an auction at par value at
specified intervals. The dividend is reset by "Dutch" auction in which bids are
made by broker-dealers and other institutions for a certain amount of securities
at a specified minimum yield. The dividend rate set by the auction is the
lowest interest or dividend rate that covers all securities offered for sale.
While this process is designed to permit auction rate securities to be traded at
par value, there is some risk that an auction will fail due to insufficient
demand for the securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Code.
A Fund's investments in auction rate securities of closed-end funds are
subject to the limitations prescribed by the Act and certain state securities
regulations. The Funds will indirectly bear their proportionate share of any
management and other fees paid by such closed-end funds in addition to the
advisory fees payable directly by the Funds.
Insurance. The Funds may invest in "insured" tax-exempt Municipal
---------
Securities. Insured Municipal Securities are securities for which scheduled
payments of interest and principal are guaranteed by a private (nongovernmental)
insurance company. The insurance only entitles a Fund to receive the face or
par value of the securities held by the Fund. The insurance does not guarantee
the market value of the Municipal Securities or the value of the shares of a
Fund.
The Funds may utilize new issue or secondary market insurance. A new issue
insurance policy is purchased by a bond issuer who wishes to increase the credit
rating of a security. By paying a
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premium and meeting the insurer's underwriting standards, the bond issuer is
able to obtain a high credit rating (usually, Aaa from Moody's or AAA from
Standard & Poor's) for the issued security. Such insurance is likely to
increase the purchase price and resale value of the security. New issue
insurance policies are non-cancelable and continue in force as long as the bonds
are outstanding.
A secondary market insurance policy is purchased by an investor (such as a
Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. The Funds may purchase bonds
which have already been insured under a secondary market insurance policy by a
prior investor, or the Funds may directly purchase such a policy from insurers
for bonds which are currently uninsured.
An insured Municipal Security acquired by a Fund will typically be covered
by only one of the above types of policies. All of the insurance policies used
by a Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by Standard & Poor's. The Municipal Securities
invested in by the High Yield Fund will not be subject to this requirement.
Standby Commitments. In order to enhance the liquidity of Municipal
-------------------
Securities, the Tax Exempt Funds may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a "standby commitment" or liquidity put, depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
a Tax Exempt Fund. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by a Tax Exempt Fund. In considering whether a security meets a Tax Exempt
Fund's quality standards, the particular Tax Exempt Fund will look to the
creditworthiness of the party providing the Fund with the right to sell as well
as the quality of the security itself.
The Tax Exempt Funds value Municipal Securities which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining a Tax Exempt
Fund's net asset value. The cost of a standby commitment is carried as
unrealized depreciation from the time of purchase until it is exercised or
expires. Since the value of a standby commitment is dependent on the ability of
the standby commitment writer to meet its obligation to repurchase, a Tax Exempt
Fund's policy is to enter into standby
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commitment transactions only with banks, brokers or dealers which present a
minimal risk of default.
The Adviser understands that the Service has issued a favorable revenue
ruling to the effect that, under specified circumstances, a registered
investment company will be the owner of tax-exempt municipal obligations
acquired subject to a put option. The Service has subsequently announced that it
will not ordinarily issue advance ruling letters as to the identity of the true
owner of property in cases involving the sale of securities or participation
interests therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax Exempt Funds intend to take the position that they are the owner
of any Municipal Securities acquired subject to a standby commitment or acquired
or held with certain other types of put rights and that tax-exempt interest
earned with respect to such Municipal Securities will be tax-exempt in their
hands. There is no assurance that standby commitments will be available to the
Tax Exempt Funds nor have the Tax Exempt Funds assumed that such commitments
would continue to be available under all market conditions.
Call Risk and Reinvestment Risk. Municipal Securities may include "call"
-------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in a Fund's portfolio are called prior
to the maturity, the Fund will be required to reinvest the proceeds on such
securities at an earlier date and may be able to do so only at lower yields,
thereby reducing the Fund's return on its portfolio securities.
FOREIGN INVESTMENTS
Core, High Yield and Global Income Funds may invest in securities of
foreign issuers and in fixed-income securities quoted or denominated in a
currency other than U.S. dollars. Investing in the securities of foreign
issuers involves certain special considerations, including those set forth
below, which are not typically associated with investing in U.S. issuers. Since
investments in the securities of foreign issuers may involve currencies of
foreign countries, and since Core, High Yield and Global Income Funds may
temporarily hold funds in bank deposits in foreign currencies during completion
of investment programs, Core, High Yield and Global Income Funds may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations and may incur costs in connection with conversions between various
currencies.
Foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. In addition, there may be less publicly available
information about a foreign company than about a comparable U.S. company.
Volume and
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liquidity in most foreign bond markets are less than in the United States
markets and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Commissions on foreign
securities exchanges are often fixed and generally are higher than negotiated
commissions or dealer mark-ups in the U.S. markets, although each Fund endeavors
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of securities markets
and exchanges, brokers, dealers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlement of portfolio transactions or loss of certificates for portfolio
securities.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of Core Fund, High Yield Fund or Global
Income Fund is uninvested and no return is earned thereon. The inability of
Core Fund, High Yield Fund or Global Income Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to Core Fund, High Yield Fund
or Global Income Fund due to subsequent declines in value of the portfolio
securities, or, if Core Fund, High Yield Fund or Global Income Fund has entered
into a contract to sell the securities, could result in possible liability to
the purchaser. In addition, with respect to certain foreign countries, there is
the possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could adversely affect Core, High
Yield or Global Income Funds' investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources self-sufficiency and balance of payments
position.
INVESTING IN EMERGING COUNTRIES
Market Characteristics. Debt securities of most emerging markets issuers
----------------------
may be less liquid and are generally subject to greater price volatility than
securities of issuers in the U.S. and other developed countries. The markets
for securities of emerging markets may have substantially less volume than the
market for similar securities in the U.S. and may not be able to absorb, without
price disruptions, a significant increase in trading volume or trade size.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The less liquid the market, the more
difficult it may be for the Fund to accurately price its portfolio securities or
to
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dispose of such securities at the times determined to be appropriate. The risks
associated with reduced liquidity may be particularly acute to the extent that a
Fund needs cash to meet redemption requests, to pay dividends and other
distributions or to pay its expenses.
Securities markets of emerging markets may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and settlement
could result in temporary periods when a portion of the Fund's assets is
uninvested and no return is earned thereon. Inability to make intended security
purchases could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in
emerging markets may be higher than in the U.S. and other developed securities
markets. As legal systems in emerging markets develop, foreign investors may be
adversely affected by new or amended laws and regulations. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Economic, Political and Social Factors. Emerging markets may be subject to
--------------------------------------
a greater degree of economic, political and social instability than the U.S.,
Japan and most Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes or attempted changes
in government through extra-constitutional means; (ii) popular unrest associated
with demands for improved economic, political and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection and conflict. Many emerging
markets have experienced in the past, and continue to experience, high rates of
inflation. In certain countries inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate environment and
sharply eroding the value of outstanding financial assets in those countries.
The economies of many emerging markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging markets may differ unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
Restrictions on Investment and Repatriation. Certain emerging markets
-------------------------------------------
require governmental approval prior to investments by
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foreign persons or limit investments by foreign persons to only a specified
percentage of an issuer's outstanding securities or a specific class of
securities which may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. Repatriation of
investment income and capital from certain emerging markets is subject to
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect the operation
of a Fund.
SOVEREIGN DEBT OBLIGATIONS
Investments in sovereign debt obligations involves special risks not
present in corporate debt obligations. The issuer of the sovereign debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and a Fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and a Fund's net asset value, may be more
volatile than prices of debt obligations of U.S. issuers. In the past, the
governments of certain emerging markets have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core, High Yield and Global
Income Funds may enter into forward foreign currency exchange contracts for
hedging purposes and to seek to increase total return. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
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<PAGE>
At the maturity of a forward contract, Global Income Fund, High Yield Fund
and Core Fund may either accept or make delivery of the currency specified in
the contract or, at or prior to maturity, enter into a closing purchase
transaction involving the purchase or sale of an offsetting contract. Closing
purchase transactions with respect to forward contracts are usually effected
with the currency trader who is a party to the original forward contract.
Global Income, High Yield or Core Funds may enter into forward foreign
currency exchange contracts in several circumstances. First, when Global
Income, High Yield or Core Funds enter into a contract for the purchase or sale
of a security quoted or denominated in a foreign currency, or when Global
Income, High Yield or Core Funds anticipate the receipt in a foreign currency of
a dividend or interest payment on such a security which it holds, Global Income,
High Yield or Core Funds may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for the purchase or sale,
for a fixed amount of U.S. dollars, of the amount of foreign currency involved
in the underlying transactions, Global Income, High Yield or Core Funds will
attempt to protect themselves against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of foreign currency approximating the value of some or all of a Fund's
portfolio securities quoted or denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of a Fund's foreign
assets.
Global Income, High Yield and Core Funds may engage in cross-hedging by
using forward contracts in one currency to hedge against fluctuations in the
value of securities denominated or quoted in a different currency if the
Advisers determine that there is a pattern of correlation between the two
currencies. The Global Income, High Yield and Core Funds may also purchase and
sell
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<PAGE>
forward contracts to seek to increase total return when the Advisers anticipate
that the foreign currency will appreciate or depreciate in value, but securities
quoted or denominated in that currency do not present attractive investment
opportunities and are not held in a Fund's portfolio.
Global Income, High Yield and Core Funds' custodian will place cash or
liquid assets, into a segregated account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contracts requiring the Fund to purchase foreign
currencies and forward contracts entered into to seek to increase total return.
If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Fund's commitments
with respect to such contracts. The segregated accounts will be marked-to-
market on a daily basis. Although the contracts are not presently regulated by
the Commodity Trading Futures Commission ("CFTC"), the CFTC may in the future
assert authority to regulate these contracts. In such event, a Fund's ability to
utilize forward foreign currency exchange contracts may be restricted. The
Global Income, Core and High Yield Funds will not enter into a forward contract
with a term of greater than one year.
While Global Income, Core and High Yield Funds may enter into forward
contracts to seek to reduce currency exchange rate risks, transactions in such
contracts involve certain other risks. Thus, while Global Income, Core and
High Yield Funds may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for a Fund than if it
had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by
Global Income, Core and High Yield Funds. Such imperfect correlation may cause
the Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
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<PAGE>
INTEREST RATE SWAPS, MORTGAGE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS,
FLOORS AND COLLARS
Each Fund may enter into interest rate swaps, caps, floors and collars. In
addition, Core, Adjustable Rate, Government Income, Short Duration Government,
Global Income and High Yield Funds may enter into mortgage swaps and Core, High
Yield and Global Income Funds may also enter into currency swaps. Each Fund may
enter into swap transactions for hedging purposes or to seek to increase total
return. Interest rate swaps involve the exchange by a Fund with another party
of their respective commitments to pay or receive interest, such as an exchange
of fixed-rate payments for floating rate payments. Mortgage swaps are similar
to interest rate swaps in that they represent commitments to pay and receive
interest. The notional principal amount, however, is tied to a reference pool
or pools of mortgages. Currency swaps involve the exchange of the parties'
respective rights to make or receive payments in specified currencies. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar is the combination of
a cap and a floor that preserves a certain return within a predetermined range
of interest rates. Since interest rate, mortgage and currency swaps and
interest rate caps, floors and collars are individually negotiated, each Fund
expects to achieve an acceptable degree of correlation between its portfolio
investments and its swap, cap, floor and collar positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each interest rate or currency swap will
be accrued on a daily basis and an amount of cash or liquid assets, having an
aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by a Fund's custodian. Inasmuch as these
transactions are entered into
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for hedging purposes or are offset by cash or liquid assets, as permitted by
applicable law, maintained in a segregated account the Funds and the Advisers
believe that swaps do not constitute senior securities under the Act and,
accordingly, will not treat them as being subject to a Fund's borrowing
restriction.
The Funds will not enter into any swap transactions unless the unsecured
commercial paper, senior debt or claims-paying ability of the other party is
rated either AA or A-1 or better by Standard & Poor's or Aa or P-1 or better by
Moody's or their equivalent ratings. If there is a default by the other party
to such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
The staff of the Securities and Exchange Commission (the "SEC") currently takes
the position that swaps, caps, floors and collars are illiquid for purposes of
a Fund's limitation on illiquid investments.
The use of interest rate, mortgage and currency swaps, as well as interest
rate caps, floors and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a Fund would be less favorable than it would have been if this
investment technique were not used.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
-----------------------
options on any securities in which it may invest or on any securities index
based on securities in which it may invest. A Fund may purchase and write such
options on securities that are listed on national domestic securities exchanges
or foreign securities exchanges or traded in the over-the-counter market. A
call option written by a Fund obligates the Fund to sell specified securities to
the holder of the option at a specified price if the option is exercised at any
time before the expiration date. All call options written by a Fund are
covered, which means that the Fund will own the securities subject to the option
so long as the option is outstanding or use the other methods described below.
The purpose of a Fund in writing covered call options is to realize greater
income than would be realized in portfolio securities transactions alone.
However, in writing covered call options for additional income, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. The
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purpose of writing such options is to generate additional income. However, in
return for the option premium, the Fund accepts the risk that it will be
required to purchase the underlying securities at a price in excess of the
securities' market value at the time of purchase.
All call and put options written by a Fund are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid assets, as
permitted by applicable law, either of which, in the case of Global Income Fund,
Core Fund or High Yield Fund, may be quoted or denominated in any currency, in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position.
A Fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases
are referred to as "closing purchase transactions."
Each Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
The Funds may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by their respective custodian) upon conversion or exchange of
other securities in its portfolio. The Funds may also cover call and put
options on a securities index by maintaining cash or liquid assets, as permitted
by applicable law, with a value equal to the exercise price in a segregated
account with their custodian or by using the other methods described above.
PURCHASING OPTIONS. Each Fund may also purchase put and call options on
------------------
any securities in which it may invest or on any securities index composed of
securities in which it may invest. A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options it had purchased.
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<PAGE>
A Fund would normally purchase call options in anticipation of an increase,
or put options in anticipation of a decrease ("protective puts") in the market
value of securities of the type in which it may invest. The purchase of a call
option would entitle a Fund, in return for the premium paid, to purchase
specified securities at a specified price during the option period. A Fund would
ordinarily realize a gain on the purchase of a call option if, during the option
period, the value of such securities exceeded the sum of the exercise price, the
premium paid and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the call option. The purchase of a put option
would entitle a Fund, in exchange for the premium paid, to sell specified
securities at a specified price during the option period. The purchase of
protective puts is designed to offset or hedge against a decline in the market
value of a Fund's securities. Put options may also be purchased by a Fund for
the purpose of affirmatively benefiting from a decline in the price of
securities which it does not own. A Fund would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased below
the exercise price sufficiently to cover the premium and transaction costs;
otherwise the Fund would realize either no gain or a loss on the purchase of the
put option. Gains and losses on the purchase of put options may be offset by
countervailing changes in the value of the underlying portfolio securities.
A Fund may purchase put and call options on securities indices for the same
purposes as it may purchase options on securities. Options on securities indices
are similar to options on securities, except that the exercise of securities
index options requires cash payments and does not involve the actual purchase or
sale of securities. In addition, securities index options are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security.
Transactions by a Fund in options on securities and securities indices will
be subject to limitations established by each of the exchanges, boards of trade
or other trading facilities on which such options are traded governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which a
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Advisers. An exchange, board of trade
or other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Core, Global Income
----------------------------------------------------
and High Yield Funds may write covered put and call options and purchase put and
call options on foreign currencies in
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an attempt to protect against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. Global Income, Core and High Yield Funds may use options on currency
to cross-hedge, which involves writing or purchasing options on one currency to
seek to hedge against changes in exchange rates for a different currency with a
pattern of correlation. In addition, Global Income, Core and High Yield Funds
may purchase call options on currency to seek to increase total return when the
Advisers anticipate that the currency will appreciate in value, but the
securities denominated or quoted in that currency do not present attractive
investment opportunities and are not included in the Fund's portfolios.
A call option written by Core, Global Income and High Yield Funds obligates
the Fund to sell specified currency to the holder of the option at a specified
price if the option is exercised at any time before the expiration date. A put
option written by a Fund obligates the Fund to purchase specified currency from
the option holder at a specified price if the option is exercised at any time
before the expiration date. The writing of currency options involves a risk
that a Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase currency subject to a put at a price that exceeds the
currency's market value.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one written. Such purchases are referred
to as "closing purchase transactions." A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
purchased options.
Core, Global Income and High Yield Funds would normally purchase call
options in anticipation of an increase in the U.S. dollar value of currency in
which securities to be acquired by the Fund are denominated or quoted. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified currency at a specified price during the option period. A
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
Core, Global Income and High Yield Funds would normally purchase put
options in anticipation of a decline in the U.S. dollar value of currency in
which securities in its portfolio are denominated or quoted ("protective puts").
The purchase of a put option would entitle Core, Global Income and High Yield
Funds, in exchange for the premium paid, to sell specified currency at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the U.S. dollar value of
a Fund's portfolio securities due to currency exchange rate fluctuations. A
Fund would ordinarily realize a gain if, during the option period, the value
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of the underlying currency decreased below the exercise price sufficiently to
more than cover the premium and transaction costs; otherwise the Fund would
realize either no gain or a loss on the purchase of the put option. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying currency.
In addition to using options for the hedging purposes described above,
Core, Global Income and High Yield Funds may use options on currency to seek to
increase total return. Global Income Fund, High Yield Fund and Core Fund may
write (sell) covered put and call options on any currency in an attempt to
realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Global Income, High Yield and Core Funds may forego the opportunity to
profit from an increase in the market value of the underlying currency. Also,
when writing put options, Global Income, High Yield and Core Funds accept, in
return for the option premium, the risk that it may be required to purchase the
underlying currency at a price in excess of the currency's market value at the
time of purchase.
Global Income, High Yield and Core Funds would normally purchase call
options to seek to increase total return in anticipation of an increase in the
market value of a currency. Global Income, High Yield and Core Funds would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the call option. Put
options may be purchased by the Global Income, High Yield and Core Funds for
the purpose of benefiting from a decline in the value of currencies which it
does not own. Global Income, High Yield and Core Funds would ordinarily realize
a gain if, during the option period, the value of the underlying currency
decreased below the exercise price sufficiently to more than cover the premium
and transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the put option.
YIELD CURVE OPTIONS. Each Fund may enter into options on the yield
-------------------
"spread," or yield differential between two securities. Such options are
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. For example, a Fund may purchase a call option on the yield spread
between two securities if it owns one of the securities and anticipates
purchasing the other security and
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wants to hedge against an adverse change in the yield spread between the two
securities. A Fund may also purchase or write yield curve options for other
than hedging purposes (i.e., in an attempt to increase its current income) if,
in the judgment of the Adviser, the Fund will be able to profit from movements
in the spread between the yields of the underlying securities. The trading of
yield curve options is subject to all of the risks associated with the trading
of other types of options. In addition, however, such options present a risk of
loss even if the yield of one of the underlying securities remains constant, or
if the spread moves in a direction or to an extent which was not anticipated.
Yield curve options written by a Fund must be "covered." A call (or put)
option is covered if the Fund holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or liquid assets, as permitted by applicable law, sufficient to
cover the Fund's net liability under the two options. Therefore, a Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter, and because they
have been only recently introduced, established trading markets for these
options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the
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secondary market on that exchange (or in that class or series of options) would
cease to exist although outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
A Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the SEC changes its position, the Funds will treat
purchased over-the counter options and all assets used to cover written over-the
counter options as illiquid securities, except that with respect to options
written with primary dealers in U.S. Government Securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to a formula
approved by the SEC.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options for
hedging purposes depends in part on the applicable Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
- --------------------------------------------------
To seek to increase total return or to hedge against changes in interest
rates or securities prices or, in the case of Core, High Yield and Global Income
Funds, currency exchange rates, each Fund may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. Each Fund may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), securities indices, foreign currencies in the case of Global
Income, Core and High Yield Funds and any other financial instruments and
indices. A Fund will engage in futures and related options transactions only
for bona fide hedging purposes as defined below or for purposes of seeking to
increase total return to the extent permitted by regulations of the CFTC. All
futures contracts entered into by a Fund are traded on U.S. exchanges or boards
of trade that are licensed and regulated by the CFTC or on foreign exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
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When interest rates are rising or securities prices are falling, a Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a Fund, through the purchase of futures contracts,
can attempt to secure better rates or prices than might later be available in
the market when it effects anticipated purchases. Core, Global Income and High
Yield Funds may each seek to offset anticipated changes in the value of a
currency in which its portfolio securities, or securities that it intends to
purchase, are quoted or denominated by purchasing and selling futures contracts
on such currencies.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currency are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
------------------
establish with more certainty than would otherwise be possible the effective
price or rate of return on portfolio securities or securities that a Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are quoted or denominated. A Fund may, for example, take a "short"
position in the futures market by selling futures contracts to seek to hedge
against an anticipated rise in interest rates or a decline in market prices or
foreign currency rates that would adversely affect the U.S. dollar value of the
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by a Fund or securities with
characteristics similar to those of a Fund's portfolio securities. Similarly,
Core Fund, High Yield Fund and Global Income Fund may each sell futures
contracts on any currencies in which its portfolio securities are quoted or
denominated or in one currency to seek to hedge against fluctuations in the
value of securities denominated in a different currency if there is an
established historical pattern of correlation between the two currencies. If,
in the opinion of the Advisers, there is a sufficient degree of correlation
between price trends for a Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Funds may also enter into such futures contracts as part of its hedging
strategy. Although under some circumstances prices of securities in a Fund's
portfolio may be more or less volatile than prices of such futures contracts,
the Advisers will attempt to estimate the extent of this volatility difference
based on historical patterns and compensate for any such differential by having
a Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting a
Fund's portfolio securities. When hedging of this character is successful, any
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depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position. On the other hand, any
unanticipated appreciation in the value of a Fund's portfolio securities would
be substantially offset by a decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium,
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that a Fund intends to
purchase. However, a Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Funds will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Each Fund will engage in futures and related options
--------------------
transactions only for bona fide hedging or to seek to increase total return as
permitted by CFTC regulations which permit principals of an investment company
registered under the Act to engage in such transactions without registering as
commodity pool operators. Each Fund will determine that the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price
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fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. Except as stated below, each Fund's futures
transactions will be entered into for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities (or the currency in which they are quoted or denominated) that a Fund
owns or futures contracts will be purchased to protect a Fund against an
increase in the price of securities (or the currency in which they are quoted or
denominated) it intends to purchase. As evidence of this hedging intent, each
Fund expects that on 75% or more of the occasions on which it takes a long
futures or option position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities (or assets denominated in the related currency) in
the cash market at the time when the futures or option position is closed out.
However, in particular cases, when it is economically advantageous for a Fund to
do so, a long futures position may be terminated or an option may expire without
the corresponding purchase of securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation permits the Funds to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish positions
to seek to increase total return in futures contracts and options on futures
will not exceed 5% of the net asset value of a Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Funds will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") for maintaining their
qualifications as regulated investment companies for federal income tax
purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
assets, as permitted by applicable law, in an amount equal to the underlying
value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of
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securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government Securities. The only
futures contracts available to hedge a Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies.
MORTGAGE DOLLAR ROLLS
- ---------------------
The Taxable Funds may enter into mortgage "dollar rolls" in which a Fund
sells securities for delivery in the current month and simultaneously contracts
with the same counterparty to repurchase similar (same type, coupon and
maturity), but not identical securities on a specified future date. During the
roll period, a Fund loses the right to receive principal and interest paid on
the securities sold. However, a Fund would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase (often referred to as the "drop") or fee
income plus the interest earned on the cash proceeds of the securities sold
until the settlement date of the forward purchase. Unless such benefits exceed
the income, capital appreciation and gain or loss due to mortgage prepayments
that would have been realized on the securities sold as part of the mortgage
dollar roll, the use of this technique will diminish the investment performance
of a Fund compared with what such performance would have been without the use of
mortgage dollar rolls. All cash proceeds will be invested in instruments that
are permissible investments for the applicable Fund. Each Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
assets, as permitted by applicable law, in an amount equal to its forward
purchase price.
For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions; one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if
the broker-dealer to whom a Fund sells the security becomes insolvent, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
CONVERTIBLE SECURITIES
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Convertible securities include corporate notes or preferred stock but are
ordinarily long-term debt obligation of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline. Convertible
securities generally offer lower interest or dividend yields than non-
convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion price,
the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities in which the Core Fund and High Yield Fund invest will be
subject to the same rating criteria as its other investments in fixed-income
securities.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions, such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents, letters of credit or U.S. Government Securities maintained on a
current basis in an amount at least equal to the market value of the securities
loaned. Cash collateral may be invested in cash equivalents. A Fund has the
right to call a loan and obtain the securities loaned at any time on five days'
notice. For the duration of a loan, a Fund continues to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned and
also receives compensation from investment of the collateral. A Fund would not
have the right to vote any securities having voting rights during the existence
of the loan, but a Fund would call the loan in anticipation of an important vote
to be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovering, or even loss of
rights in, the collateral should the borrower of the securities fail
financially. However, the loans are made only to firms deemed by the applicable
Adviser to be of good standing, and when, in the judgment of the applicable
Adviser, the consideration which can be earned currently from securities loans
of this type justifies the attendant risk. If an Adviser determines to make
securities loans, the value of the securities loaned will not exceed one-third
of the value of the total assets of each Fund.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
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However, a Fund will not invest more than 15% of its net assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate, currency and mortgage swaps, interest rate caps, floors and
collars, certain SMBS, municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted Securities, unless the
Board of Trustees determines, based upon a continuing review of the trading
markets for the specific Restricted Securities, that such Restricted Securities
are liquid. Certain commercial paper issued in reliance on Section 4(2) of the
1933 Act is treated like Rule 144A Securities. The Trustees have adopted
guidelines and delegated to the Advisers the daily function of determining and
monitoring the liquidity of the Funds' portfolio securities. The Board of
Trustees, however, will retain sufficient oversight and be ultimately
responsible for the determinations. Since it is not possible to predict with
assurance exactly how the market for Restricted Securities sold and offered
under Rule 144A or Section 4(2) will develop, the Trustees will carefully
monitor the Funds' investments in these securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
This investment practice could have the effect of increasing the level of
illiquidity in a Fund to the extent that qualified institutional buyers become
for a time uninterested in purchasing these Restricted Securities.
The purchase price and subsequent valuation of Restricted Securities
normally reflect a discount from the price at which such securities trade when
they are not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the Restricted Securities and prevailing
supply and demand conditions.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. The Funds will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, the Funds may dispose of or negotiate a
commitment after entering into it. A Fund also may sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Funds may realize a capital gain or loss in connection
with these transactions. For purposes of determining each Fund's duration,
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the maturity of when-issued or forward commitment securities will be calculated
from the commitment date. Each Fund is required to hold and maintain in a
segregated account with the Fund's custodian until three days prior to
settlement date, cash or liquid assets, in an amount sufficient to meet the
purchase price. Alternatively, each Fund may enter into offsetting contracts
for the forward sale of other securities that it owns. Securities purchased or
sold on a when-issued or forward commitment basis involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date or
if the value of the security to be sold increases prior to the settlement date.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets,
calculated at the time of purchase, in the securities of other investment
companies, but may not invest more than 5% of its total assets in the securities
of any one investment company or acquire more than 3% of the voting securities
of any other investment company. Pursuant to an exemptive order obtained from
the SEC, the Funds may invest in money market funds for which the Adviser or any
of its affiliates serves as investment adviser. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that a Fund invests in a money
market fund for which the Adviser acts as adviser, the management fees payable
by the Fund to the Adviser will be reduced by an amount equal to the Fund's
proportionate share of the management fees paid by such money market fund to the
Adviser or any of its affiliates.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected broker-
dealers, banks or other financial institutions. A repurchase agreement is an
arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities will be maintained by each Fund's custodian. The
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the security subject to the repurchase agreement.
For purposes of the Act and, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the
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security under a repurchase agreement, a Fund may encounter delay and incur
costs before being able to sell the security. Such a delay may involve loss of
interest or a decline in price of the security. If the court characterizes the
transaction as a loan and a Fund has not perfected a security interest in the
security, the Fund may be required to return the security to the seller's estate
and be treated as an unsecured creditor of the seller. As an unsecured
creditor, a Fund would be at risk of losing some or all of the principal and
interest involved in the transaction.
As with any unsecured debt instrument purchased for each Fund, the
applicable Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
security. Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the security subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), each Fund will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price. Certain repurchase agreements which provide for
settlement in more than seven days can be liquidated before the nominal fixed
term on seven days or less notice. Such repurchase agreements will be regarded
as liquid instruments.
In addition, the Funds, together with other registered investment companies
having management agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the affected Fund. The
investment objective of each Fund and all other investment policies or practices
of the Funds, except for Short Duration Tax-Free Fund's and Municipal Income
Fund's policy to invest under normal market conditions 80% of its net assets in
Municipal Securities, are considered by the Trust not to be fundamental and
accordingly may be changed without shareholder approval. See "INVESTMENT
OBJECTIVES AND POLICIES" in the Prospectuses. As defined in the Act, "a
majority of the outstanding voting securities" of a Fund means the vote (a) of
67% or more of the shares of the Fund present at a meeting, if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy or (b) more than 50% of the outstanding shares of the Fund, whichever
is less.
For the purposes of the limitations (except for the asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered
B-57
<PAGE>
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by, a Fund. With respect to the Tax Exempt Funds, the identification
of the issuer of a Municipal Security that is not a general obligation is made
by the Adviser based on the characteristics of the Municipal Security, the most
important of which is the source of funds for the payment of principal and
interest on such securities.
AS A MATTER OF FUNDAMENTAL POLICY, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in municipal securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other municipal securities. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations.
(3) borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% or its total assets (including the amount borrowed), (b)
the Fund may, to
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<PAGE>
the extent permitted by applicable law borrow up to an additional 5%
of its total assets for temporary purposes, (c) the Fund may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities, (d) the Fund may
purchase securities on margin to the extent permitted by applicable
law and (e) the Fund may engage in transactions in mortgage dollar
rolls which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted by
applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be an
underwriting.
(6)(a) for each Fund other than Core Fund, purchase, hold or deal in real
estate, although a Fund may purchase and sell securities that are
secured by real estate or interests therein, securities of real
estate investment trusts and mortgage-related securities and may
hold and sell real estate acquired by a Fund as a result of the
ownership of securities.
(6)(b) in the case of the Core Fund, purchase, hold or deal in real estate
(including real estate limited partnerships) or oil, gas or mineral
leases, although the Fund may purchase and sell securities that are
secured by real estate or interests therein, may purchase mortgage-
related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts that
are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same fundamental investment
objectives, restrictions and policies as the Fund.
In addition, as non-fundamental policies, a Fund may not:
B-59
<PAGE>
(1) Invest in companies for the purpose of exercising control or
management.
(2) Invest more than 15% of the Fund's net assets in illiquid
investments including repurchase agreements maturing in more than
seven days, securities which are not readily marketable and
restricted securities not eligible for resale pursuant to Rule 144A
under the 1933 Act.
(3) Purchase additional securities if the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
MANAGEMENT
TRUSTEES AND OFFICERS
- ---------------------
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees and Officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
Ashok N. Bakhru, Age 53, 1325 Avenue of the Americas, 34th Floor, New York, New
York 10019. Chairman and Trustee. Executive Vice President-Finance and
--------------------
Administration and Chief Financial Officer, Coty Inc. (since April 1996);
President, ABN Associates, Inc. (June 1994 through March 1996); Senior Vice
President, Scott Paper Company (until June 1994); Director, Arkwright Mutual
Insurance Company; Trustee, International House of Philadelphia; Member of
Cornell University Council; Trustee of Walnut Street Theater.
David B. Ford,* Age 51, One New York Plaza, New York, New York 10004. Trustee.
-------
Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs,
(1986-1996); Co-Head of GSAM since December 1994.
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Vice President, Goldman Sachs since May 1996; President,
- ---------------------
MFS Retirement Services Inc., of Massachusetts Financial Services prior thereto.
John P. McNulty,* Age 44, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
B-60
<PAGE>
Mary P. McPherson, Age 60, Taylor Hall, Bryn Mawr College, Bryn Mawr, PA 19010.
Trustee. President of Bryn Mawr College since 1978; Director of Josiah Macy,
- -------
Jr. Foundation since 1977; Director of the Philadelphia Contributionship since
1985; Director of Amherst College since 1986; Director of Dayton Hudson
Corporation since 1988; Director of the Spencer Foundation since 1993; and
member of PNC Advisory Board since 1993.
Alan A. Shuch,* Age 48, One New York Plaza, New York, New York 10004. Trustee.
-------
Limited Partner, Goldman Sachs (since 1994); Director and Vice President,
Goldman Sachs Funds Management, Inc. from April 1990 to November 1994; President
and Chief Operating Officer, GSAM from September 1988 to November 1994; Limited
Partner, Goldman Sachs since December 1994.
Jackson W. Smart, Jr., Age 66, One Northfield Plaza, #218, Northfield, Illinois
60093. Trustee. Chairman, Executive Committee, First Commonwealth, Inc. (a
-------
managed dental care company, since January 1996); Chairman and Chief Executive
Officer, MSP Communications Inc. (a company engaged in radio broadcasting) since
November 1988; Director, Federal Express Corporation since 1976; Evanston
Hospital Corporation (since 1980) and First Commonwealth,Inc. (since 1988) and
North American Private Equity Group (a venture capital fund).
William H. Springer, Age 67, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman and Chief Financial and Administrative Officer,
- -------
Ameritech (a telecommunications holding company) from February 1987 to
retirement in June 1992; Director, Walgreen Co. (a retail drugstore business);
and Baker, Fentress & Co. (a closed-end non-diversified management investment
company) April 1992 to present.
Richard P. Strubel, Age 57, 70 West Madison Street, Suite 1400, Chicago,
Illinois 60602. Trustee. Managing Director, Tandem Partners, Inc. (since
-------
1990); President and Chief Executive Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and connectors) from January 1984 to October
1994.
Pauline Taylor,* Age 50, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Director of
- ---------
Shareholder Servicing since June 1992.
Nancy L. Mucker,* Age 47, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
Scott M. Gilman,* Age 37, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds
B-61
<PAGE>
Management, Inc. since March 1993. Vice President, Goldman Sachs since March,
1990.
John M. Perlowski,* Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 36, 85 Broad Street, New York, New York 10004.
Secretary. Associate General Counsel of GSAM since February 1994; Vice
- ---------
President and Assistant General Counsel of Goldman Sachs; Counsel to the Funds
Group, GSAM since June 1992; Partner, Hale and Dorr from September 1991 to June
1992.
Howard B. Surloff,* Age 31, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General Counsel, Goldman Sachs since
- ---------
November 1993 and May 1994, respectively; Counsel to the Funds Group, GSAM since
November 1993; Associate of Shereff, Friedman, Hoffman & Goodman, LLP prior
thereto.
Valerie A. Zondorak,* Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Vice President, Goldman Sachs (since March 1997); Counsel
- --------------------
to the Funds Group, GSAM (since March 1997); Associate of Shereff, Friedman,
Hoffman & Goodman, LLP (prior thereto).
Steven E. Hartstein*, Age 33, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs since June 1993;
- -------------------
Funds Compliance Officer, Citibank Global Asset Management from August 1991 to
June 1993); Legal Assistant, Brown & Wood prior thereto.
Deborah A. Farrell*, Age 25, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman Sachs since January
- -------------------
1994. Formerly at Cleary, Gottlieb, Stein and Hamilton.
Kaysie Uniacke*, Age 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Senior Portfolio Manager, GSAM since
- -------------------
1988.
Elizabeth D. Anderson*, Age 27, One New York Plaza, New York, New York 10004.
Assistant Secretary. Portfolio Manager, GSAM since April 1996; Junior Portfolio
- -------------------
Manager, Goldman Sachs 1995-1996. Funds Trading Assistant, GSAM 1993-1995.
Compliance Analyst, Prudential Insurance, from 1991 to 1993.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or GSFM is the
investment adviser, administrator and/or distributor. As of _______, 1997, the
Trustees and officers as a
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<PAGE>
group owned less than 1% of the outstanding shares of beneficial interest of
each Fund.
B-63
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended October
31, 1996:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Funds
from the as of Part of (including
Funds/1/ Trust's Expenses the Funds)/2/
------------ ---------------- --------------
<S> <C> <C> <C>
Name of Trustees
Ashok N. Bakhru $4,109 $0 $77,375
Marcia L. Beck/3/ $0 $0 $0
David B. Ford $0 $0 $0
Douglas C. Grip $0 $0 $0
Paul C. Nagel, Jr./4/ $2,525 $0 $50,500
Alan A. Shuch $0 $0 $0
Jackson W. Smart $3,169 $0 $65,750
William H. Springer $3,169 $0 $65,750
Richard P. Strubel $3,169 $0 $65,750
</TABLE>
/1/ Reflects amount paid by Goldman Sachs Trust, a Massachusetts business
trust, during fiscal year ended October 31, 1996.
/2/ The Goldman Sachs Funds consisted of 29 mutual funds, including the seven
series of the Trust, on October 31, 1996.
/3/ Resigned as of May 1, 1996.
/4/ Retired as of June 30, 1996.
B-64
<PAGE>
INVESTMENT ADVISERS
- -------------------
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Municipal Income
Fund, Government Income Fund, Short Duration Tax-Free Fund, High Yield Fund and
Core Fund pursuant to a management agreement. GSFM, One New York Plaza, New
York, New York 10004, serves as the investment adviser to Adjustable Rate Fund
and Short Duration Government Fund pursuant to a management agreement. GSFM, a
Delaware limited partnership, is an affiliate of Goldman Sachs. GSAMI, 133
Peterborough Court, London EC4A 2BB, England, serves as investment adviser to
Global Income Fund pursuant to a management agreement. As a company with
unlimited liability under the laws of England, GSAMI is regulated by the
Investment Management Regulatory Organization Limited, a United Kingdom self-
regulatory organization, in the conduct of its investment advisory business.
See "MANAGEMENT" in the Funds' Prospectuses for a description of the applicable
Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24 hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico,
Milan, Montreal, Osaka, Paris, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs, whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching
$160 million, Goldman Sachs' Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers. The Advisers manage money for
some of the world's largest institutional investors.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry
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<PAGE>
surveys conducted in the U.S. and abroad. Goldman Sachs is also among the
leading investment firms using quantitative analytics (now used by a growing
number of investors) to structure and evaluate portfolios. For example, Goldman
Sachs' options evaluation model analyzes each security's term, coupon and call
option, providing an overall analysis of the security's value relative to its
interest risk.
In planning the Tax Exempt Funds' strategies, the portfolio managers also
evaluate and monitor individual issues by using analytical techniques that have
traditionally been applied to corporate bonds and Mortgage-Backed Securities.
In particular, the Adviser's embedded option valuation model provides a picture
of an individual security's relative value and the portfolio's overall interest
rate risk. By constantly reviewing the positions of securities within the
portfolio, the Adviser looks for opportunities to enhance the Tax Exempt Funds'
yields by fine-tuning the portfolio, using quantitative tools designed for
municipal portfolio management. The Adviser, which managed approximately $3
billion in tax-free securities in 1996, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
In structuring Adjustable Rate Fund's and Short Duration Government Fund's
respective securities portfolio, the Adviser will review the existing overall
economic and mortgage market trends. The Adviser will then study yield spreads,
the implied volatility and the shape of the yield curve. The Adviser will then
apply this analysis to a list of eligible securities that meet the respective
Fund's investment guidelines. With respect to Adjustable Rate Fund, this
analysis is used to plan a two-part portfolio, which will consist of a "core"
portfolio of ARMs and a "relative value" portfolio of other mortgage assets that
can enhance portfolio returns and lower risk (such as investments in CMO
floating-rate tranches and interest only stripped Mortgage-Backed Securities).
With respect to Adjustable Rate Fund, Government Income Fund, Short
Duration Government Fund, High Yield Fund and Core Fund, the applicable Adviser
expects to utilize Goldman Sachs' sophisticated option-adjusted analytics to
help make strategic asset allocations within the markets for U.S. government,
Mortgage-Backed and other securities and to employ this technology periodically
to re-evaluate the Funds' investments as market conditions change. Goldman
Sachs has also developed a prepayment model designed to estimate mortgage
prepayments and cash flows under different interest rate scenarios. Because a
Mortgage-Backed Security incorporates the borrower's right to prepay the
mortgage, the Advisers use a sophisticated option-adjusted spread (OAS) model to
measure expected returns. A security's OAS is a function of the level and shape
of the yield curve, volatility and the applicable Adviser's expectation of how a
change in interest rates will affect prepayment levels. Since the OAS model
assumes a relationship between prepayments and interest rates, the Advisers
consider it a better way to measure a security's expected return and absolute
and relative values than yield to maturity. In using OAS
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<PAGE>
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and prepayment
sensitivity. The Advisers will then analyze its value relative to alternative
investments and to its own investments. The Advisers will also measure a
security's interest rate risk by computing an option adjusted duration (OAD).
The Advisers believe a security's OAD is a better measurement of its price
sensitivity than cash flow duration, which systematically misstates portfolio
duration. The Advisers also evaluate returns for different mortgage market
sectors and evaluate the credit risk of individual securities. This
sophisticated technical analysis allows the Advisers to develop portfolio and
trading strategies using Mortgage-Backed Securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility
to meet the respective Fund's duration targets and cash flow pattern
requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to calculate projected
security returns under different, discrete interest rate scenarios, and Goldman
Sachs' proprietary prepayment model to generate yield estimates under these
scenarios. The OAS, scenario returns, expected returns, and yields of
securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The Advisers will use OAS analytics to choose what they believe is an
appropriate portfolio of investments for Adjustable Rate Fund, Government Income
Fund, Short Duration Government Fund and Core Fund from a universe of eligible
investments. In connection with initial portfolio selections, in addition to
using OAS analytics as an aid to meeting each Fund's particular composition and
performance targets, the Advisers will also take into account important market
criteria like the available supply and relative liquidity of various mortgage
securities in structuring the portfolio.
The Advisers also expect to use OAS analytics to evaluate the mortgage
market on an ongoing basis. Changes in the relative value of various Mortgage-
Backed Securities could suggest tactical trading opportunities for the Funds.
The Advisers will have access to both current market analysis as well as
historical information on the relative value relationships among different
Mortgage-Backed Securities. Current market analysis and historical information
is available in the Goldman Sachs database for most actively traded Mortgage-
Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive basis,
use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
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<PAGE>
services to third parties or using such services as a basis for trading for its
own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments
in U.S. and foreign fixed-income markets, assesses the outlooks for various
sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed
Income Research Department is at the forefront in developing and using computer-
based tools for analyzing fixed-income securities and markets, developing new
fixed income products and structuring portfolio strategies for investment policy
and tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed-income research and credit research, the Advisers in
managing Global Income Fund are supported by Goldman Sachs' economics research.
The Economics Research Department, based in London, conducts economic, financial
and currency markets research which analyzes economic trends and interest and
exchange rate movements worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In allocating assets in the Global Income Fund's portfolio among
currencies, the Adviser will have access to the Global Asset Allocation Model.
The model is based on the observation that the prices of all financial assets,
including foreign currencies, will adjust until investors globally are
comfortable holding the pool of outstanding assets. Using the model, the
Adviser will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with Goldman Sachs' research
professionals' expectations to produce an optimal currency and asset allocation
for the level of risk suitable for the Fund's investment objective and criteria.
Each Fund's management agreement, (the "Management Agreements"), was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 23, 1997. The applicable Fund's
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<PAGE>
Management Agreement was approved by the shareholders of Adjustable Rate Fund on
October 30, 1991, the shareholders of Short Duration Government Fund on March
27, 1989, the sole initial shareholder of Short Duration Tax-Free Fund on
September 25, 1992, the sole initial shareholder of Core Fund on October 29,
1993, and the shareholders of each other Fund on April 21, 1997. Each
Management Agreement will remain in effect until June 30, 1998 and will continue
in effect with respect to the applicable Fund from year to year thereafter
provided such continuance is specifically approved at least annually by (a) the
vote of a majority of the outstanding voting securities of such Fund or a
majority of the Trustees of the Trust, and (b) the vote of a majority of the
non-interested Trustees of the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
Each Management Agreement will terminate automatically if assigned (as
defined in the Act). Each Management Agreement is also terminable at any time
without penalty by the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund on 60 days' written notice to the
applicable Adviser or by the Adviser on 60 days' written notice of the Trust.
The Management Agreements provide that GSAM, GSFM and GSAMI, in their
capacity as advisers may each render similar services to others so long as the
services under the Management Agreements are not impaired thereby. Pursuant to
the Management Agreements, the Advisers are entitled to receive the fee set
forth below and the Advisers are currently limiting the fee to the rate set
forth below:
<TABLE>
<CAPTION>
Contractual Current
Fund Rate* Rate
- ---- ---- ----
<S> <C> <C>
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .55% .40%
Core Fixed Income .55% .40%
High Yield .70% .65%
GSFM
Short Duration Government .65% .40%
Adjustable Rate Government .55% .40%
GSAMI
Global Income .90% .59%
- ----------------------------
</TABLE>
* The Contractual Rate is identical to the aggregate advisory and
administration fee rates payable by each Fund under the previous separate
advisory (including subadvisory in the case of Global Income Fund) and
administration agreements. For the fiscal year ended October 31, 1996, the
annual rate expressed is the combined advisory and administration fees paid
(after fee waivers). Such reduction or limits, if any, are calculated
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<PAGE>
monthly on a cumulative basis and may be discontinued or modified by the
applicable Adviser at its discretion at any time, although they have no
current intention to do so.
For the fiscal years ended October 31, 1996, 1995 and 1994, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Adjustable Rate Fund $2,535,709 $2,947,492 $6,798,185
Short Duration Government 411,360 517,091 1,063,867
Fund/(1)/
Short Duration Tax-Free Fund 169,796 260,970 468,868
Core Fund/(2)/ 246,568 137,158 56,255
Global Income Fund/(3)(6)/ 1,117,226 706,460 1,518,814
Government Income Fund/(4)(6)/ 74,060 44,037 0
Municipal Income Fund/(5)(6)/ 211,283 154,707 35,494
</TABLE>
_________________________
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $514,200, $646,364 and $1,329,834,
respectively, for such years.
/(2)/ Core Fund commenced operations January 5, 1994.
/(3)/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of
$837,920, $1,412,921 and $3,037,627, respectively. If expense limitations
had not been in effect, Global Income Fund would have paid advisory and
subadvisory fees of $1,474,204 and $491,401, respectively, for the year
ended October 31, 1996 and $789,127 and $1,578,254, respectively, for the
year ended October 31, 1995.
/(4)/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $148,120, $101,737 and $65,604, respectively,
for such years.
/(5)/ Had expense limitations not been in effect for the years ended October 31,
1995 and 1994, Municipal Income Fund would have paid advisory fees of
$200,207 and $174,161, respectively, for such years.
/(6)/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
The fees and services under the Investment Advisory and Administration
Agreements are identical to the fees and services under the Management
Agreement.
Each Adviser performs administrative services for the applicable Funds
under the Management Agreement. Such
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<PAGE>
administrative services include, subject to the general supervision of the
Trustees of the Trust, (a) providing supervision of all aspects of the Funds'
non-investment operations (other than certain operations performed by others
pursuant to agreements with the Funds), (b) providing the Funds, to the extent
not provided pursuant to the agreement with the Trust's custodian, transfer and
dividend disbursing agent or agreements with other institutions, with personnel
to perform such executive, administrative and clerical services as are
reasonably necessary to provide effective administration of the Funds, (c)
arranging, to the extent not provided pursuant to such agreements, for the
preparation, at the Funds' expense, of each Fund's tax returns, reports to
shareholders, periodic updating of the Funds' prospectuses and statements of
additional information, and reports filed with the SEC and other regulatory
authorities, (d) providing the Funds, to the extent not provided pursuant to
such agreements, with adequate office space and certain related office equipment
and services, and (e) maintaining all of the Funds' records other than those
maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
- ----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed-income markets, in each case on a proprietary basis and
for the accounts of customers. As such, Goldman Sachs and its affiliates are
actively engaged in transactions in the same securities, currencies, and
instruments in which the Funds invest. Such activities could affect the prices
and availability of the securities, currencies, and instruments in which the
Funds invest, which could have an adverse impact on each Fund's performance.
Such transactions, particularly in respect of proprietary accounts or customer
accounts other than those included in the Advisers' and their advisory
affiliates' asset management activities, will be executed independently of the
Funds' transactions and thus at prices or rates that may be more or less
favorable. When the Advisers and their advisory affiliates seek to purchase or
sell the same assets for their managed accounts, including the Funds, the assets
actually purchased or sold may be allocated among the accounts on a basis
determined in its good faith discretion of such entitles to be equitable. In
some cases, this system may adversely affect the size or the price of the assets
purchased or sold for the Funds.
B-71
<PAGE>
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which, or in securities of issuers for
which, the Advisers and/or their affiliates are performing services or when
position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs
B-72
<PAGE>
or their affiliated entities. As a result, the performance by these principals
and employees of their obligations to such other entities may be a consideration
of which investors in the Funds should be aware.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income, High Yield and Core Funds, currencies on behalf of
the applicable Funds in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Funds, and such party may
have no incentive to assure that the Funds obtain the best possible prices or
terms in connection with the transactions. Goldman Sachs and its affiliates may
also create, write or issue derivative instruments for customers of Goldman
Sachs or its affiliates, the underlying securities currencies or instruments of
which may be those in which the Funds invest or which may be based on the
performance of a Fund. The Funds may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter into transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the Funds. At times, these activities may cause
departments of the Firm to give advice to clients that may cause these clients
to take actions adverse to the interest of the client. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on a Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
B-73
<PAGE>
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust. Pursuant to the distribution agreement, after the Funds'
Prospectuses and periodic reports have been prepared, set in type and mailed to
shareholders, Goldman Sachs will pay for the printing and distribution of copies
thereof used in connection with the offering to prospective investors. Goldman
Sachs will also pay for other supplementary sales literature and advertising
costs. Goldman Sachs has entered into sales agreements with certain investment
dealers and financial service firms (the "Authorized Dealers") to solicit
subscriptions for Class A, Class B and Class C Shares of each of the Funds that
offer such classes of shares. Goldman Sachs receives a portion of the sales
load imposed on the sale, in the case of Class A Shares, or redemption in the
case of Class B and Class C Shares, of such Fund shares. No Class B Shares were
outstanding during the fiscal years ended October 31, 1994 and 1995. No Class C
Shares were outstanding during the fiscal years ended October 31, 1994, 1995 and
1996. Goldman Sachs retained approximately the following combined commissions
on sales of Class A and B shares during the following periods:
<TABLE>
<CAPTION>
1996** 1995* 1994
------- -------- --------
<S> <C> <C> <C>
Adjustable Rate Fund* $79,000 $40,000 N/A
Municipal Income Fund $24,900 $48,000 $ 76,000
Government Income Fund $17,300 $22,000 $ 5,000
Global Income Fund $52,600 $15,000 $350,000
- ---------------------
</TABLE>
* Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
** Prior to May 1, 1997, the Municipal, Government Income and Global Income
Funds did not offer Class B shares.
Goldman Sachs serves as the Trust's transfer and dividend disbursing agent.
Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken
with the Trust with respect to each Fund to (i) record the issuance, transfer
and redemption of shares, (ii) provide confirmations of purchases and
redemptions, and quarterly statements, as well as certain other statements,
(iii) provide certain information to the Trust's custodian and the relevant
subcustodian in connection with redemptions, (iv) provide dividend crediting and
certain disbursing agent services, (v) maintain shareholder accounts, (vi)
provide certain state Blue Sky and other information, (vii) provide shareholders
and certain regulatory authorities with tax-related information, (viii) respond
to shareholder inquiries, and (ix) render certain other miscellaneous services.
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer and dividend disbursing agent and the
B-74
<PAGE>
assumption by Goldman Sachs of the expenses related thereto, Goldman Sachs
received fees for the fiscal years ended October 31, 1996, 1995 and 1994 by each
Fund then in existence as follows:
Fund 1996 1995 1994
- ---- ------- ------- -------
Adjustable Rate Fund 278,337 306,662 679,819
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 16,980 26,098 46,887
Core Fund/(1)/ 24,657 13,716 5,637
Global Income Fund 121,212 106,764 132,123
Municipal Income Fund 90,284 63,695 70,811
Government Income Fund 72,237 94,095 57,960
- ------------------------
/(1)/ Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
each provides thereunder to the Funds are not impaired thereby. Each such
agreement also provides that the Trust will indemnify Goldman Sachs against
certain liabilities.
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser, the fees and expenses of
the Trust's custodian, transfer agent fees, brokerage fees and commissions,
filing fees for the registration or qualification of the Trust's shares under
federal or state securities laws, expenses of the organization of the Trust,
fees and expenses incurred by the Trust in connection with membership in
investment company organizations, taxes, interest, costs of liability insurance,
fidelity bonds or indemnification, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal, tax and auditing fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
B-75
<PAGE>
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees (in the
case of Global Income Fund and High Yield Fund) and other extraordinary
expenses) to the following percentage of each Fund's average daily net assets:
Short Duration Government Fund 0.05%
Adjustable Rate Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fund 0.05%
Global Income Fund 0.06%
High Yield Fund 0.01%
Such reductions or limits are calculated monthly on a cumulative
basis. Although the Advisers have no current intention of modifying or
discontinuing such expense limitations or the limitations on the management
fees, described above under "Management -- Investment Advisers," each may do so
in the future at its discretion. For the fiscal year ended October 31, 1996,
October 31, 1995 and October 31, 1994, Other Expenses of each Fund were reduced
by the Advisers in the following amounts:
1996 1995 1994
------- ------- -------
Adjustable Rate Fund 386,863 551,405 442,880
Short Duration
Government Fund 169,069 219,994 115,389
Short Duration
Tax-Free Fund 238,097 213,139 192,696
Core Fund* 233,065 176,469 141,815
Municipal Income Fund 238,203 196,265 198,806
Government Income Fund 219,091 242,036 224,285
Global Income Fund** 337,079 70,195 0
- ----------------------
* Core Fund commenced operations on January 5, 1994.
** For the fiscal year ended October 31, 1994, there was no expense
limitation.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by the
Advisers in performing certain accounting services not being provided by the
Trust's custodian.
CUSTODIAN AND SUB-CUSTODIANS
- ----------------------------
B-76
<PAGE>
State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, is the custodian of the Trust's portfolio
securities and cash. State Street also maintains the Trust's accounting
records. State Street may appoint sub-custodians from time to time to hold
certain securities purchased by the Trust in foreign countries and to hold cash
and currencies for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------
Arthur Andersen LLP, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the Trust.
In addition to audit services, Arthur Andersen LLP prepares the Trust's federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a dealer is dealing with a Fund as
principal and receives compensation equal to the spread between the dealer's
cost for a given security and the resale price of such security). In certain
foreign countries, debt securities in which the Global Income Fund, Core Fund
and High Yield Fund may invest are traded on exchanges at fixed commission
rates. In connection with portfolio transactions, the Management Agreement
provides that the Advisers shall attempt to obtain the best net price and the
most favorable execution. The Management Agreement provides that, on occasions
when an Adviser deems the purchase or sale of a security to be in the best
interests of a Fund as well as its other customers (including any other fund or
other investment company or advisory account for which the Advisers or an
affiliate act as investment adviser), a Fund, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution. In
such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the applicable Adviser in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to the applicable Fund and such other customers. In some instances,
this procedure may adversely affect the size and price of the position
obtainable for a Fund. The Management Agreement permits each Adviser, in its
discretion, to purchase and sell portfolio securities to and from dealers who
provide the Trust with brokerage or research services in which dealers may
execute brokerage transactions at a higher cost to the Fund. Brokerage and
research services furnished by firms through which the Fund's effect their
securities transactions may be used by the Advisers in servicing other accounts
and not all of these services may be used by the Adviser in connection with the
specific Fund generating the brokerage credits. The fees received under the
Management Agreement
B-77
<PAGE>
are not reduced by reason of the Adviser receiving such brokerage and research
services. In addition, in selecting brokers and dealers, the Advisers may take
into account sales of shares of the Funds and other funds in the Goldman Sachs
Group of Funds by such brokers and dealers.
For the fiscal years ended October 31, 1995 and 1994, the Funds then in
existence paid no brokerage commissions.
B-78
<PAGE>
For the fiscal year ended October 31, 1996, the Funds then in existence paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid/3/ Research
=========== ================= ======================= ==========
<S> <C> <C> <C> <C>
Fiscal Year Ended
October 31, 1996:
Adjustable Rate Fund $108,000 $108,000(100%)/1/ $2,121,317,579(100%)/2/ $N/A
Short Duration Government Fund 24,000 24,000(100%)/1/ 447,205,928(100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000(100%)/1/ 8,559,280(100%)/2/ N/A
Core Fixed Income Fund 4,000 4,000(100%)/1/ 43,548,299(100%)/2/ N/A
Government Income Fund 1,200 1,200(100%)/1/ 24,437,288(100%)/2/ N/A
Municipal Income Fund 2,750 2,750(100%)/1/ 51,101,625(100%)/2/ N/A
</TABLE>
_______________________________
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Refers to Market Value of Futures Contracts.
B-79
<PAGE>
During the fiscal year ended October 31, 1996, the Funds acquired and
sold securities of their regular broker-dealers: Chase Securities, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1996, Short Duration Tax-Free Fund, Global Income Fund
and Municipal Income Fund held no securities of their regular broker-dealers.
As of the same date, Short Duration Government Fund, Adjustable Rate Fund,
Government Income Fund and Core Fund held the following amounts of securities of
their regular broker-dealers, as defined in Rule 10b-1 under the 1940 Act, or
their parents ($ in thousands): Short Duration Government Fund: Lehman
Brothers, Inc. ($370), Nomura Securities ($280) and Bear Stearns ($280);
Adjustable Rate Fund: Lehman Brothers, Inc. ($4,531), Bear Stearns ($3,430) and
Nomura Securities ($3,430); Government Income Fund: Lehman Brothers, Inc.
($2,774), Nomura Securities (2,774) and Bear Stearns ($2,100); Nomura Securities
(2,774); Core Fund: Lehman Brothers, Inc. ($4,808), Nomura Securities ($3,640)
and Bear Stearns ($3,640).
SHARES OF THE TRUST
The Funds were reorganized from series of a Massachusetts business
trust as part of Goldman Sachs Trust, a Delaware business trust, by a
Declaration of Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees have authority to classify and reclassify any series of shares into one
or more classes of shares. As of the date of this Additional Statement, the
Trustees have authorized: (i) the issuance of six classes of shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares; (ii) the issuance of four classes of shares
of Adjustable Rate Fund: Institutional Shares, Administration Shares, Service
Shares and Class A Shares; and (iii) the issuance of five classes of shares of
Global Income Fund, Government Income Fund, Municipal Income Fund and High Yield
Fund: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. As of October 31, 1996, no Service Shares of the Adjustable
Rate Fund were outstanding; no Class A, Class B or Class C Shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund were
outstanding; no Class C Shares of Government Income Fund and Municipal Income
Fund were outstanding; and no shares of High Yield Fund were outstanding.
B-80
<PAGE>
Each Institutional Share, Administration Share, Service Share, Class A
Share, Class B Share and Class C Share of a Fund represents a proportionate
interest in the assets belonging to the applicable class of the Fund. All
expenses of a Fund are borne at the same rate by each class of shares, except
that fees under Administration and Service Plans are borne exclusively by
Administration and Service Shares, fees under Distribution and Authorized Dealer
Service Plans are borne exclusively by Class A, Class B or Class C Shares and
transfer agency fees are borne at different rates by Class A, Class B or Class C
Shares than Institutional, Administration and Service Shares. The Trustees may
determine in the future that it is appropriate to allocate other expenses
differently between classes of shares and may do so to the extent consistent
with the rules of the SEC and positions of the Internal Revenue Service. Each
class of shares may have different minimum investment requirements and be
entitled to different shareholder services. Currently, shares of a class may
only be exchanged for shares of the same or an equivalent class of another fund.
See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the institution's customers.
Administration Shares may be purchased for accounts held in the name
of an institution that provides certain account administration services to its
customers, including maintenance of account records and processing orders to
purchase, redeem and exchange Administration Shares. Administration Shares bear
the cost of account administration fees at the annual rate of up to 0.25% of the
average daily net assets of such Administration Shares.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge, through brokers
and dealers who are members of the National Association of Securities Dealers,
Inc. and certain other financial service firms that have sales agreements with
Goldman Sachs. Class A Shares of the Funds bear the cost of distribution (Rule
12b-1) fees at the aggregate rate of up to 0.25% of the average daily net assets
of such Class A Shares. Class A Shares also bear the cost of an Authorized
Dealer Service Plan at an annual rate of up to 0.25% of average daily net assets
attributable to Class A Shares.
B-81
<PAGE>
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge through brokers and dealers who are members of the National
Association of Securities Dealers, Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. Class B shares bear the
cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of
the average daily net assets attributable to Class B shares. Class B shares
also bear the cost of an Authorized Dealer Service Plan at an annual rate of up
to 0.25% of the average daily net assets attributable to Class B shares.
Class C Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 1.0% through brokers and dealers who are members of the
National Association of Securities Dealers Inc. and certain other financial
services firms that have sales arrangements with Goldman Sachs. Class C Shares
bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to
0.75% of the average daily net assets attributable to Class C Shares. Class C
Shares also bear the cost of an Authorized Dealer Service Plan at an annual rate
of up to 0.25% of the average daily net assets attributable to Class C Shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A, Class B and Class C Shares) to its customers and thus receive different
compensation with respect to different classes of shares of each Fund.
Dividends paid by each Fund, if any, with respect to each class of shares will
be calculated in the same manner, at the same time on the same day and will be
in the same amount, except for differences caused by the fact that the
respective account administration, service, authorized dealer service plan and
distribution fees relating to a particular class will be borne exclusively by
that class. Similarly, the net asset value per share may differ depending upon
the class of shares purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, each Fund's shares are fully paid and non-assessable by
the Trust. In the event of liquidation of a Fund, shareholders of that Fund are
entitled to share pro rata in the net assets of that Fund available for
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of July 15, 1997, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following Funds: Adjustable
Rate Fund:
Short Duration Government Fund:
Short Duration Tax-Free Fund:
Government Income Fund:
Core Fund:
B-82
<PAGE>
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act, applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company (such as
the Trust) shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of Trustees from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the election of Trustees (this method of voting being
referred to at "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for
any act or obligation of the series and satisfy any judgment thereon from the
assets of the series.
B-83
<PAGE>
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have
the right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of the Delaware Trust, all the powers and authorities of
Trustees under the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations
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of a Fund. Notice of such disclaimer will normally be given in each agreement,
obligation or instrument entered into or executed by a series or the Trustees.
The Declaration of Trust provides for indemnification by the relevant Fund for
all loss suffered by a shareholder as a result of a obligation of the series.
The Declaration of Trust also provides that a series shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of the series and satisfy any judgment thereon. In view of the above, the risk
of personal liability of shareholders is remote.
In addition to the requirement under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the series or class to which such action relates, shall join in the request for
the Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of other advisers in considering the merits of the request
and shall require an undertaking by the shareholders making such request to
reimburse the Fund for the expense of any such advisers in the event that the
Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason or willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
NET ASSET VALUE
Under the Act, the Trustees of the Trust are responsible for
determining in good faith the fair value of securities of the Funds. In
accordance with procedures adopted by the Trustees of the Trust, the net asset
value per share of each class of each Fund is calculated by determining the
value of the net assets attributable to each class of that Fund (assets,
including securities at value, minus liabilities) and dividing by the number of
outstanding shares of that class. All securities are valued as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time) on each Business Day (as defined in each Fund's Prospectus).
For the purpose of calculating the net asset value of the Funds,
investments are valued under valuation procedures established by the Trustees.
Portfolio securities, other than money market instruments and with the exception
of Global Income Fund, for which accurate market quotations are readily
available are valued as follows: (a) via electronic feeds to the custodian bank
containing dealer-supplied bid quotations or bid quotations
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from a nationally recognized pricing service; (b) securities for which the
custodian bank is unable to obtain an external price or with respect to which
the Adviser believes an external price does not reflect accurate market values,
will be valued by the Adviser in good faith based on valuation models that take
into account daily spread and yield changes on U.S. Treasury securities (i.e.,
matrix pricing); (c) overnight repurchase agreements will be valued by the
Adviser at cost; (d) term repurchase agreements (i.e., those whose maturity
exceeds seven days) and interest rate swaps, caps, collars and floors will be
valued at the average of the bid quotations obtained daily from at least two
dealers or, for term repurchase agreements, recognized counterparties; (e) debt
securities with a remaining maturity of 60 days or less are valued by the
Adviser at amortized cost, which the Trustees have determined to approximate
fair value; (f) spot and forward foreign currency exchange contracts will be
valued using a pricing service such as Reuters then calculating then mean
between the last bid and asked quotations supplied by certain independent
dealers in such contracts; (g) exchange-traded options and futures contracts
will be valued by the custodian bank at the last sale price on the exchange
where such contracts and options are principally traded; and (h) over-the-
counter options will be valued by an independent unaffiliated broker identified
by the portfolio manager/trader and contacted by the custodian bank.
Portfolio securities of the Global Income Fund for which accurate
market quotations are available are valued as follows: (a) securities listed on
any U.S. or foreign stock exchange or on the National Association of Securities
Dealers Automated Quotations System ("NASDAQ") will be valued at the last sale
price on the exchange or system in which they are principally traded, on the
valuation date. If there is no sale on the valuation day, securities traded
principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean between
the closing bid and asked prices, and (ii) on a foreign exchange will be valued
at the official bid price. The last sale price and official bid price for
securities traded principally on a foreign exchange will be determined as of the
close of the London Foreign Exchange; (b) over-the-counter securities not quoted
on NASDAQ will be valued at the last sale price on the valuation day or, if no
sale occurs, at the mean between the last bid and asked prices; (c) options and
futures contracts will be valued at the last sale price in the market where such
contract is principally traded; and (d) forward foreign currency exchange
contracts will be valued at the mean between the last bid and asked quotations
supplied by a dealer in such contracts.
All other securities, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved by the Board of Trustees.
Money market instruments held by a Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost
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method, which the Trustees have determined approximates market value.
The value of all assets and liabilities expressed in foreign
currencies will be converted into U.S. dollar values at current exchange rates
of such currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the time the Global Income, Core and High
Yield Funds calculate their net asset value. Occasionally, events affecting the
values of such securities may occur between the times at which they are
determined and the calculation of net asset value which will not be reflected in
the computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value, in which case an adjustment
may be made.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies and financial institutions. Each prospective
shareholder is urged to consult his own tax adviser with respect to the specific
federal, state, local and foreign tax consequences of investing in the Funds.
This summary is based on the laws in effect on the date of this Additional
Statement, which are subject to change.
GENERAL
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Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect to
be treated and intends to continue to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its gross
income (including tax-exempt interest) for its taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks or securities, or foreign currencies or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"); (b) a Fund derive less than 30% of its
gross income for its taxable year from the sale or other disposition of any of
the following which was held for less than three months: (i) stock or
securities,
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(ii) options, futures or forward contracts (other than options, futures or
forward contracts on foreign currencies) and (iii) foreign currencies and
foreign currency options, futures and forward contracts that are not directly
related to the Fund's principal business of investing in stocks or securities or
options and futures with respect to stocks or securities (the "short-short
test"); and (c) a Fund diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the market value of its total
(gross) assets is comprised of cash, cash items, United States Government
Securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (gross) assets is invested in the securities of any
one issuer (other than United States Government Securities and securities of
other regulated investment companies) or two or more issuers controlled by a
Fund and engaged in the same, similar or related trades or businesses. Gains
from the sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that are not directly related to Core
Fund's or Global Income Fund's principal business of investing in stock or
securities or options and futures with respect to stock or securities will be
treated as gains from the sale of investments held for less than three months
under the short-short test (even though characterized as ordinary income for
some purposes) if such currencies or instruments were held for less than three
months. In addition, future Treasury regulations could provide that qualifying
income under the 90% gross income test will not include gains from foreign
currency transactions that are not directly related to Core Fund's or Global
Income Fund's principal business of investing in stock or securities or options
and futures with respect to stock or securities. Using foreign currency
positions or entering into foreign currency options, futures and forward
contracts for purposes other than hedging currency risk with respect to
securities in Core Fund's or Global Income Fund's portfolio or anticipated to be
acquired may not qualify as "directly related" under these tests.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on the portion of its income and capital gains that it
distributes to its shareholders in any taxable year for which it distributes, in
compliance with the Code's timing and other requirements, at least 90% of its
"investment company taxable income" (which includes dividends, taxable interest,
taxable original issue discount income, market discount income, income from
securities lending, net short-term capital gain in excess of net long-term
capital loss, certain net realized foreign exchange gains, and any other taxable
income other than "net capital gain" as defined below and is reduced by
deductible expenses) and at least 90% of the excess of its gross tax-exempt
interest income over certain disallowed deductions ("net tax-exempt interest").
A Fund may retain for investment its "net capital gain" (which consists of the
excess of its net long-term capital gain over its
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net short-term capital loss). However, if a Fund retains any investment company
taxable income or net capital gain, it will be subject to tax at regular
corporate rates on the amount retained. If a Fund retains any net capital gain,
that Fund may designate the retained amount as undistributed net capital gain in
a notice to its shareholders who, if subject to U.S. federal income tax on long-
term capital gains, (i) will be required to include in income for federal income
tax purposes, as long-term capital gain, their shares of such undistributed
amount, and (ii) will be entitled to credit their proportionate shares of the
tax paid by that Fund against their U.S. federal income tax liabilities, if any,
and to claim refunds to the extent the credit exceeds such liabilities. For
U.S. federal income tax purposes, the tax basis of shares owned by a shareholder
of the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute for each taxable year to its
shareholders all or substantially all of its investment company taxable income
(if any), net capital gain and any net tax-exempt interest. Exchange control or
other foreign laws, regulations or practices may restrict repatriation of
investment income, capital or the proceeds of securities sales by foreign
investors such as Global Income Fund or Core Fund and may therefore make it more
difficult for Global Income Fund or Core Fund to satisfy the distribution
requirements described above, as well as the excise tax distribution
requirements described below. However, Global Income Fund and Core Fund
generally expect to be able to obtain sufficient cash to satisfy such
requirements from new investors, the sale of securities or other sources. If
for any taxable year a Fund does not qualify as a regulated investment company,
it will be taxed on all of its investment company taxable income and net capital
gain at corporate rates, its net tax-exempt interest (if any) may be subject to
the alternative minimum tax, and its distributions to shareholders will be
taxable as ordinary dividends to the extent of its current and accumulated
earnings and profits.
For federal income tax purposes, each Fund is permitted to carry
forward a net capital loss in any year to offset its own capital gains, if any,
during the eight years following the year of the loss. At October 31, 1996, the
Funds had approximately the following amounts of capital loss carry forwards:
Years of
Amount Expiration
----------- ----------
Adjustable Rate Fund $47,923,000 2000-2003
Short Duration
Government Fund $13,272,000 2002-2003
Short Duration
Tax-Free Fund $ 4,271,000 2002-2003
Core Fixed Income Fund $ 77,000 2004
Global Income Fund $ 4,472,000 2002
Municipal Income Fund $ 1,535,000 2002
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These amounts are available to be carried forward to offset future capital
gains to the extent permitted by the Code and applicable tax regulations.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year) and 100% of any taxable
ordinary income and the excess of capital gains over capital losses for the
prior year that were not distributed during such year and on which the Fund did
not pay federal income tax. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will be treated as if they were received by
shareholders on December 31 of the year declared.
The Tax Exempt Funds may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." The Tax Exempt Funds may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, the Tax
Exempt Funds may purchase beneficial interests in Municipal Securities held by
trusts, custodial arrangements or partnerships and/or combined with third-party
puts and other types of features such as interest rate swaps; those investments
may require the Fund to pay "tender fees" or other fees for the various features
provided.
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that tax-
exempt interest received by a regulated investment company with respect to such
obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax Exempt Funds intends to take
the position that it
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is the owner of any municipal obligations acquired subject to a standby
commitment or other third party put and that tax-exempt interest earned with
respect to such municipal obligations will be tax-exempt in its hands. There is
no assurance that the Service will agree with such position in any particular
case. Additionally, the federal income tax treatment of certain other aspects
of these investments, including the treatment of tender fees paid by these
Funds, in relation to various regulated investment company tax provisions is
unclear. However, the Adviser intends to manage the Tax Exempt Funds'
portfolios in a manner designed to minimize any adverse impact from the tax
rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging transactions entered into by a Fund, that
Fund may be required to defer the recognition of losses on futures or forward
contracts and options or underlying securities or foreign currencies to the
extent of any unrecognized gains on related positions held by the Fund and the
characterization of gains or losses as long-term or short-term may be changed.
The short-short test described above may limit each Fund's ability to use
options, futures and forward transactions as well as its ability to engage in
short sales. The tax provisions described above applicable to options, futures
and forward contracts may affect the amount, timing, and character of a Fund's
distributions to shareholders. Certain tax elections may be available to the
Funds to mitigate some of the unfavorable consequences described in this
paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by Core Fund and Global Income
Fund. Under these rules, foreign exchange gain or loss realized by Core Fund or
Global Income Fund with respect to foreign currencies and certain futures and
options thereon, foreign currency-denominated debt instruments, foreign currency
forward contracts, and foreign currency-denominated payables and receivables
will generally be treated as ordinary income or loss, although in some cases
elections may be available that would alter this treatment. If a net foreign
exchange loss treated as ordinary loss under Section 988 of the Code were to
exceed a Fund's investment company taxable income
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(computed without regard to such loss) for a taxable year, the resulting loss
would not be deductible by the Fund or its shareholders in future years. Net
loss, if any, from certain foreign currency transactions or instruments could
exceed net investment income otherwise calculated for accounting purposes with
the result being either no dividends being paid or a portion of Core Fund's,
High Yield Fund's or Global Income Fund's dividends being treated as a return of
capital for tax purposes, nontaxable to the extent of a shareholder's tax basis
in his shares and, once such basis is exhausted, generally giving rise to
capital gains.
Core and Global Income, and High Yield Funds may be subject to foreign
taxes on income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes in some cases. Because more than 50% of Global Income
Fund's total assets at the close of any taxable year will generally consist of
stock or securities of foreign corporations, Global Income Fund will generally
qualify to file an election with the Internal Revenue Service pursuant to which
shareholders of Global Income Fund would be required to (i) include in ordinary
gross income (in addition to taxable dividends actually received) their pro rata
shares of foreign income taxes paid by Global Income Fund that are treated as
income taxes under U.S. tax regulations (which excludes, for example, stamp
taxes, securities transaction taxes, and similar taxes) even though not actually
received by such shareholders, and (ii) treat such respective pro rata portions
as foreign income taxes paid by them. Global Income Fund may or may not make
this election for any particular taxable year. Core Fund will not satisfy the
50% requirement described above and, therefore, will not make this election.
Core Fund and, if it does not make the election, Global Income Fund will,
however, be entitled to deduct such taxes in computing the amounts they are
required to distribute.
If Global Income Fund makes this election, its shareholders may then deduct
such pro rata portions of qualified foreign taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of qualified foreign taxes paid by
Global Income Fund, although such shareholders will be required to include their
shares of such taxes in gross income if Global Income Fund makes the election
referred to above.
If a shareholder chooses to take a credit for the foreign taxes deemed paid
by such shareholder as a result of any such election by Global Income Fund, the
amount of the credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken which the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. For
this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by Global Income Fund
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will generally not be treated as income from foreign sources. This foreign tax
credit limitation may also be applied separately to certain specific categories
of foreign-source income and the related foreign taxes. As a result of these
rules, which have different effects depending upon each shareholder's particular
tax situation, certain shareholders of Global Income Fund may not be able to
claim a credit for the full amount of their proportionate shares of the foreign
taxes paid by the Fund.
Shareholders who are not liable for U.S. federal income taxes, including
tax-exempt shareholders, will ordinarily not benefit from this election. Each
year, if any, that Global Income Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of qualified foreign income taxes paid by Global Income Fund and (ii) the
portion of Fund dividends which represents income from each foreign country.
If Core, or Global Income or High Yield Funds acquire stock (including,
under proposed regulations, an option to acquire stock such as is inherent in a
convertible bond) in certain foreign corporations that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gain) or hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies") Core, Global Income or High Yield Funds could be subject to federal
income tax and additional interest charges on "excess distributions" received
from such companies or gain from the sale of such stock in such companies, even
if all income or gain actually received by Core, Global Income or High Yield
Funds is timely distributed to its shareholders. Core, Global Income or High
Yield Funds would not be able to pass through to their shareholders any credit
or deduction for such a tax. Certain elections may, if available, ameliorate
these adverse tax consequences, but any such election would require Core, Global
Income or High Yield Funds to recognize taxable income or gain without the
concurrent receipt of cash. Core, Global Income or High Yield Funds may limit
and/or manage their holdings in passive foreign investment companies to minimize
its tax liability or maximize its return from these investments.
A Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark-to-market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
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The federal income tax rules applicable to mortgage dollar rolls and
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations concerning the tax-exempt status of such obligations, nor does it
guarantee or represent that bond counsels' opinions are correct. Bond counsels'
opinions will generally be based in part upon covenants by the issuers and
related parties regarding continuing compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex requirements
that must be satisfied on a continuing basis in order for bonds to be and remain
tax-exempt. If the issuer of a bond or a user of a bond-financed facility fails
to comply with such requirements at any time, interest on the bond could become
taxable, retroactive to the date the obligation was issued. In that event, a
portion of a Tax Exempt Fund's distributions attributable to interest the Fund
received on such bond for the current year and for prior years could be
characterized or recharacterized as taxable income. The availability of tax-
exempt obligations and the value of a Tax Exempt Fund's portfolio may be
affected by restrictive federal income tax legislation enacted in recent years
or by similar, future legislation. If a Tax Exempt Fund satisfies the
applicable requirements, dividends paid by the Fund which are attributable to
tax exempt interest on Municipal Securities and designated by the Fund as
exempt-interest dividends in a written notice mailed to its shareholders within
sixty days after the close of its taxable year may be treated by shareholders
as items of interest excludable from their gross income under Section 103(a) of
the Code. Exempt-interest dividends a Tax Exempt Fund receives from other
regulated investment companies, including exempt-interest dividends on auction
rate preferred securities of such companies held by a Fund, are treated as
interest on Municipal Securities and may be distributed by a Tax Exempt Fund as
exempt-interest dividends. The recipient of tax-exempt income is required to
report such income on his federal income tax return. However, a shareholder is
advised to consult his tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Section 103(a) if such shareholder would be
treated as a
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"substantial user" under Section 147(a)(1) with respect to some or all of the
tax-exempt obligations held by a Tax Exempt Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of a
Tax Exempt Fund is not deductible to the extent attributable to exempt-interest
dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions from investment company taxable income, as
defined above, are taxable to shareholders who are subject to tax as ordinary
income whether paid in cash or reinvested in additional shares. Taxable
distributions include distributions from any Fund, including Short Duration Tax-
Free Fund and Municipal Income Fund, that are attributable to (i) taxable
income, including but not limited to dividends, taxable bond interest,
recognized market discount income, original issue discount income accrued with
respect to taxable bonds, income from repurchase agreements, income from
securities lending, income from dollar rolls, income from interest rate or
currency swaps, caps, floors and collars, and a portion of the discount from
certain stripped tax-exempt obligations or their coupons or (ii) capital gains
from the sale of securities or other investments (including from the disposition
of rights to when-issued securities prior to issuance) or from options, futures
or certain forward contracts. Any portion of such taxable distributions that is
attributable to a Fund's net capital gain, as defined above, may be designated
by the Fund as a "capital gain dividend," taxable to shareholders as long-term
capital gain whether received in cash or additional shares and regardless of the
length of time their shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less
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<PAGE>
than a minimum period, generally 46 days. Receipt of certain distributions
qualifying for the deduction may result in reduction of the tax basis of the
corporate shareholder's shares and may give rise to or increase its liability
for federal corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes,
will first reduce a shareholder's basis in his shares and, after the
shareholder's basis is reduced to zero, will generally constitute capital gains
to a shareholder who holds his shares as capital assets. Amounts that are not
allowable as a deduction in computing taxable income, including expenses
associated with earning tax-exempt interest income, do not reduce a Fund's
current earnings and profits for these purposes. Consequently, the portion, if
any, of Short Duration Tax-Free Fund's or Municipal Income Fund's distributions
from gross tax-exempt interest income that exceeds its net tax-exempt interest
would be taxable as ordinary income to the extent of such disallowed deductions
even though such excess portion may represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash and will have a cost basis in the shares received equal
to such amount.
TAXABLE U.S. SHAREHOLDERS -- SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of in
a transaction that is treated as a sale for tax purposes, the shareholder will
generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale, such gain or loss should be capital in
character, and long-term if the shareholder has a tax holding period for the
shares of more than one year, otherwise short-term, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund Shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. All or a portion
of a sales charge paid in purchasing Class A shares of Adjustable Rate Fund or
Global Income Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of that Fund or another fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment or
exchange privilege. Any disregarded portion of such charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired. If
a shareholder received a capital gain dividend with respect to
B-96
<PAGE>
shares and such shares have a tax holding period of six months or less at the
time of the sale or redemption, then any loss the shareholder realizes on the
sale or redemption will be treated as a long-term capital loss to the extent of
such capital gain dividend. Also, any losses realized by shareholders who
dispose of shares of Short Duration Tax-Free or Municipal Income Funds with a
tax holding period of six months or less are disallowed to the extent of any
exempt-interest dividends received with respect to such shares. Additionally,
any loss realized on a sale or redemption of shares of a Fund may be disallowed
under "wash sale" rules to the extent the shares disposed of are replaced with
other shares of the same Fund within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of, such as pursuant to
a dividend reinvestment in shares of the Fund. If disallowed, the loss will be
reflected in an adjustment to the basis of the shares acquired.
After the close of each calendar year, each of Short Duration Tax-Free Fund
and Municipal Income Fund will inform shareholders of the federal income tax
status of its dividends and distributions for such year, including the portion
of such dividends that qualifies as tax-exempt and the portion, if any, that
should be treated as a tax preference item for purposes of the federal
alternative minimum tax. Shareholders who have not held shares of Short
Duration Tax-Free Fund or Municipal Income Fund for such Fund's full taxable
year may have designated as tax-exempt or as a tax preference item a percentage
of distributions which is not equal to the actual amount of tax-exempt income or
tax preference item income earned by Short Duration Tax-Free Fund or Municipal
Income Fund during the period of their investment in Short Duration Tax-Free
Fund or Municipal Income Fund, as the case may be.
All distributions, whether received in shares or in cash, as well as
redemptions and exchanges, must be reported by each shareholder who is required
to file a U.S. Federal income tax return.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of
B-97
<PAGE>
31% in the case of non-exempt shareholders who fail to furnish the Funds with
their correct taxpayer identification number and with certain required
certifications or if the Service or a broker notifies the Funds that the number
furnished by the shareholder is incorrect or that the shareholder is subject to
backup withholding as a result of failure to report interest or dividend income.
However, any taxable distributions from Short Duration Tax-Free Fund or
Municipal Income Fund will not be subject to backup withholding if the
applicable Fund reasonably estimates that at least 95% of its distributions will
be exempt-interest dividends. A Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment company taxable income distributed by a
Fund to a shareholder who is not a U.S. person will be subject to U.S.
withholding tax at the rate of 30% (or a lower rate provided by an applicable
tax treaty) unless the dividends are effectively connected with a U.S. trade or
business of the shareholder, in which case the dividends will be subject to tax
on a net income basis at the graduated rates applicable to U.S. individuals or
domestic corporations. Distributions of net capital gain, including amounts
retained by a Fund which are designated as undistributed capital gains, to a
shareholder who is not a U.S. person will not be subject to U.S. federal income
or withholding tax unless the distributions are effectively connected with the
shareholder's trade or business in the United States or, in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met. Non-U.S. shareholders may also be subject to U.S.
withholding tax on deemed income resulting from any election by Global Income
Fund to treat qualified foreign taxes it pays as passed through to shareholders
(as described above), but they may not be able to claim a U.S. tax credit or
deduction with respect to such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the
B-98
<PAGE>
United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Thirty-day yield and average annual total return values are computed pursuant to
formulas specified by the SEC. Each Fund may also from time to time quote
distribution rates in reports to shareholders and in sales literature.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price per share on the
last day of such period. Yield is then annualized by assuming that yield is
realized each month for twelve months and is reinvested every six months. Net
investment income per share is equal to the dividends and interest earned during
the period, reduced by accrued expenses for the period. The calculation of net
investment income for these purposes may differ from the net investment income
determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, a Tax Exempt Fund's tax-free yield. Tax equivalent yield is
calculated by dividing a Tax Exempt Fund's tax-exempt yield by one minus a
stated federal and/or state tax rate.
Distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share on the last day of the period.
B-99
<PAGE>
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price applicable to the relevant
class (i.e., net asset value in the case of each class other than Class A) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption (and in the case
of Class B and Class C Shares payment of any contingent deferred sales charge)
at the end of the period. This calculation assumes a complete redemption of the
investment. It also assumes that all dividends and distributions are reinvested
at net asset value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price per share with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period.
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
Thirty-day yield, tax equivalent yield (Short Duration Tax-Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A, Class B or Class C Shares which is based upon a Fund's net asset value per
share would be reduced if a sales charge were taken into account.
B-100
<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- -------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 6.00% 5.94%
Administration Shares 5.75% 5.69%
Service Shares/2/
Class A Shares
- Assumes 1.5% sales charge 5.66% 5.35%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.43% 6.16%
Administration Shares 6.19% 5.93%
Service Shares 5.96% 5.71%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.34% 3.71%
Administration Shares 4.09% 3.42%
Service Shares 3.84% 3.22%
CORE FUND
Institutional Shares 6.60% 6.25%
Administration Shares 6.37% 6.03%
Service Shares 6.12% 5.78%
GLOBAL INCOME FUND
Institutional Shares 5.20% 4.76%
Service Shares/2/
Class A Shares
(Assumes 4.5% sales charge) 4.54% 4.08%
Class B Shares 4.23% 3.80%
MUNICIPAL INCOME FUND
Class A Shares 4.21% 3.56%
(assumes 4.5% sales charge)
Class B Shares 3.68% 3.25%
GOVERNMENT INCOME FUND
Class A Shares 6.04% 4.76%
(assumes 4.5% sales charge)
Class B Shares 5.57% 4.48%
</TABLE>
B-101
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION RATE
<S> <C> <C> <C>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- -------------------------------- ------------------ ----------- ------------
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 5.87% 5.81%
Administration Shares 5.62% 5.56%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.62% 5.31%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.24% 5.97%
Administration Shares 6.00% 5.72%
Service Shares 5.78% 5.49%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.19% 3.56%
Administration Shares 3.94% 3.28%
Service Shares 3.69% 3.06%
MUNICIPAL INCOME FUND
Class A Shares 4.27% 3.59%
-assumes no sales charge
Class B Shares 3.53% 3.09%
GOVERNMENT INCOME FUND
Class A Shares 6.33% 5.00%
-assumes no sales charge
Class B Shares 5.58% 4.50%
CORE FUND
Institutional Shares 6.46% 6.12%
Administration Shares 6.23% 5.89%
Service Shares 5.98% 5.63%
GLOBAL INCOME FUND
Institutional Fund 5.95% 6.18%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.44% 4.96%
Class B Shares 5.02% 4.59%
</TABLE>
B-102
<PAGE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---------------------------- --------------------- ------------- -----------------
<S> <C> <C> <C>
30-Days
ended
10/31/96
SHORT DURATION
TAX-FREE FUND/3/
Institutional Shares 6.94% 5.89%
Administration Shares 6.52% 5.43%
Service Shares 6.11% 5.07%
MUNICIPAL INCOME FUND/3/
Class A Shares 7.07% 5.94%
-assumes no sales charge
Class B Shares 5.84% 5.12%
_______________________________
</TABLE>
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to limit its advisory fees and to maintain
expenses at a specified level.
2 There were no Service Shares outstanding during the periods indicated.
3 The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 39.6% federal income tax rate.
The above tables should not be considered a representation of future
performance.
B-103
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-------------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Expense Expense
Fund Date Investment Period Limitations Limitations
- -------------------------------- ---------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/96 5.32% 5.19%
11/1/95 one year ended
10/31/96 6.86% 6.80%
11/1/91 five years ended
10/31/96 5.13% 5.05%
Administration Shares 4/15/93/1b/ ended 10/31/96 4.69% 4.64%
11/1/95 one year ended
10/31/96 6.60% 6.53%
Service Shares/1c/ N/A N/A
Class A Shares 5/12/95/1d/ ended 10/31/96
Assumes 1.5% Sales Charge 5.29% 4.96%
Assumes No Sales Charge 6.40% 6.07%
11/1/95 one year ended
Assumes 1.5% Sales Charge 10/31/96 4.99% 4.66%
Assumes No Sales Charge 6.60% 6.27%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/96 7.24% 6.84%
11/1/95 one year ended
10/31/96 6.75% 6.47%
11/1/91 five years
ended 10/31/96 5.67% 5.44%
Administration Shares 2/28/96/2b/ ended 10/31/96 4.00% 3.82%
Service Shares 4/10/96/2b/ ended 10/31/96 4.35% 4.20%
</TABLE>
B-104
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-----------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ------------------------------ -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
Institutional Shares 10/1/92/3a/ ended 10/31/96 4.21% 3.71%
11/1/95 one year ended
10/31/96 4.50% 3.92%
Administration Shares 5/20/93/3b/ ended 10/31/96 3.51% 3.15%
11/1/95 one year ended
10/31/96 4.24% 3.66%
Service Shares 9/20/94/3c/ ended 10/31/96 4.36% 3.92%
11/1/95 one year ended
10/31/96 3.98% 3.40%
CORE FUND
Institutional Shares 1/15/94/4a/ 10/31/96 6.34% 5.70%
11/1/95 one year ended
10/31/96 5.98% 5.58%
Administration Shares 2/28/96/4b/ ended
10/31/96 3.56% 3.29%
Service Shares 3/13/96/4b/ ended
10/31/96 4.90% 4.69%
</TABLE>
B-105
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-----------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ------------------------------ -------------- ------------------- --------------- ------------
<S> <C> <C> <C> <C>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/96
Assumes 4.5% Sales Charge 7.08% 6.76%
Assumes No Sales Charge 8.02% 7.71%
Assumes 4.5% Sales Charge 11/1/95 one year 6.08% 5.57%
Assumes No Sales Charge ended 10/31/96 11.05% 10.53%
Assumes 4.5% Sales Charge 11/1/91 five years 7.02% 6.73%
Assumes No Sales Charge ended 10/31/96 8.01% 7.69%
Class B Shares/5b/ 5/1/96 ended 10/31/96/5d/ 6.24% 6.01%
Institutional Shares 8/1/95/5e/ ended 10/31/96 12.95% 12.45%
11/1/95 one year
ended 10/31/96 11.55% 11.05%
Service Shares/5f/
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/96
Assumes 4.5% Sales Charge 3.80% 2.78%
Assumes No Sales Charge 5.27% 4.23%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.35% 0.65%
Assumes No Sales Charge 6.13% 5.40%
Class B Shares/6b/ 5/1/96 ended 10/31/96 4.40% 4.07%
</TABLE>
B-106
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
--------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ----------------------------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/96
Assumes 4.5% Sales Charge 5.41% 2.92%
Assumes No Sales Charge 6.72% 4.21%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.06% -0.33%
Assumes No Sales Charge 5.80% 4.35%
Class B Shares/7b/ 5/1/96 ended 10/31/96 4.85% 4.17%
- ----------------
</TABLE>
1a Institutional Shares of Adjustable Rate Fund commenced operations on
July 17, 1991.
1b Administration Shares of Adjustable Rate Fund commended operations on
April 15, 1993.
1c No Service Shares of Adjustable Rate Fund were outstanding during the
periods indicated.
1d Class A shares of Adjustable Rate Fund commenced operations on May 12,
1995.
2a Institutional Shares of Short Duration Government Fund commenced
operations on August 15, 1988.
2b Administration Shares of Short Duration Government Fund commenced
operations on February 28, 1996. Service Shares of Short Duration
Government Fund commenced operations on April 10, 1996. An aggregate
total return (not annualized) is shown instead of an average annual
total return since Administration and Service Shares have not
completed a full 12 months of operation as of October 31, 1996.
3a Institutional Shares of Short Duration Tax-Free Fund commenced
operations on October 1, 1992.
3b Administration Shares of Short Duration Tax-Free Fund commenced
operations on May 20, 1993.
3c Service Shares of Short Duration Tax-Free Fund commenced operations on
September 20, 1994.
4a Institutional Shares of Core Fund commenced operations on January 5,
1994.
4b Administration Shares of Core Fund commenced operations on February
28, 1996. Service Shares of Core Fund commenced operations on March
13, 1996. An aggregate total return (not annualized) is shown instead
of an average annual total return since Administration and Service
Shares have not completed a full 12 months of operation as of October
31, 1996.
5a Class A Shares of Global Income Fund commenced operations on August 2,
1991.
5b Class B Shares of Global Income Fund commenced operations on May 1,
1996.
5c On November 27, 1992, the maximum sales charge was changed from 3% to
4.5% of the offering price. All performance figures in this table
incorporate the sales charge currently in effect.
5d An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a
full 12 months of operation as of October 31, 1996.
5e Institutional Shares of Global Income Fund commenced operations on
August 1, 1995.
5f No Service Shares of Global Income Fund were outstanding during the
periods indicated.
6a Class A shares of Municipal Income Fund commenced operations on July
20, 1993.
6b Class B Shares of Municipal Income Fund commenced operations on May 1,
1996. An aggregate total return (not annualized) is shown instead of
an average annual total return since Class B Shares have not completed
a full 12 months of operation as of October 31, 1996.
B-107
<PAGE>
7a Class A Shares of Government Income Fund commenced operations on
February 10, 1993.
7b Class B Shares of Government Income Fund commenced operations on May
1, 1996. An aggregate total return (not annualized) is shown instead
of an average annual total return since Class B Shares have not
completed a full 12 months of operation as of October 31, 1996.
The above table should not be considered a representation of future
performance.
B-108
<PAGE>
Occasionally statistics may be used to specify a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare a Fund's net
asset value or performance relative to a market index. One measure of volatility
is beta. Beta is the volatility of a fund relative to the total market. A beta
of more than 1.00 indicates volatility greater than the market, and a beta of
less than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
Each Fund may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to, Lipper
------
Analytical Services, Inc., Donaghues Money Fund Report, Barron's, The Wall
- ------------------------- --------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- ----------------- -------------------------------- -----
In addition, Adjustable Rate, Government Income and Short Duration
Government Funds may from time to time advertise their performance relative to
certain indices and benchmark investments, including: (a) the Shearson Lehman
Government/Corporate (Total) Index, (b) Shearson Lehman Government Index, (c)
Merrill Lynch 1-3 Year Treasury Index, (d) Merrill Lynch 2-Year Treasury Curve
Index, (e) the Salomon Brothers Treasury Yield Curve Rate of Return Index, (f)
the Payden & Rygel 2-Year Treasury Note Index, (g) 1 through 3 year U.S.
Treasury Notes, (h) constant maturity U.S. Treasury yield indices, (i) the
Consumer Price Index, (j) the London Interbank Offered Rate, (k) other taxable
investments such as certificates of deposit, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds, repurchase
agreements, commercial paper and (l) historical data concerning the performance
of adjustable and fixed-rate mortgage loans.
Short Duration Tax-Free and Municipal Income Funds may from time to
time advertise their performance relative to certain indices, any components of
such indices and benchmark investments, including but not limited to: (a) the
Lipper Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed Income
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
Lehman Brothers Municipal Bond Indices; (c) the Merrill Lynch Municipal Bond
Institutional Total Rate of Return Indices; (d) Bond Buyer Indices; (e)
IBC/Donoghue's Money Fund Averages/Institutional Only Tax Free; and constant
maturity U.S. Treasury yield indices.
Core, Global Income and High Yield Funds may each from time to time
advertise its performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income
B-109
<PAGE>
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
CDA Mutual Fund Report published by CDA Investment Technologies, Inc. (which
analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Salomon Brothers' World Bond Index (which measures the total
return in U.S. dollar terms of government bonds, Eurobonds and foreign bonds of
ten countries, with all such bonds having a minimum maturity of five years); (f)
the Lehman Brothers Aggregate Bond Index or its component indices; (g) the
Standard & Poor's Bond Indices (which measure yield and price of corporate,
municipal and U.S. government bonds); (h) the J.P. Morgan Global Government Bond
Index; (i) other taxable investments including certificates of deposit (CDs),
money market deposit accounts (MMDAs), checking accounts, savings accounts,
money market mutual funds and repurchase agreements; (j) historical investment
data supplied by the research departments of Goldman Sachs, Lehman Brothers
Inc., First Boston Corporation, Morgan Stanley & Co. Incorporated, Salomon
Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson
Lufkin and Jenrette Securities Corporation; and (k) Donoghue's Money Fund Report
(which provides industry averages for 7-day annualized and compounded yields of
taxable, tax-free and U.S. government money funds).
The composition of the investments in the above-referenced indices and
the characteristics of a Fund's benchmark investments are not identical to, and
in some cases may be very different from, those of a Fund's portfolio. These
indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by the a Fund to calculate its performance figures.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Goldman Sachs as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
regulated matters believed to be of relevance to a Fund.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
.. The performance of various types of securities (taxable money market funds,
U.S. Treasury securities, adjustable rate mortgage securities, government
securities, municipal bonds) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
B-110
<PAGE>
.. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/ All
Taxable Index) over varying periods of time.
.. Credit Ratings of domestic government bonds in various countries
.. Price volatility comparisons of types of securities over different periods
of time.
.. Price and yield comparisons of a particular security over different periods
of time.
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other material
which highlight or summarize the services provided in support of an asset
allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein.
Performance data is based on historical results and is not intended to
indicate future performance. Total return, thirty-day yield, tax equivalent
yield and distribution rate will vary based on changes in market conditions,
portfolio expenses, portfolio investments and other factors. The value of a
Fund's shares will fluctuate and an investor's shares may be worth more or less
than their original cost upon redemption. The Trust may also, at its
discretion, from time to time make a list of a Fund's holdings available to
investors upon request.
OTHER INFORMATION
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value of each Fund during any 90-day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net
B-111
<PAGE>
asset value of each respective Fund at the time of redemption by a distribution
in kind of securities (instead of cash) from such Fund. The securities
distributed in kind would be readily marketable and would be valued for this
purpose using the same method employed in calculating each Fund's net asset
value per share. See "Net Asset Value." If a shareholder receives redemption
proceeds in kind, the shareholder should expect to incur transaction costs upon
the disposition of the securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such other period as the
SEC may by order permit for the protection of shareholders of a Fund.
The Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen LLP,
independent public accounts, for each Fund contained in each Fund's 1996 Annual
Report are hereby incorporated by reference and attached hereto. A copy of the
annual reports may be obtained without charge by writing Goldman, Sachs & Co.,
4900 Sears Tower, Chicago, Illinois 60606 or by calling Goldman, Sachs & Co., at
the telephone number on the back cover of each Fund's Prospectus. Unaudited
financial statements for each Fund for the six months ended April 30, 1997 are
also attached hereto.
B-112
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders
- -------------------------------------------------------------------------------
Dear Shareholders:
A return of robust economic growth during the period under review fueled
fears of higher inflation, which pushed Treasury yields higher across the
maturity spectrum. In this semiannual report, we will review the performance of
the Goldman Sachs Fixed Income Funds for the six-month period ended April 30,
1997, as well as provide a brief overview of the U.S. economy and the bond
market. We are pleased to note that during the period, the Goldman Sachs Fixed
Income Funds performed well compared with their peers.
Economic Activity Rebounded, Led by Consumer Spending
After a sluggish third quarter, the pace of economic growth strengthened
during the period. During November and December, consumer spending rebounded,
the trade deficit narrowed and industrial production climbed significantly. As a
result, fourth-quarter real Gross Domestic Product (GDP) growth was 3.8%
(annualized), up from 2.1% in the prior quarter.
Economic activity continued to gain momentum during the first quarter of
1997, with real GDP surging 5.8%, the largest jump in a decade. Signs of
strength were led by a sharp increase in consumer spending, which resulted in
solid sales gains for automobile manufacturers and retailers. In addition,
upbeat reports on factory orders and inventories, construction outlays and labor
market conditions all pointed towards economic acceleration. Despite the growth
spurt, reported inflation remained surprisingly mild during the period.
Furthermore, several economic reports for April came in at the low end of
consensus expectations, which suggested that the economy could moderate during
the second quarter.
The Bond Market Rallied, Then Fell as Inflation Fears Reemerged
The U.S. fixed income market came under pressure during the period under
review. In November, bonds performed well in anticipation of a continued
slowdown in U.S. economic growth. However, the market experienced a reversal in
December when better-than-expected economic data, in particular, robust
employment figures, triggered a sell-off and drove interest rates higher. In
early February, bond prices briefly rebounded, but later faltered as it became
increasingly likely that the U.S. Federal Reserve would raise short term
interest rates in March. By the end of March, the yield on the benchmark 30-year
Treasury bond rose above the psychologically important 7% threshold. Despite the
lackluster performance of the U.S. bond market for the period as a whole, a
sharp rebound at the end of April helped bonds recoup part of their earlier
losses.
The Fed Raised the Federal Funds Rate in March
In March 1997, the Fed raised the federal funds rate by 25 basis points to
5.50%. Though there were few signs of actual inflation, the Fed tightening was
prompted by the economy's pervasive strength. The Fed's action was its first
since a quarter-point cut in January 1996.
During the period under review, the yield curve shifted higher across all
maturities. The yield on six-month Treasury bills rose from 5.26% on October 31,
1996 to approximately 5.52% on April 30, 1997. For the same period, the yield on
the 30-year U.S. Treasury bond rose more dramatically, climbing from 6.64% to
6.95%.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Table of Contents
<S> <C>
Market Overview 1
Goldman Sachs Adjustable Rate Government Fund 3
Goldman Sachs Short Duration Government Fund 9
Goldman Sachs Short Duration Tax-Free Fund 14
Goldman Sachs Core Fixed Income Fund 20
Financial Statements 28
Notes to Financial Statements 32
Financial Highlights 39
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
1
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
10/31/96 4/30/97
<S> <C> <C>
3-Month 5.14% 5.23%
6-Month 5.26% 5.52%
1 5.40% 5.89%
2 5.73% 6.27%
3 5.86% 6.40%
5 6.07% 6.57%
10 6.34% 6.71%
15 6.64% 6.95%
</TABLE>
Source: Bloomberg, L.P.
The yield curve shifted upward across all maturities and steepened sharply at
the short end.
Outlook: Strengthening Economic Growth May
Trigger Further Preemptive Rate Hikes
Despite reports of economic moderation and minimal price acceleration, the
economy's broad-based fundamental strength and resilient equity market make
additional Fed rate increases likely this year. Goldman Sachs' economists
believe that the speed and extent of Fed tightening will depend in large part on
the emergence of conclusive signs that the economy is nearing maximum capacity,
rather than immediate evidence of increased inflationary pressures.
In conclusion, we thank you for your support of the Goldman Sachs Fixed
Income Funds and we look forward to continuing our relationship.
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
May 30, 1997
- -------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs 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.
Special Events
As of March 27, 1997, the fund opened a new share class (Service). In
addition, effective May 1, 1997, the name of the GS Adjustable Rate Government
Fund was changed to the Goldman Sachs Adjustable Rate Government Fund. The
fund's objective and investment focus remain the same.
ARM Market Performed Well, Buoyed by Low Volatility and Strong Investor Demand
The ARM market performed well during the period under review, supported by
low volatility and stable prepayments. In addition, investor interest in the
sector increased as opportunities in short-duration alternatives diminished. In
combination, these factors drove ARM spreads approximately 15 basis points
tighter over the period.
Performance Review
During the six-month period ended April 30, the fund's Institutional,
Administration and Class A shares all outperformed the six-month U.S. Treasury
bill and the one-year U.S. Treasury bill. (The fund's duration as of April 30
was 0.7 years, in between that of the six-month and the one-year U.S. Treasury
bill.) The fund's positive performance was due to the tightening of yield
spreads between ARMs and Treasuries, as well as the incremental yield of ARMs
over similar-duration Treasuries.
The fund also performed well compared with its peers. For the 12 months
ended April 30, 1997, the fund's Institutional shares ranked 11th out of 47
adjustable rate mortgage funds based on total return, as tracked by Lipper
Analytical Services, Inc. (Lipper does not rank the fund's Administration,
Service 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.)
We are pleased to announce that for the three- and five-year periods ended
April 30, 1997, the fund's Institutional shares were rated "five stars" (out of
1,193 taxable bond funds) and "four stars" (out of 641 taxable bond funds),
respectively, according to Morningstar, Inc., an independent rating agency. In
addition, as of April 30, Morningstar rated the fund's Administration shares
"five stars" for the one-year period (out of 1,709 taxable bond funds) and "four
stars" (out of 1,193 taxable bond funds) for the three-year period./1/
- ------------------------------------------------
/1/Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-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" for the one-year period and were rated among 1,709 taxable bond funds.
The Morningstar ratings apply only to the fund's Institutional and
Administration shares; the fund's Class A and Service shares have not been
rated. Class A and Service shares are subject to additional fees and expenses
which may have the effect of lowering performance and may affect any future
Morningstar rating. Morningstar rates each fund against its peers in the same
category. In all, there are four Morningstar categories (domestic equity,
international equity, taxable bond and municipal). 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.
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
6-Month 1-Year
Institu- Adminis- Treasury Treasury
tional tration Class A Service* Bill Bill
------ ------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Return 3.28% 3.16% 3.16% 0.74% 2.65% 2.56%
(based on net
asset value)
- --------------------------------------------------------------------------------
Return From 2.97% 2.85% 2.85% 0.20% NA NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From 0.31% 0.31% 0.31% 0.54% NA NA
Price
Appreciation
- --------------------------------------------------------------------------------
NAV (4/30/97) $9.86 $9.86 $9.86 $9.86 NA NA
- --------------------------------------------------------------------------------
NAV Change +$0.03 +$0.03 $0.03 $0.02 NA NA
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period. Performance and net asset value
(NAV) change are from its inception date on 3/27/97.
Portfolio Composition and Investment Strategies
Portfolio composition remained similar compared with six months ago, with
the exception of a slight reduction in collateralized mortgage obligations
(CMOs) and an increase in repurchase agreements/cash equivalents.
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
ARMs 85.8%
SBA Floaters 7.4%
Repos/Cash Equivalents 4.8%
CMOs 2.0%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
.. ARMs. As of April 30, 1997, the fund's primary investment continued to be
in ARMs, which accounted for 85.8% of the portfolio. We emphasized seasoned,
fully indexed one-year Constant Maturity Treasury (CMT) securities that were
issued prior to 1990, which are attractive because of their lower prepayment
risk. (Seasoned issues are less likely to be impacted by prepayments than newly
issued mortgages because homeowners who did not refinance in earlier periods of
lower rates are generally less likely to refinance in the future.)
.. SBA Floaters. The portfolio's position in securities backed by Small
Business Administration (SBA) loans was 7.4%, approximately the same as six
months ago. The sector offered incremental yield over similar-duration
Treasuries and increased fund diversification.
.. CMOs. We reduced the portfolio's CMO allocation to 2.0%, down from 3.5%
last October. Within the sector, the fund's largest holding was a 1.1% position
in super floaters. Because super floaters are generally considered to be higher
risk than conventional floaters, we use them selectively in seeking to enhance
fund performance. The remainder of the CMO position (0.9%) was invested in a
variety of other structures.
.. Duration. We seek excess return over similar-duration U.S. Treasuries
through our sector weightings and specific security selection rather than
attempting to make interest rate predictions. Therefore, we manage the fund's
duration to approximate that of the Index, partly through the use of futures. As
of April 30, the fund's duration was 0.7 years, unchanged from six months ago.
Credit Quality. The fund invests exclusively in securities issued by the U.S.
government, its agencies or instrumentalities, which are considered to be of the
highest credit quality.
Market Outlook
Despite some suggestion of economic moderation, we continue to believe that
interest rates are likely to move higher during the balance of the year. This
expectation is
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
- --------------------------------------------------------------------------------
predicated on the economy's broad-based fundamental strength, as well as the
Fed's well-publicized commitment to monetary discipline.
As of the end of the period, we have a neutral outlook for the ARM sector.
ARMs are currently trading at fair value, reflecting a stable prepayment
outlook. Seasoned one-year CMT ARMs remain attractive as a core holding due to
their prepayment stability in a falling rate environment and reduced cap risk in
a rising rate environment.
Distribution Policy
During the six-month period ended April 30, 1997, the fund's
Institutional, Administration and Class A shares distributed $0.29, $0.28 and
$0.28 per share, respectively. From their inception on March 27 through April
30, the fund's Service shares paid out $0.05 per share.
The fund distributes substantially all of its investment company taxable
income. The dividend is set at the start of each month, based on the income the
fund is expected to generate. However, because the fund invests primarily in
mortgage securities that are subject to prepayments, we cannot precisely predict
the amount of principal and interest that a portfolio will receive. Therefore,
at times a portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy has not affected the management of
the fund or significantly affected its NAV per share.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
Goldman Sachs Adjustable Rate Government Fund
May 30, 1997
- --------------------------------------------------------------------------------
5
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--94.4%
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a)--25.6%
$ 2,499,665 7.41% 07/01/18 $ 2,603,551
1,337,640 7.57 12/01/18 1,390,932
10,052,878 7.45 05/01/19 10,420,411
19,024,919 7.65 11/01/19/(b)/ 19,952,383
4,828,320 7.75 05/01/20 5,061,431
17,560,720 7.50 06/01/20/(b)/ 18,260,339
36,305,075 7.77 02/01/22/(b)/ 38,097,820
6,736,255 7.27 06/01/22 6,940,632
3,743,219 7.48 08/01/22 3,889,430
6,343,944 7.55 09/01/22 6,616,543
5,798,265 7.29 09/01/22 5,961,312
16,426,906 7.65 11/01/22 17,181,558
9,544,724 7.68 06/01/24 10,002,584
3,422,929 7.32 02/01/28 3,543,279
1,677,210 7.68 07/01/30 1,756,089
- -------------------------------------------------------------------------------
$ 151,678,294
- -------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association (FNMA)(a)--53.9%
$ 1,626,928 7.45% 04/01/03 $ 1,648,729
1,063,451 7.81 11/01/14 1,116,453
671,988 7.60 12/01/15 696,771
5,800,505 6.72 03/01/17 5,911,063
3,475,919 7.56 03/01/17 3,625,279
11,078,486 7.04 04/01/17 11,476,093
734,378 7.51 11/01/17 764,216
4,070,446 6.49 03/01/18 4,114,976
755,256 7.67 05/01/18 781,101
1,196,229 7.88 05/01/18 1,250,167
1,291,177 7.32 06/01/18/(c)/ 1,326,271
7,811,611 7.50 06/01/18 8,172,898
4,895,608 7.48 07/01/18 5,117,428
6,964,915 7.61 07/01/18 7,297,907
5,963,754 7.27 08/01/18 6,190,198
3,775,708 7.75 08/01/18 3,964,493
3,424,816 7.60 10/01/18 3,584,275
6,244,935 7.49 11/01/18 6,486,927
1,919,120 7.39 12/01/18 1,992,296
12,663,766 7.67 12/01/18/(b)/ 13,296,954
3,245,589 7.37 06/01/19 3,366,779
4,222,057 7.31 07/01/19 4,376,415
1,572,328 7.40 07/01/19 1,632,768
1,466,614 7.35 08/01/19 1,513,589
4,212,924 7.63 09/01/19 4,404,485
2,660,817 7.31 01/01/20 2,761,848
2,845,244 7.79 03/01/20 2,987,506
8,236,162 7.39 07/01/20 8,548,889
4,385,557 7.67 02/01/21 4,600,713
4,953,699 7.40 04/01/21 5,140,998
69,652,900 7.65 09/01/21/(b)/ 72,928,676
5,721,530 7.10 01/01/22 5,920,639
20,957,781 7.66 02/01/22/(b)/ 21,972,976
13,609,253 7.80 06/01/22 14,266,989
645,000 7.56 08/01/22 661,628
2,036,342 7.73 08/01/22 2,137,202
29,003,668 7.67 09/01/22/(b)/ 30,449,210
1,821,772 7.57 02/01/23 1,868,464
272,046 6.23 12/01/23 268,986
15,812,397 7.56 04/01/25 16,501,660
16,515,667 7.59 09/01/25 17,302,804
3,390,319 7.41 08/01/27 3,523,830
2,373,397 7.43 10/01/27 2,466,102
1,077,506 7.09 07/01/29 1,111,350
- -------------------------------------------------------------------------------
$ 319,529,001
- -------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association (GNMA)(a)--3.9%
$ 1,430,321 7.00% 03/20/16 $ 1,462,732
1,877,843 7.13 08/20/17 1,929,784
975,525 7.13 08/20/18 1,004,186
6,329,270 7.00 02/20/21 6,492,439
3,551,234 6.50 01/20/22 3,624,282
4,539,525 7.13 04/20/22 4,679,978
3,724,927 7.00 03/20/23 3,816,299
- -------------------------------------------------------------------------------
$ 23,009,700
- -------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(a)--7.3%
$ 1,395,750 7.00% 10/25/14 $ 1,435,878
2,310,178 7.00 02/25/15 2,370,450
2,799,672 7.00 04/25/15 2,871,428
1,880,379 7.00 05/25/15 1,928,573
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Adjustable Rate Small Business Administration
(SBA)(continued)
$ 1,022,753 7.00% 08/25/15 $ 1,055,992
1,661,578 7.00 09/25/15 1,709,348
2,041,631 7.00 10/25/15 2,094,591
1,059,044 6.62 09/25/16 1,070,302
4,076,904 6.62 07/25/17 4,121,505
4,036,805 6.62 08/25/17 4,080,967
2,744,035 6.62 08/25/17 2,774,055
1,756,376 6.62 08/25/17 1,775,590
3,752,990 6.62 09/25/17 3,794,048
1,761,608 6.62 10/25/17 1,781,144
1,774,313 6.62 10/25/17 1,793,990
8,582,508 6.62 02/25/18 8,677,688
- -------------------------------------------------------------------------------
$ 43,335,549
- -------------------------------------------------------------------------------
Collateralized Mortgage Obligations--3.7%
Adjustable Rate CMOs/(a)/ --1.8%
FNMA Remic Trust 1990-145, Class A
$ 10,348,000 6.58% 12/25/20 $ 10,437,510
- -------------------------------------------------------------------------------
$ 10,437,510
- -------------------------------------------------------------------------------
Inverse Floater/(a)/--0.0%
FNMA Remic Trust 1991-91, Class S
$ 138,928 8.55% 07/25/98 $ 149,631
- -------------------------------------------------------------------------------
$ 149,631
- -------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only/(a)/--0.0%
FNMA Remic Trust 1992-157, Class SA
$ 1,384,066/(d)/ 55.35% 03/25/04 $ 86,712
- -------------------------------------------------------------------------------
$ 86,712
- -------------------------------------------------------------------------------
Inverse IOette--0.1%
FHLMC Series 1164, Class O
$ 33,045/(d)/ 19.07% 11/15/06 $ 431,596
- -------------------------------------------------------------------------------
$ 431,596
- -------------------------------------------------------------------------------
IOette--0.1%
FNMA Remic Trust 1990-145, Class B
$ 25,428/(d)/ 10.00% 12/25/20 $ 850,208
- -------------------------------------------------------------------------------
$ 850,208
- -------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--0.6%
FHLMC Series 1645, Class B
$ 2,956,606 5.50% 01/15/08 $ 2,730,573
FNMA Remic Trust 1990-65, Class U
185,451 9.50 11/25/06 185,160
FNMA Remic Trust 1991-37, Class E
838,752 8.50 04/25/05 839,801
- -------------------------------------------------------------------------------
$ 3,755,534
- -------------------------------------------------------------------------------
Super Floater CMOs/(a)/ --1.1%
FNMA Remic Trust 1992-157, Class FA
$ 6,813,861 2.16% 03/25/04 $ 6,632,817
- -------------------------------------------------------------------------------
$ 6,632,817
- -------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 22,344,009
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $557,420,929) $ 559,896,552
- -------------------------------------------------------------------------------
Repurchase Agreement--6.2%
Joint Repurchase Agreement Account
$ 36,700,000 5.49% 05/01/97/(b)/ $ 36,700,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $36,700,000) $ 36,700,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $594,120,929)/(e)/ $ 596,596,552
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long (Short)(f) Month Gain (Loss)
- ---------------------------- ---------------- ----------------- -------------
<S> <C> <C> <C>
1-Month Libor 110 May 1997 $(20,500)
1-Month Libor 115 June 1997 21,563
Euro Dollars 325 June 1997 (210,188)
Euro Dollars 285 September 1997 (104,813)
Euro Dollars 145 December 1997 (50,000)
Euro Dollars 10 March 1998 (14,500)
Euro Dollars (20) December 1998 (14,000)
Euro Dollars 10 June 1999 (18,000)
Euro Dollars 20 September 1999 (33,000)
5 Year U.S. Treasury Notes 64 June 1997 (5,781)
10 Year U.S. Treasury Notes (281) June 1997 70,063
------------
$(379,156)
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 3,264,098
Gross unrealized loss for investments in which cost
exceeds value (925,961)
- -------------------------------------------------------------------------------
Net unrealized gain $ 2,338,137
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(b)/ Portions of these securities are being segregated for futures margin
requirements and when-issued securities.
/(c)/ When-issued security.
/(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 $594,258,415.
/(f)/ Each Euro dollar contract represents $1,000,000 in notional par value.
Each 1-month Libor contract represents $3,000,000 in notional par value.
Each 5-Year and 10-year U.S. Treasury Note contract represents $100,000
in notional par value. The total notional amount and market value are
$1,524,500,000 and $281,048,344 respectively. The determination of
notional amounts and market value and 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
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs 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. Secondarily, the fund may, in
seeking current income, also consider the potential for capital appreciation.
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.
Special Events
Effective May 1, 1997, the name of the GS Short Duration Government Fund
was changed to the Goldman Sachs Short Duration Government Fund. In addition, to
accommodate different clients' needs and preferences, the fund added two new
share classes as of May 1: Class A shares, which have a front-end load but no
contingent deferred sales charge (on amounts less than $1 million), and Class B
shares, which are subject to a contingent deferred sales charge but no up-front
sales charge. The fund's investment focus remains the same.
Performance Review
During the six-month period ended April 30, the fund's Institutional,
Administration and Service shares all outperformed their benchmark, the two-year
U.S. Treasury security. Despite a slight decline in net asset value (NAV) due to
the backup in interest rates, the fund's positions in collateralized mortgage
obligations (CMOs) and adjustable rate mortgage (ARM) securities significantly
contributed to performance.
The fund performed very well relative to its peers. For the 12-month period
ended April 30, 1997, the fund's Institutional and Administration shares ranked
third and fifth, respectively, out of 97 short-intermediate U.S. government
funds based on total return, according to Lipper Analytical Services, Inc. In
addition, the fund's Service shares ranked within the top 20% (14th out of 97)
for the same time period. (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, the fund's Institutional shares were rated "four stars"
(out of 641 taxable bond funds) by Morningstar, Inc., an independent rating
agency, for the five years ended April 30./1/
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on net 2.67% 2.55% 2.42%
asset value)
- -------------------------------------------------------------------------------
Return From Monthly 3.39% 3.27% 3.14%
Distributions
- -------------------------------------------------------------------------------
Return From Price -0.72% -0.72% -0.72%
Depreciation
- -------------------------------------------------------------------------------
Total Return of Two-Year 2.09% 2.09% 2.09%
U.S. Treasury
- -------------------------------------------------------------------------------
NAV (4/30/97) $9.76 $9.78 $9.75
- -------------------------------------------------------------------------------
NAV Change -$0.07 -$0.07 -$0.07
- -------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-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 "four
stars" for both the three- and one-year periods and were rated among 1,193 and
1,709 taxable bond funds for the three- and one-year periods, respectively. The
Morningstar ratings apply only to the funds' Institutional shares; the fund's
Administration and Service shares have not been rated. The Administration and
Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates each fund against its peers in the same category. In all,
there are four Morningstar categories (domestic equity, international equity,
taxable bond and municipal). 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.
- -------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
Portfolio Composition and Investment Strategies
The most significant changes in the portfolio's sector composition
during the period were a reduction in U.S. Treasuries in favor of CMOs and a new
position in agency debentures.
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
CMOs 61.8%
ARMS 19.0%
Fixed Rate Mortgage Pass-Throughs 9.7%
Agency Debentures 4.8%
U.S. Treasuries 3.6%
Repos/Cash Equivalents 1.1%
</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.
.. CMOs. CMOs accounted for 61.8% of the portfolio, up from 56.9% six
months ago. The CMO sector performed very well during the period, bolstered by
low volatility and strong investor demand. CMOs were particularly attractive to
investors because they offered substantial yield over similar-duration Treasury
and non-Treasury alternatives. Within the sector, the portfolio's positions
included sequential-pay/support CMOs (24.5%) and planned amortization class
(PAC) CMOs (21.2%). These securities were short duration issues that offered
relatively predictable cash flows.
.. ARMs. As of April 30, the fund's allocation to ARMs was 19.0%, unchanged
from last October. We emphasized seasoned, fully indexed one-year Constant
Maturity Treasury (CMT) securities that were issued prior to 1990, which are
attractive because of their lower prepayment risk. (Seasoned issues are less
likely to be impacted by prepayments than newly issued mortgages because
homeowners who did not refinance in earlier periods of lower rates are generally
less likely to refinance in the future.)
.. Fixed Rate Mortgage Pass-Throughs. The fixed rate mortgage pass-through
sector accounted for 9.7% of the portfolio, up from 7.2% six months ago. We
continued to favor the sector because of its attractive yield enhancement
potential.
.. Agency Debentures. We established a new 4.8% position in agency debentures,
which are bonds issued by agencies of the U.S. government. This sector offered
incremental yield over Treasuries and added to portfolio diversification.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. During the
period, we sold more than three-quarters of the fund's Treasury allocation in
favor of other sectors that offered better relative value. By April 30, the
fund's position in the sector was down to 3.6%, while repurchase agreements/cash
equivalents were 1.1%, unchanged from six months ago.
.. Issuer Composition. The portfolio's mortgage-backed security composition by
issuer was 47.6% in Federal National Mortgage Association (FNMA) issues, 37.0%
in Federal Home Loan Mortgage Corporation (FHLMC) issues and 5.8% in Government
National Mortgage Association (GNMA) issues.
.. Credit Quality. The fund invests exclusively in securities issued by the
U.S. government and its agencies or instrumentalities.
.. Prudent Use of Derivatives. The fund's CMO position included several
securities typically considered to be
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
lower risk derivatives. These included sequential-pay/support CMOs and PAC CMOs
(24.5% and 21.2% of the portfolio, respectively), as noted previously, and a
9.0% allocation in CMO floaters (whose coupons reset upward when interest rates
rise). The fund also held a 2.8% position in super floaters (whose coupons reset
higher than conventional floaters when rates rise), a 2.1% position in inverse
floaters (whose coupons reset in the opposite direction of interest rates), and
small positions in PAC interest-only (IO) and inverse IO securities. We invest
in these higher risk derivatives only when we believe such securities will
enhance returns without incurring undue risk. These positions contributed to the
fund's positive performance along with the other CMO securities. In addition, we
used futures as a tool to help manage the portfolio's duration.
Market Outlook
Our outlook is cautious for CMOs: the sector is now trading at fair spreads
relative to equal-duration Treasuries and does not appear to offer significant
tightening potential. Despite the lack of general value, we continue to look for
issues within the CMO market that offer favorable investment characteristics
that are not fully valued by the market. In the ARM market, seasoned one-year
CMT ARMs remain attractive as a core holding relative to other ARM sectors.
Distribution Policy
During the six-month period under review, the fund's Institutional,
Administration and Service shares paid out distributions of $0.33, $0.32 and
$0.30 per share, respectively. The fund distributes substantially all of its
investment company taxable income, as required by tax law.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Short Duration Government Fund
May 30, 1997
- -------------------------------------------------------------------------------
11
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--90.0%
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a)--13.8%
$ 1,862,421 7.38% 08/01/17/(b)/ $ 1,928,183
1,799,630 7.58 12/01/18/(b)/ 1,871,327
7,952,048 7.77 02/01/22/(b)/ 8,344,720
2,036,342 7.73 08/01/22/(b)/ 2,137,202
- -------------------------------------------------------------------------------
$ 14,281,432
- -------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association (FNMA)(a)--11.6%
$ 306,024 9.00% 12/01/97 $ 307,489
2,894,069 6.50 04/01/03/(b)/ 2,853,696
812,321 6.00 01/01/14 762,436
2,961,367 6.00 03/01/14/(b)/ 2,771,662
2,552,281 7.81 11/01/14/(b)/ 2,679,487
2,569,866 7.58 08/01/22 2,636,117
- -------------------------------------------------------------------------------
$ 12,010,887
- -------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (FNMA)--3.2%
$ 504,862 6.00% 10/01/08 $ 484,981
1,032,431 6.00 06/01/09 991,774
1,949,537 6.00 10/01/09/(b)/ 1,878,671
- -------------------------------------------------------------------------------
$ 3,355,426
- -------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--61.4%
Inverse Floater(a)--3.0%
FHLMC Series 1296, Class J
$ 890,613 12.15% 07/15/99 $ 954,683
FHLMC Series 1325, Class C
944,285 6.83 07/15/97 943,086
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 9.27 05/25/99 1,217,824
- -------------------------------------------------------------------------------
$ 3,115,593
- -------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.2%
FHLMC Series 1684, Class JD
$ 2,524,793/(c)/ 3.72% 08/15/20 $ 170,222
FNMA Remic Trust 1993-110, Class SC
2,010,905/(c)/ 3.52 04/25/19 74,564
- -------------------------------------------------------------------------------
$ 244,786
- -------------------------------------------------------------------------------
Planned Amortization - Accrual Bond--1.2%
FHLMC Series 1560, Class X
$ 1,245,394 6.00% 11/15/16 $ 1,234,885
- -------------------------------------------------------------------------------
Planned Amortization Class (PAC) CMOs--21.9%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,937,180
FHLMC Series 1684, Class F
5,000,000 5.75 08/15/20/(b)/ 4,756,650
FNMA Remic Trust 1992-138, Class C
2,375,000 6.00 12/25/18/(b)/ 2,351,986
FNMA Remic Trust, Series 1997-9, Class B
4,000,000 6.50 10/25/22/(b)/ 3,850,040
FNMA Series 1991-31, Class PJ
3,000,000 6.55 10/25/20 2,920,290
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09/(b)/ 5,982,420
- -------------------------------------------------------------------------------
$ 22,798,566
- -------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--1.3%
FHLMC Series 1552, Class JE
$ 7,308,380/(c)/ 7.00% 02/15/14 $ 313,822
FHLMC Series 1587, Class HA
9,090,222/(c)/ 6.50 10/15/08 1,032,104
- -------------------------------------------------------------------------------
$ 1,345,926
- -------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.4%
FNMA Remic Trust 1992-198, Class K
$ 34,647/(c)/ 12.81% 12/25/15 $ 370,318
- -------------------------------------------------------------------------------
Regular Floater CMOs(a)--8.8%
FHLMC Series 1296, Class I
$ 2,493,715 5.16% 07/15/97/(b)/ $ 2,462,544
FHLMC Series 1325, Class B
2,219,071 6.38 07/15/97/(b)/ 2,219,759
FHLMC Series 1684, Class JC
2,524,793 5.28 08/15/20/(b)/ 2,472,706
FNMA Remic Trust 1993-110, Class FC
2,010,905 5.48 04/25/19/(b)/ 1,987,639
- -------------------------------------------------------------------------------
$ 9,142,648
- -------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--24.6%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,046,860
FHLMC Series 1645, Class B
4,927,677 5.50 01/15/08/(b)/ 4,550,956
FNMA Remic Trust 1988-12, Class A
3,743,398 10.00 02/25/18/(b)/ 3,973,692
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
FNMA Remic Trust 1988-12, Class B
$ 2,955,314 4.74% 02/25/18/(b)/ $ 2,840,796
FNMA Remic Trust 1989-12, Class X
1,588,415 10.00 12/25/14 1,642,024
FNMA Remic Trust 1989-18, Class B
1,051,388 9.50 01/25/04 1,081,279
FNMA Remic Trust 1989-59, Class H
3,840,291 7.75 10/25/18/(b)/ 3,882,265
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,351,960
FNMA Series 1989-34, Class E
2,113,584 9.85 08/25/14/(b)/ 2,176,992
- -------------------------------------------------------------------------------
$ 25,546,824
- -------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 63,799,546
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $93,441,725) $ 93,447,292
- -------------------------------------------------------------------------------
Agency Debentures--4.7%
Sri Lanka Aid/(a)/
$ 5,000,000 6.06% 02/21/16/(b)/ $ 4,928,150
- -------------------------------------------------------------------------------
Total Agency Debentures
(Cost $4,925,000) $ 4,928,150
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--3.6%
United States Treasury Notes
$ 3,800,000 5.63% 11/30/00/(b)/ $ 3,696,678
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $3,672,738) $ 3,696,678
- -------------------------------------------------------------------------------
Repurchase Agreement--0.6%
Joint Repurchase Agreement Account
$ 600,000 5.49% 05/01/97/(b)/ $ 600,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $600,000) $ 600,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $102,639,463)/(d)/ $ 102,672,119
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts
Long Unrealized
Type (Short)/(e)/ Settlement Month Gain (Loss)
- ----------------------------- --------------- ----------------- ---------------
<S> <C> <C> <C>
1-Month Libor 14 June 1997 $2,625
1-Month Libor 15 May 1997 (4,125)
Euro Dollars 56 June 1997 (12,525)
Euro Dollars 53 September 1997 30,525
Euro Dollars 55 December 1997 21,750
Euro Dollars 45 March 1998 (23,125)
Euro Dollars 40 June 1998 (35,500)
Euro Dollars 35 September 1998 (15,250)
5 Year U.S. Treasury Notes (71) June 1997 (1,109)
2 Year U.S. Treasury Notes 71 June 1997 (53,250)
10 Year U.S. Treasury Notes (131) June 1997 101,500
U.S. Long Term Bond (4) June 1997 11,843
---------------
$23,359
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value exceeds
cost $ 554,824
Gross unrealized loss for investments in which cost exceeds
value (522,168)
- -------------------------------------------------------------------------------
Net unrealized gain $ 32,656
- -------------------------------------------------------------------------------
</TABLE>
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(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 amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/ Each Euro Dollar contract represents $1,000,000 in notional par value.
Each 1-Month Libor contract represents $3,000,000 in notional par value.
Each 2-Year U.S. Treasury Note contract represents $200,000 in notional
par value. Each 5-Year and 10-Year U.S. Treasury Note and each U.S. Long
Term Bond contract represents $100,000 in notional par value. The total
notional amount and market value are $405,800,000 and $109,850,675,
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.
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs 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 investment-grade
municipal securities. 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.
Special Event
The fund's name was changed to Goldman Sachs Short Duration Tax-Free Fund
from GS Short Duration Tax-Free Fund on May 1, 1997. In addition, Class A and
Class B shares have been added to the existing Institutional, Administration and
Service shares. The fund's focus and investment objective remain the same.
A Strong, Stable Municipal Bond Market
The municipal market has remained at relatively rich levels compared with
the taxable market since the end of 1996, as light primary and secondary supply
has been consumed easily by stable demand. The average price of a three-year
municipal bond (as calculated from data provided by Municipal Market Data, an
independent municipal market information provider) declined approximately 1.25%,
while yields rose from 4.15% on October 31, 1996 to 4.60% on April 30, 1997.
Supply increased throughout most of the period, though it remained light
compared with historical averages. In November, municipal bond issuance was up
30% versus the prior three-month average. As is typical, increased supply
continued in early December due to the approaching year-end. The 1997 new issue
supply has followed historical early-month patterns, with January and February
supply well below annual averages (slightly more than $10 billion each month)
and March and April supply closer to normal levels ($13 to $14 billion).
Demand from individual investors (who control approximately two-thirds of
municipal bond ownership either through mutual funds or direct investment)
remained stable, but not strong, as long-term municipal yields were below the
psychologically significant 6% level. While yields have not yet cracked that
barrier, President Clinton's reelection and the loss of Republican momentum have
put talk of tax reform and talk of significant changes in the tax-exempt status
of municipal bonds on the back burner, comforting some of the investors
concerned about the market. In addition, the emergence of "nontraditional"
buyers during April has helped support the long end of the market.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
4/30/97 10/31/96
<S> <C> <C>
1998 3.85% 3.90%
1999 4.40% 4.15%
2000 4.60% 4.30%
2001 4.70% 4.40%
2002 4.80% 4.50%
2003 4.85% 4.60%
2004 4.90% 4.70%
2005 4.95% 4.80%
2006 5.00% 4.90%
2007 5.05% 5.00%
2008 5.10% 5.10%
2009 5.20% 5.20%
2010 5.30% 5.25%
2011 5.35% 5.30%
2012 5.40% 5.35%
2013 5.45% 5.40%
2014 5.50% 5.40%
2015 5.50% 5.45%
2016 5.55% 5.45%
2017 5.55% 5.45%
2018 5.55% 5.50%
2019 5.55% 5.50%
2020 5.60% 5.50%
2021 5.60% 5.50%
2022 5.60% 5.50%
2023 5.60% 5.50%
2024 5.60% 5.50%
2025 5.60% 5.50%
2026 5.60% 5.50%
2027 5.60% 5.50%
</TABLE>
The yield curve steepened and shifted upward at the short end, remained nearly
the same in the mid-range, and shifted marginally upward at the longer end, in
contrast to six months ago.
Performance Review
The performance of the fund's Institutional shares exceeded the benchmark,
the Lehman Brothers Three-Year Municipal Bond Index (the "Index"), for the
six-month period ended April 30, 1997. The Administration and Service shares
also performed well, but lagged the benchmark.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on 1.91% 1.79% 1.56%
net asset value)
- -------------------------------------------------------------------------------
Return From 2.11% 1.99% 1.86%
Monthly Distributions
- -------------------------------------------------------------------------------
Return From Price -0.20% -0.20% - 0.30%
Depreciation
- -------------------------------------------------------------------------------
Lehman Brothers 3-Year 1.83% 1.83% 1.83%
Municipal Bond Index
- -------------------------------------------------------------------------------
NAV (as of 4/30/97) $9.94 $9.94 $9.94
- -------------------------------------------------------------------------------
NAV Change -$0.02 -$0.02 -$0.03
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
14
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
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. One
example of this is our purchase of an A-rated hospital bond that our credit
analysis indicated would likely be defeased with the purchase of Treasury
securities placed in an escrow account, thereby significantly enhancing the
credit quality of the security. Our analysis proved correct and the fund
benefited from the appreciation associated with the higher quality.
We are pleased to report that the fund's Institutional shares ranked third
out of 28 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the one-year period ended April 30, 1997 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 April
30, 1997, the fund's Institutional and Administration shares were awarded a
"four-star" rating for the three-year period (out of 1,257 municipal bond funds)
by Morningstar, Inc. For the one-year period, the Institutional shares received
a "five-star" rating (out of 1,746 municipal bond funds)./1/
Portfolio Composition and Investment Strategies:
Emphasis on Revenue Bonds
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Revenue Bonds 56.1%
Insured Revenue Bonds 28.1%
Pre-Refunded Bonds 7.8%
Insured General Obligations 6.8%
Variable Rate Demand Notes 1.3%
</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) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. For the one-year period, the Administration
shares received four stars and were rated among 1,746 municipal bond funds. Ten
percent of the funds receive the five-star rating. The Morningstar rating
applies only to the fund's Institutional and Administration shares; the fund's
Service shares have not been rated. 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 four Morningstar categories (domestic equity,
international equity, taxable bond and municipal bond). 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.
- -------------------------------------------------------------------------------
15
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- -------------------------------------------------------------------------------
.. Revenue Bonds. As of April 30, the portfolio's combined position in insured
and uninsured revenue bonds was significantly overweighted compared with the
Index, 84.2% versus 31.7%. We increased the portfolio's total revenue bond
allocation from 79.7% six months 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.)
.. Pre-refunded Bonds. Over the course of the year, we re-established the
fund's holdings in pre-refunded bonds to 7.8% from zero. The Index weighting of
pre-refunded bonds was 18.0%.
.. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 6.8% of the
portfolio, down from 15.6% six months ago. The allocation as of April 30 was
significantly underweighted versus the Index's 50.2%. 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 use to manage the portfolio's excess liquidity. VRDNs represented 1.3%
of the fund, down from 4.7% six months ago.
.. Duration. As of April 30, the fund's duration was effectively in line with
that of the Index at 2.7 years.
.. Credit Quality. During the year, the fund's credit quality allocations
shifted. We continued the trend from the last reporting period by reducing the
portfolio's allocation in triple-A-rated GOs, shifting in favor of
double-A-rated revenue bonds. This 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 quality securities in the one- to three-year
maturity range. As of April 30, 42.7% of the portfolio was invested in
triple-A-rated bonds, while double-A- and single-A-rated securities accounted
for 30.2% and 27.1%, respectively.
Market Outlook
Our long-term outlook for municipal bond supply is essentially neutral, as
rates are at high levels compared with one year ago. As a result, the current
rate environment encourages neither supply (low rates bring refinancing) nor
demand (high rates attract buyers). At this point, the municipal market does not
perceive any real threats from the federal budget accord. Without any
fundamental problems in view for tax-exempts, we are left with technical forces
as the key driver in relative market performance.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
six-month period ended April 30, 1997, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.21,
$0.20 and $0.19 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- -------------------------------------------------------------------------------
16
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- -------------------------------------------------------------------------------
We value your continued confidence in the Goldman Sachs 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
Goldman Sachs Short Duration Tax-Free Fund
May 30, 1997
- -------------------------------------------------------------------------------
17
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--99.7%
Alabama--2.6%
Selma, AL IDB for International Paper Co. PCRB (A-/A3)
$ 1,000,000 4.15% 07/15/08 $ 1,000,000
- -------------------------------------------------------------------------------
Arizona--2.8%
Mesa, Arizona IDA Health Care Facilities (AAA/Aaa)
$ 1,000,000 7.50% 01/01/04 $ 1,055,940
- -------------------------------------------------------------------------------
Arkansas--3.5%
West Memphis, AK Public Utility System RB (MBIA) (AAA/Aaa)
$ 1,310,000 5.25% 12/01/00 $ 1,333,816
- -------------------------------------------------------------------------------
Connecticut--6.6%
Connecticut State Housing Mortgage Revenue Town Colony Project (NR/Aa3)
$ 1,000,000 5.00% 04/01/08 $ 1,000,260
Connecticut State Residential Recovery Authority, Series A RB (AA-/NR)
1,500,000 5.60 11/15/99 1,542,945
- -------------------------------------------------------------------------------
$ 2,543,205
- -------------------------------------------------------------------------------
District of Columbia--2.7%
DC Ref Series A (Big 1) Tcc (AAA/Aaa)
$ 1,000,000 7.70% 06/01/98 $ 1,032,600
- -------------------------------------------------------------------------------
Georgia--5.1%
Burke County, GA Development Authority Oglethorpe Power Corp. (A/A3)/(a)/
$ 2,000,000 4.35% 01/01/01 $ 1,961,500
- -------------------------------------------------------------------------------
Illinois--9.4%
Chicago, IL GO (MBIA) (AAA/Aaa)
$ 1,500,000 5.40% 10/31/00 $ 1,533,405
Illinois Health Facilities Authority Highland Park Hospital, Series A
(AAA/Aaa)
1,000,000 5.20 10/01/01 1,003,770
Illinois Housing Development Authority, Series 1991 A (A+/A1)
1,000,000 7.90 07/01/99 1,057,620
- -------------------------------------------------------------------------------
$ 3,594,795
- -------------------------------------------------------------------------------
Louisiana--2.7%
Louisiana Offshore Deepwater Port Authority Term B RB (A/Baa1)
$ 1,000,000 5.85% 09/01/00 $ 1,030,880
- -------------------------------------------------------------------------------
Maryland--4.2%
Maryland State Health and Higher Educational Facilities Authority
GO(A-/NR)/(c)/
$ 1,600,000 5.50% 01/01/02 $ 1,600,000
- -------------------------------------------------------------------------------
Michigan--3.6%
Wayne Charter County, MI Airport (AAA/Aaa)
$ 1,250,000 6.75% 12/01/19 $ 1,371,775
- -------------------------------------------------------------------------------
Missouri--7.1%
Kansas City Municipal Assistance Corp. (AAA/Aaa)
$ 1,000,000 5.88% 10/15/00 $ 1,036,930
St. Louis, MO Municipal Finance Corp., Series A (A/Aa3)
1,655,000 5.30 07/15/02 1,677,740
- -------------------------------------------------------------------------------
$ 2,714,670
- -------------------------------------------------------------------------------
New York--11.8%
Clifton Park, NY Water Authority System, Series A (AAA/Aaa)
$ 1,500,000 6.38% 10/01/11 $ 1,630,695
New York City Municipal Assistance Corp., Series 62 (AA-/Aa2)
1,500,000 5.50 07/01/08 1,503,885
Syracuse, NY IDA RB (AA/NR)
1,365,000 4.60 10/15/98 1,371,020
- -------------------------------------------------------------------------------
$ 4,505,600
- -------------------------------------------------------------------------------
Oklahoma--5.3%
Southern Oklahoma Memorial Hospital RB (A/A)/(a)/
$ 2,000,000 5.60% 02/01/00 $ 2,048,159
- -------------------------------------------------------------------------------
Pennsylvania--8.9%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB (FGIC)
(AAA/Aaa)
$ 1,500,000 5.75% 06/15/00 $ 1,545,870
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,859,850
- -------------------------------------------------------------------------------
$ 3,405,720
- -------------------------------------------------------------------------------
Tennessee--3.9%
Clarksville, TN Public Building Authority (AA/NR)
$ 1,500,000 4.75% 12/01/00 $ 1,499,940
- -------------------------------------------------------------------------------
Texas--3.9%
Memorial Villages, TX Water Authority (NR/Aa)
$ 1,435,000 7.00% 09/01/00 $ 1,497,968
- -------------------------------------------------------------------------------
Virginia--4.7%
Petersburg, VA Hospital Authority RB GO (NR/A)
$ 1,760,000 5.50% 07/01/99 $ 1,795,658
- -------------------------------------------------------------------------------
Washington--4.2%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$ 1,500,000 7.20% 07/01/02 $ 1,608,840
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Wisconsin--2.6%
Oshkosh, WI Water Rev., Series C (NR/MIG1)/(b)/
$ 1,000,000 4.88% 01/01/00 $ 998,090
- --------------------------------------------------------------------------------
Wyoming--4.1%
Uinta County, WY School District Series A (FSA) (AAA/Aaa)
$ 1,500,000 6.88% 06/01/00 $ 1,593,570
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $38,115,334) $ 38,192,726
- --------------------------------------------------------------------------------
Short-Term Obligations--3.9%
New York City Municipal Water Finance Authority, Series A (A-1+/VMIG1)
$ 1,300,000 4.25% 05/01/97 $ 1,300,000
- --------------------------------------------------------------------------------
Wisconsin State Health Facilities Authority (A-1+/VMIG1)
200,000 4.50 05/01/97 200,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,500,000) $ 1,500,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $39,615,334)/(d)/ $ 39,692,726
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 140,632
Gross unrealized loss for investments in which cost
exceeds value (63,240)
- --------------------------------------------------------------------------------
Net unrealized gain $ 77,392
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Investment Abbreviations:
<S> <C>
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 Board
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
/(a)/ Portions of these securities are being segregated for when-issued
securities.
/(b)/ 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.
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.
19
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs 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.
Special Events
Effective May 1, 1997, the name of the GS Core Fixed Income Fund was
changed to the Goldman Sachs Core Fixed Income Fund. In addition, to accommodate
different clients' needs and preferences, the fund added two new share classes
as of May 1: Class A shares, which have a front-end load but no contingent
deferred sales charge (on amounts less than $1 million), and Class B shares,
which are subject to a contingent deferred sales charge but no up-front sales
charge. The fund's objective and investment focus remain the same.
Performance Review
We are pleased to report that the fund's Institutional and Administration
shares outperformed the Index during the period under review. The fund's
positive performance was primarily due to its overweighting in non-Treasury
sectors compared with the Index. Specifically, mortgage-backed securities and
corporate bonds were the most significant contributors to performance, and
asset-backed securities and emerging market debt also performed very well. The
fund's Service shares achieved positive results, but slightly lagged the
benchmark.
The fund performed well compared with its peers. For the three-year period
ended April 30, 1997, the fund's Institutional shares were rated "four stars"
(out of 1,193 taxable bond funds) by Morningstar, Inc., an independent rating
agency./1/
During the period, the net asset value (NAV) of the fund's Institutional,
Administration and Service shares each fell $0.14 due to rising interest rates.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on 1.87% 1.75% 1.63%
net asset value)
- --------------------------------------------------------------------------------
Return From Monthly 3.30% 3.18% 3.06%
Distributions
- --------------------------------------------------------------------------------
Return From Price -1.43% -1.43% -1.43%
Depreciation
- --------------------------------------------------------------------------------
Total Return of Lehman 1.70% 1.70% 1.70%
Brothers Aggregate
Bond Index
- --------------------------------------------------------------------------------
NAV (as of 4/30/97) $9.71 $9.70 $9.72
- --------------------------------------------------------------------------------
NAV Change -$0.14 -$0.14 -$0.14
- --------------------------------------------------------------------------------
</TABLE>
- -----------------------------------------
/1/Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-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 "four
stars" for the one-year period and were rated among 1,709 taxable bond funds.
The Morningstar ratings apply only to the fund's Institutional shares; the
fund's Administration and Service shares have not been rated. The Administration
and Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates each fund against its peers in the same category. In all,
there are four Morningstar categories (domestic equity, international equity,
taxable bond and municipal). 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.
- -------------------------------------------------------------------------------
20
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
Portfolio Composition and Investment Strategies
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Corporate Bonds 26.7%
Fixed Rate Mortgage Pass-Throughs 20.5%
U.S. Treasuries 17.1%
ABSs 13.2%
CMOs 13.2%
Emerging Market Debt 4.7%
Repos/Cash Equivalents 2.3%
Other Foreign Debt 2.3%
</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.
.. Corporate Bonds. Corporate bonds were the largest allocation at 26.7% of the
portfolio, overweighted compared with the Index (18.0%). The sector performed
well during the period as the healthy economy caused spreads to tighten across
subsectors. The fund's best performers were industrials, which included selected
cable issues that benefited from positive earnings trends (e.g., Time Warner,
Inc. and Tele-Communications, Inc.), as well as specific finance issues that
fared well due to continuing industry consolidation. We underweighted utilities
due to the regulatory and competitive pressures affecting that industry.
Fixed Rate Mortgage Pass-Throughs. The fund was underweighted in fixed rate
mortgage pass-throughs relative to the Index, 20.5% versus 29.9%. During the
period, the sector was supported by a combination of favorable trends, including
low volatility, range-bound interest rates, tight yield spreads on alternative
sectors, and light issuance of corporate and asset-backed securities (ABS).
After the sector rallied and became more fully priced, we trimmed the fund's
allocation in favor of securities that offered greater relative value.
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 liquid assets equal to the dollar amount of the forward
commitment in a segregated account with the fund's custodian.
.. U.S. Treasuries. We significantly underweighted U.S. Treasuries relative to
the Index, 17.1% compared with 44.5%, to emphasize sectors that offered greater
return potential.
.. Asset-Backed Securities. As of April 30, the fund's ABS position was 13.2%,
approximately the same weighting as six months ago. Though negative credit
events among selected credit card and sub-prime auto lenders raised investor
uncertainty during the period, investor interest remained broad-based, ratings
held firm and, relative to similarly rated spread products, ABSs continued to
offer attractive yield enhancement opportunities.
.. CMOs. The fund's collateralized mortgage obligation (CMO) holdings performed
very well and significantly contributed to the fund's performance. During the
period, CMOs enjoyed strong demand from yield-seeking investors who found the
sector particularly compelling relative to other high-quality alternatives. As
of the end of the period, CMOs were a 13.2% allocation, up from 9.8% last
October. This increase was primarily in sequential-pay/support CMOs, which
accounted for 8.8% of the portfolio, while the balance was invested in planned
- -------------------------------------------------------------------------------
21
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
amortization class (PAC) CMOs (3.3%) and floaters (1.1%). Sequential-pay/support
CMOs, PAC CMOs and floaters are typically considered to be lower risk derivative
securities.
.. Emerging Market Debt. As of April 30, 4.7% of the portfolio was invested in
emerging market debt. Our strategy in the sector is to control exposure by
stressing high-credit-quality, short-duration bonds. We continued to emphasize
Latin American issuers because structural and economic reforms in this region
are helping improve credit fundamentals. During the period, the fund held bonds
from Chile, Colombia, Mexico and the Andean region development bank, as well as
Indonesia. The sector also benefited from substantial global liquidity, which
has helped support the credit-sensitive areas of the lower grade bond markets.
.. Other Foreign Debt. During the period, we initiated a 2.3% position in a
10-year, fully hedged Australian government bond that offered attractive
incremental yield over U.S. Treasuries, as well as potential price appreciation
should Australian interest rates decline as we expect.
.. Agency Debentures. We sold the fund's allocation to agency debentures (1.5%
as of October 31, 1996) because their risk/reward profile indicated that we were
not being adequately compensated for holding the position.
.. Duration. As always, we seek to add incremental return over the Index
through sector weighting and individual security selection rather than
attempting to predict the direction of interest rates. Therefore, we manage the
fund's duration to approximate that of the Index, partly through the use of
financial futures. As of April 30, the fund's duration was in line with the
Index at 4.6 years.
.. Credit Quality. As of April 30, 39.7% of the portfolio was invested in
government and agency securities, 21.3% was invested in triple-A-rated
securities, 3.4% was invested in double-A-rated securities and 12.6% was
invested in single-A-rated securities. Triple-B-rated securities (20.7%) and
repurchase agreements/cash equivalents (2.3%) make up the remainder of the
portfolio.
Market Outlook
Though indications of economic moderation emerged in April, the economy's
fundamental strength remains intact, which leads us to believe that interest
rates will move higher during the balance of the year.
In terms of specific fixed income sectors, we have a neutral view of the
corporate market. While we anticipate no near-term deterioration in the
fundamental state of the economy, we are concerned that a series of Fed
tightenings may cause spreads to widen slightly in the near term. In the
mortgage-backed security market, spreads relative to Treasuries have remained
impressively resilient. Nonetheless, mortgage technicals may come under pressure
due to a potential increase in supply as the housing market accelerates during
the summer. We expect the portfolio's allocation to the ABS market to remain
stable in the near future, as it has become more challenging to identify
unrecognized value within the sector, particularly among the higher quality
issues that we tend to emphasize. Finally, we are optimistic regarding the
performance prospects of the emerging market debt sector, as credit trends
continue to improve and global liquidity remains plentiful. In the near future,
Latin America is likely to remain the fund's geographic focus; however, we will
actively seek attractive investment opportunities in other regions to increase
fund diversification.
- -------------------------------------------------------------------------------
22
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
Distribution Policy
During the six-month period under review, the fund's Institutional,
Administration and Service shares distributed $0.32, $0.31 and $0.30 per share,
respectively. Dividends are declared daily and paid on a monthly basis. As
required by tax law, the fund distributes substantially all of its investment
company taxable income.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Mark A. Van Wyk
Mark A. Van Wyk
Portfolio Managers
Goldman Sachs Core Fixed Income Fund
May 30, 1997
- -------------------------------------------------------------------------------
23
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds--25.4%
Finance Bonds--9.8%
BankAmerica Corp.
$ 200,000 6.03% 05/17/99 /(a)/ $ 205,042
300,000 7.75 07/15/02 305,466
Capital One Bank
600,000 6.66 02/03/00 593,580
400,000 6.88 04/24/00 399,284
800,000 6.58 04/17/01 780,976
500,000 6.60 08/20/01 487,010
Conseco Finance
170,000 8.70 11/15/26 169,252
Conseco Inc.
340,000 10.50 12/15/04 394,101
Continental Bank N.A.
525,000 11.25 07/01/01 551,565
Countrywide Funding Corp.
125,000 6.08 07/14/99 123,531
250,000 8.43 11/16/99 259,772
250,000 7.75 08/10/01 257,025
375,000 8.00 12/15/26 354,994
First U.S.A. Bank
160,000 6.13 10/30/97 159,872
Meditrust, Inc.
390,000 7.82 09/10/26 400,082
Mic Finance Trust
360,000 8.38 02/01/27 353,495
Phoenix RE Capital Trust
165,000 8.85 02/01/27 164,594
Security Pacific Corp.
995,000 11.50 11/15/00 /(a)/ 1,133,693
Signet Banking Corp.
240,000 9.63 06/01/99 252,629
Taubman Realty Group
480,000 8.00 07/30/01 489,811
Washington Real Estate Investment Trust
120,000 7.13 08/13/03 118,458
- -------------------------------------------------------------------------------
$ 7,954,232
- -------------------------------------------------------------------------------
Industrial Bonds--14.4%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 515,949
Continental Airlines, Inc.
339,989 7.75% 07/02/14 348,451
553,994 8.56 07/02/14 590,857
Edison Mission Energy Funding Corp.
170,564 6.77 09/15/03 168,785
Ford Capital Corp.
300,000 9.50 07/01/01 326,253
Ford Motor Corp.
300,000 7.00 09/25/01 300,474
General Motors Acceptance Corp.
275,000 7.63 03/09/98 277,989
200,000 7.13 05/10/00 201,840
375,000 9.63 12/15/01 412,492
H + T Master Trust
550,000 8.18 08/15/02 550,000
Harrahs Operations, Inc.
300,000 8.75 03/15/00 301,500
Hertz Corp.
400,000 7.00 07/15/03 391,260
Mitchell Energy and Dev. Corp.
310,000 9.25 01/15/02 328,758
Northwest Airlines Corp.
163,540 8.26 03/10/06 170,804
567,358 8.97 01/02/15 588,117
NWCG Holding Crp
680,000 7.05 06/15/99 586,786
Panamerican Beverage Co.
130,000 8.13 04/01/03 133,416
RJR Nabisco Inc.
175,000 8.00 07/15/01 172,440
550,000 8.63 12/01/02 548,218
Tele-Communications, Inc.
100,000 7.13 02/02/98 100,396
300,000 8.25 01/15/03 304,011
1,135,000 6.27 09/15/03 1,132,912
50,000 6.82 09/15/10 49,846
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,690,128
350,000 9.63 05/01/02 384,776
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds(continued)
Industrial Bonds(continued)
Time Warner, Inc. (continued)
$ 400,000 7.98% 08/15/04 $ 406,440
U.S. Air Inc.
553,242 6.76 04/15/08 528,761
USI American Holdings Corp.
150,000 7.25 12/01/06 145,070
- -------------------------------------------------------------------------------
$ 11,656,729
- -------------------------------------------------------------------------------
Utility Bonds--1.1%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 326,215
Salton Sea Funding
580,000 7.02 05/30/00 580,922
- -------------------------------------------------------------------------------
$ 907,137
- -------------------------------------------------------------------------------
Total Corporate Bonds
(Cost $20,576,762) $ 20,518,098
- -------------------------------------------------------------------------------
Asset-Backed Securities--14.1%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 /(a)/ $ 157,232
Asset Securitization Corp., Series 1996, Class A1
600,000 6.88 11/13/26 /(a)/ 591,398
Asset Securitization Corp., Series 4, Class A
900,000 7.49 04/14/27 914,800
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
177,654 5.80 06/15/02 176,876
Discover Card Master Trust 1996-4, Class A
1,910,000 6.06 10/16/13 /(a)/ 1,942,222
Discover Card Master Trust 1996-4, Class B
1,100,000 6.24 10/16/13 1,108,250
DVI Equipment Lease Trust Series 1996-1, Class A
1,011,139 6.55 07/10/04 1,006,286
General Motors Acceptance Corp. Series 1995, Class A
69,659 7.15 03/15/00 70,203
Navistar Financial Trust, Series 1995-A, Class A2
214,878 6.55 11/20/01 215,549
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
245,032 6.85 06/15/01 247,048
Premier Auto Trust Series 1995-1, Class A4
123,449 7.85 09/04/98 123,680
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 80,625
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20% 02/16/06 667,250
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 565,983
Sears Credit Account Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 302,718
Standard Credit Card Master Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 714,422
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,120,694
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 910,683
World Financial Tower B Series 1996, Class B
498,093 6.91 09/01/13 483,679
- -------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $11,543,903) $ 11,399,598
- -------------------------------------------------------------------------------
Emerging Market Debt--4.4%
Bancoldex
$ 60,000 8.63% 06/02/00 $ 61,372
BCO De Colombia
110,000 8.63 06/02/00 112,516
Bridas Corp.
110,000 12.50 11/15/99 118,581
Empresa Col Petroleos
900,000 7.25 07/08/98 903,438
Financiera Energy Nacional
50,000 9.38 06/15/06 50,504
90,000 9.38 06/15/06 94,271
Instituto de Fomento Industrial
140,000 8.38 07/29/01 141,558
130,000 8.38 07/29/01 131,447
Republic of Colombia
30,000 7.13 05/11/98 30,139
Republic of Croatia
210,000 7.00 02/27/02 204,091
Sampoerna International
120,000 8.38 06/15/06 120,164
United Mexican States
180,000 7.56 08/06/01 181,940
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Emerging Market Debt(continued)
United Mexican States (continued)
$ 650,000 7.62% 08/06/01 $ 657,007
YPF Sociedad Anonima
633,003 7.50 10/26/02 637,687
118,531 7.00 10/26/02 118,835
- -------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $3,558,558) $ 3,563,550
- -------------------------------------------------------------------------------
Government Bonds--3.0%
Australia Commonwealth
AUD 2,400,000 7.50% 07/15/05 $ 1,845,509
Province of Quebec
$ 520,000 13.25 09/15/14 611,666
- -------------------------------------------------------------------------------
Total Government Bonds
(Cost $2,524,905) $ 2,457,175
- -------------------------------------------------------------------------------
Mortgage Backed Obligations--31.9%
Bear Stearns Mortgage Securities, Inc.
$ 2,045,784 6.50% 03/28/09/(a)/ $ 1,883,062
Federal Home Loan Mortgage Corp. (FHLMC)
1,000,000 7.00 TBA-15 Yr./(b)/ 990,938
1,245,394 6.00 11/15/16 1,234,885
1,000,000 6.35 03/25/18 976,870
Federal National Mortgage Association (FNMA)
1,000,000 6.50 TBA-7 Yr./(b)/ 981,560
1,000,000 7.00 TBA-30 Yr./(b)/ 968,750
4,500,000 7.50 TBA-30 Yr./(b)/ 4,466,250
500,000 6.25 07/25/18 486,875
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24/(a)/ 1,771,240
Government National Mortgage Association (GNMA)
3,000,000 7.50 TBA-30 Yr./(b)/ 2,973,750
3,000,000 8.00 TBA-30 Yr./(b)/ 3,040,290
335,213 8.00 02/15/17 344,240
30,057 7.00 11/15/22 29,296
362,778 7.00 12/15/22 353,592
596,838 7.00 12/15/22 581,726
184,742 7.00 01/15/23 179,892
787,526 7.50 03/15/23 785,313
779,931 7.00 05/15/23 759,457
120,766 7.50 08/15/23 120,427
39,068 7.00 11/15/23 38,042
JP Morgan Commercial Mortgage Finance Corp., Series 1997-C4
1,000,000 7.32% 12/26/28 997,227
Morgan Stanley Capital Commercial Mortgage, Inc. Series 1997-C1
900,000 7.46 05/15/06 912,375
Prudential Home Mortgage Securities Corp. 1992-39 A8
1,000,000 7.11 12/25/07 860,550
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $25,637,886) $ 25,736,607
- -------------------------------------------------------------------------------
Sovereign Credit--0.4%
State of Israel
$ 370,000 6.38% 12/15/05 $ 343,748
- -------------------------------------------------------------------------------
Total Sovereign Credit
(Cost $346,061) $ 343,748
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--17.0%
United States Treasury Bonds
$ 330,000 8.75% 05/15/17 $ 390,070
550,000 8.88 08/15/17/(a)/ 657,938
2,230,000 8.75 05/15/20 2,656,488
120,000 7.88 02/15/21/(a)/ 131,174
2,240,000 7.63 02/15/25 2,402,400
United States Treasury Interest-Only Stripped Securities/(c)/
2,250,000 6.99 08/15/09 966,893
350,000 7.04 11/15/10 136,808
United States Treasury Notes
4,000,000 6.88 08/31/99 4,044,360
280,000 5.63 11/30/00 272,387
590,000 7.88 11/15/04/(a)/ 630,380
United States Treasury Principal-Only Stripped Securities/(d)/
40,000 5.78 11/15/97 38,781
410,000 6.81 11/15/04/(a)/ 247,566
5,730,000 7.22 05/15/20 1,119,356
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,742,043) $ 13,694,601
- -------------------------------------------------------------------------------
Yankee Bonds--0.3%
Korea Electric Power
$ 263,790 7.40% 04/01/16 $ 265,088
- -------------------------------------------------------------------------------
Total Yankee Bonds
(Cost $255,077) $ 265,088
- -------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase Agreement--20.1%
Joint Repurchase Agreement Account/(a)/
$ 16,200,000 5.49% 05/01/97 $ 16,200,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $16,200,000) $ 16,200,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $94,385,195)/(e)/ $ 94,178,465
- -------------------------------------------------------------------------------
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(f) Month Gain (Loss)
- ---------------------------- -------------- ----------------- -------------
Euro Dollars 5 June 1997 $4,250
Euro Dollars 8 September 1997 (2,338)
Euro Dollars 5 December 1997 (1,000)
Euro Dollars 5 June 1998 (2,250)
5 Year U.S. Treasury Notes 10 June 1997 (2,828)
10 Year U.S. Treasury Notes 17 June 1997 (12,750)
U.S. Long Term Bond (14) June 1997 42,682
-------------
$25,766
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $382,996
Gross unrealized loss for investments in which cost
exceeds value (704,905)
- ------------------------------------------------------------------------------
Net unrealized loss $(321,909)
- --------------------------------------------------------------------------------
</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)/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 interest rate disclosed for these securitites represents effective
yields to maturity.
/(e)/The aggregate cost for federal income tax purposes is $94,500,374.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and each U.S. Long Term Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $27,100,000 and $9,088,344, 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.
27
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Adjustable
Rate Short Duration
Government Government
Fund Fund
--------------------------------------
<S> <C> <C>
Assets:
Investments in securities, at value (cost $594,120,929, $102,639,463, $39,615,334
and $94,385,195, respectively) $ 596,596,552 $ 102,672,119
Cash 57,183 89,184
Receivables:
Investment securities sold 295,632 --
Interest 6,240,961 1,042,023
Forward foreign currency exchange contracts -- --
Fund shares sold 2,978,910 203,746
Variation margin -- --
Deferred organization expenses, net -- --
Other assets 64,048 50,879
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 606,233,286 104,057,951
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,032,523 109,251
Investment securities purchased 1,331,393 --
Fund shares repurchased 10,604,905 1,707
Investment adviser fees 191,592 34,620
Transfer agent fees 42,054 --
Authorized dealer service fees 6,616 --
Variation margin 87,000 46,971
Accrued expenses and other liabilities 59,487 15,162
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 13,355,570 207,711
- ------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 643,684,171 117,737,007
Accumulated undistributed (distributions in excess of) net investment income (2,943,415) 599,277
Accumulated net realized loss on investment and futures transactions (49,959,507) (14,542,059)
Accumulated net realized foreign currency loss -- --
Net unrealized gain (loss) on investments and futures 2,096,467 56,015
Net unrealized gain on translation of assets and liabilities denominated in
foreign currencies -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net assets $ 592,877,716 $ 103,850,240
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:
Institutional shares $9.86 $9.76
Administration shares $9.86 $9.78
Service shares $9.86 $9.75
Class A shares (a) $9.86 --
- ------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Institutional shares 55,732,381 10,231,208
Administration shares 424,079 153,792
Service shares 2,171 258,644
Class A shares 3,960,437 --
- ------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value (unlimited
number of shares authorized) 60,119,068 10,643,644
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
---------------------------------
<S> <C> <C>
Assets:
Investments in securities, at value (cost $594,120,929, $102,639,463, $39,615,334
and $94,385,195, respectively) $ 39,692,726 $ 94,178,465
Cash 91,511 94,989
Receivables:
Investment securities sold 145,393 1,331,207
Interest 554,155 1,045,248
Forward foreign currency exchange contracts -- 34,692
Fund shares sold -- 60,750
Variation margin -- 6,750
Deferred organization expenses, net 10,458 41,206
Other assets 51,608 29,277
- -------------------------------------------------------------------------------------------------------------------------
Total assets 40,545,851 96,822,584
- -------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 18,312 43,289
Investment securities purchased 2,144,574 15,935,315
Fund shares repurchased 10,296 --
Investment adviser fees 11,244 26,250
Transfer agent fees 12,983 2,771
Authorized dealer service fees -- --
Variation margin -- --
Accrued expenses and other liabilities 31,430 30,169
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,228,839 16,037,794
- -------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 42,243,143 81,193,439
Accumulated undistributed (distributions in excess of) net investment income 90,133 36,949
Accumulated net realized loss on investment and futures transactions (4,093,656) (267,089)
Accumulated net realized foreign currency loss -- (32,353)
Net unrealized gain (loss) on investments and futures 77,392 (175,768)
Net unrealized gain on translation of assets and liabilities denominated in
foreign currencies -- 29,612
- -------------------------------------------------------------------------------------------------------------------------
Net assets $ 38,317,012 $ 80,784,790
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:
Institutional shares $9.94 $9.71
Administration shares $9.94 $9.70
Service shares $9.94 $9.72
Class A shares (a) -- --
- -------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Institutional shares 3,738,166 7,565,340
Administration shares 11,363 638,323
Service shares 105,100 114,034
Class A shares -- --
- -------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value (unlimited
number of shares authorized) 3,854,629 8,317,697
- -------------------------------------------------------------------------------------------------------------------------
</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 $10.01.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Operations
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Adjustable Short
Rate Duration
Government Government
Fund Fund
-----------------------------------
<S> <C> <C>
Investment income:
Interest/(a)/ $ 19,521,515 $ 3,571,901
- -----------------------------------------------------------------------------------------------------------------------------------
Total income 19,521,515 3,571,901
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 1,196,772 259,279
Distribution fees 24,001 --
Authorized dealer service fees 24,001 --
Administration share fees 5,231 1,118
Service share fees 10 5,244
Transfer agent fees 143,729 --
Custodian fees 65,396 32,437
Professional fees 30,592 30,169
Registration fees 31,419 29,736
Amortization of deferred organization expenses -- --
Trustees' fees 5,754 990
Other 64,428 26,459
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,591,333 385,432
Less--Expenses reimbursable and fees waived by Goldman Sachs (215,722) (145,719)
- -----------------------------------------------------------------------------------------------------------------------------------
Net expenses 1,375,611 239,713
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 18,145,904 3,332,188
- -----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (301,736) 77,934
Futures transactions (575,601) (78,182)
Foreign currency related transactions -- --
Net change in unrealized gain (loss) on:
Investments 3,237,459 (594,540)
Futures (523,110) (9,522)
Translation of assets and liabilities denominated in foreign currencies -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 1,837,012 (604,310)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 19,982,916 $ 2,727,878
- -----------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
-----------------------------
<S> <C> <C>
Investment income:
Interest/(a)/ $ 846,820 $ 2,713,928
- --------------------------------------------------------------------------------------------------------------------------
Total income 846,820 2,713,928
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 72,141 152,651
Distribution fees -- --
Authorized dealer service fees -- --
Administration share fees 79 4,929
Service share fees 2,452 1,908
Transfer agent fees 7,214 15,265
Custodian fees 24,930 43,131
Professional fees 30,238 29,501
Registration fees 29,353 29,627
Amortization of deferred organization expenses 10,290 12,146
Trustees' fees 332 775
Other 15,581 8,570
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 192,610 298,503
Less--Expenses reimbursable and fees waived by Goldman Sachs (108,922) (119,934)
- --------------------------------------------------------------------------------------------------------------------------
Net expenses 83,688 178,569
- --------------------------------------------------------------------------------------------------------------------------
Net investment income 763,132 2,535,359
- --------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions 46,213 (11,091)
Futures transactions -- (15,366)
Foreign currency related transactions -- (32,353)
Net change in unrealized gain (loss) on:
Investments (125,032) (1,032,929)
Futures -- (72,450)
Translation of assets and liabilities denominated in foreign currencies -- 29,612
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions (78,819) (1,134,577)
- --------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 684,313 $ 1,400,782
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Net of $4,391 in foreign withholding tax for the Core Fixed Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Adjustable Short
Rate Duration
Government Government
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 18,145,904 $ 3,332,188
Net realized gain (loss) from investment and futures transactions (877,337) (248)
Net realized loss from foreign currency related transactions -- --
Net change in unrealized gain (loss) on investments and futures 2,714,349 (604,062)
Net change in unrealized gain on translation of assets and liabilities
denominated in foreign currencies -- --
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 19,982,916 2,727,878
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (16,997,708) (3,409,055)
Administration shares (118,601) (29,022)
Service shares (107) (65,458)
Class A shares (531,120) --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (17,647,536) (3,503,535)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 224,637,176 17,764,086
Reinvestment of dividends and distributions 10,493,073 2,378,322
Cost of shares repurchased (272,256,791) (17,534,072)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from shares transactions (37,126,542) 2,608,336
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (34,791,162) 1,832,679
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of period $ 627,668,878 $ 102,017,561
- ----------------------------------------------------------------------------------------------------------------
End of period $ 592,877,716 $ 103,850,240
- ----------------------------------------------------------------------------------------------------------------
Accumulated undistributed (distributions in excess of) net investment income $ (2,943,415) $ 599,277
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 22,833,196 1,813,884
Reinvestment of dividends and distributions 1,066,128 243,233
Shares repurchased (27,664,736) (1,793,383)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,765,412) 263,734
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 763,132 $ 2,535,359
Net realized gain (loss) from investment and futures transactions 46,213 (26,457)
Net realized loss from foreign currency related transactions -- (32,353)
Net change in unrealized gain (loss) on investments and futures (125,032) (1,105,379)
Net change in unrealized gain on translation of assets and liabilities
denominated in foreign currencies -- 29,612
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 684,313 1,400,782
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (743,379) (2,380,508)
Administration shares (1,285) (127,789)
Service shares (18,468) (23,664)
Class A shares -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (763,132) (2,531,961)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 15,143,248 8,630,772
Reinvestment of dividends and distributions 633,411 2,308,481
Cost of shares repurchased (12,937,480) (2,167,703)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from shares transactions 2,839,179 8,771,550
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase 2,760,360 7,640,371
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of period $ 35,556,652 $ 73,144,419
- ----------------------------------------------------------------------------------------------------------------
End of period $ 38,317,012 $ 80,784,790
- ----------------------------------------------------------------------------------------------------------------
Accumulated undistributed (distributions in excess of) net investment income $ 90,133 $ 36,949
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 1,519,494 880,108
Reinvestment of dividends and distributions 63,471 235,763
Shares repurchased (1,297,285) (220,518)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding 285,680 895,353
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Adjustable Short
Rate Duration
Government Government
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 37,031,818 $ 6,604,446
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519)
Administration shares (220,450) (2,548)
Service shares -- (14,792)
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 -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441
Reinvestment of dividends and distributions 18,181,648 4,153,816
Cost of shares repurchased (477,107,914) (47,993,112)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from shares transactions (52,339,892) (1,819,855)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469)
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of year $ 676,133,018 $ 103,760,030
- ----------------------------------------------------------------------------------------------------------------
End of year $ 627,668,878 $ 102,017,561
- ----------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed net investment income $ (3,441,783) $ 770,624
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467
Reinvestment of dividends and distributions 1,856,783 424,274
Shares repurchased (48,741,470) (4,905,357)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616)
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 1,786,304 $ 4,013,477
Net realized gain (loss) from investment and futures transactions 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures (396,071) (75,350)
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,721,871 3,684,707
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (1,766,892) (4,019,797)
Administration shares (2,032) (19,144)
Service shares (17,380) (5,349)
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- (450,016)
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,786,304) (4,494,306)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 22,248,684 21,976,567
Reinvestment of dividends and distributions 1,401,492 4,315,748
Cost of shares repurchased (46,918,400) (7,840,575)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from shares transactions (23,268,224) 18,451,740
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (23,332,657) 17,642,141
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of year $ 58,889,309 55,502,278
- ----------------------------------------------------------------------------------------------------------------
End of year $ 35,556,652 $ 73,144,419
- ----------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed net investment income $ 90,133 $ 33,551
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 2,233,482 2,244,430
Reinvestment of dividends and distributions 140,950 439,299
Shares repurchased (4,727,959) (811,075)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (2,353,527) 1,872,654
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
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 Adjustable Rate Government Fund (Adjustable Rate Government),
Goldman Sachs Short Duration Government Fund (Short Duration Government),
Goldman Sachs Short Duration Tax-Free Fund (Short Duration Tax-Free) and Goldman
Sachs Core Fixed Income Fund (Core Fixed Income), collectively, ("the Funds") or
individually a ("Fund"). The Funds are diversified portfolios of the Trust
offering three classes of shares - Institutional shares, Administration shares
and Service shares. In addition, the Adjustable Rate Government Fund offers
Class A shares. Effective May 1, 1997, the Trust was reorganized from a
Massachusetts business trust to a Delaware business trust and various
operational changes were approved, including updating certain investment
restrictions and amending the management contracts. In addition, Short Duration
Government, Short Duration Tax-Free, and Core Fixed Income added two new share
classes, Class A and Class B, as of May 1.
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
- -----------------------
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. 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 Short Duration Tax-Free. 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 Core Fixed
Income Fund.
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.
- --------------------------------------------------------------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
- ----------------------------------------------
Core Fixed 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. Core Fixed 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
- ------------------------
The Funds, with the exception of Short Duration Tax-Free, may enter into
mortgage "dollar rolls" in which the Fund sells securities in the current month
for delivery and simultaneously contracts with the same counterparty to
repurchase similar (same type, coupon and maturity) but not identical securities
on a specified future date. The Fund loses the right to receive principal and
interest paid on the securities sold. However, the Fund benefits to the extent
of any price received for the securities sold and the lower forward price for
the future purchase (often referred to as the "drop") or fee income plus the
interest earned on the cash proceeds of the securities sold until the settlement
date of the forward purchase. The Fund will hold and maintain in a segregated
account, until the settlement date, cash or liquid, high-grade debt securities
in an amount equal to the forward purchase price. For financial reporting and
tax reporting purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale.
F. Futures Contracts
- --------------------
The Funds may enter into futures transactions to hedge against changes in
interest rates, securities prices, currency exchange rates (in the case of Core
Fixed Income) or to seek to increase total return.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Payments for futures contracts ("variation margin") are paid or received by the
Funds daily, dependent on the daily fluctuations in the value of the contracts,
and are recorded for financial reporting purposes as unrealized gains or losses.
When contracts are closed, the Funds realize a gain or loss equal to the
difference between the value of the futures contract to sell and the value of
futures contract to buy. Gains and losses are reported in the Statement of
Operations.
The use of futures contracts involve, to varying degrees, elements of
market and counterparty risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities. 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 potentially result in a loss.
G. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
H. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are generally allocated to the portfolios based on
each portfolio's relative average net assets for the period.
- --------------------------------------------------------------------------------
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
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 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.
I. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of its investment company taxable and tax-exempt income to its
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial
statement purposes as either from or in excess of net investment income or net
realized gain on investment transactions, or from capital, depends on the type
of book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
The Funds, at their most recent tax year-ends (October 31, 1996 for Core
Fixed Income and December 31, 1996 for Adjustable Rate Government, Short
Duration Government and Short Duration Tax-Free) 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>
Adjustable Rate Government $49,069,000 2000-2004
Short Duration Government $14,141,000 2002-2004
Short Duration Tax-Free $4,058,000 2002-2003
Core Fixed Income $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 Adjustable Rate
Government and 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 Short
Duration Tax-Free and 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 Adjustable Rate Government, Short Duration Tax-Free
and Core Fixed Income and .50% of average daily net assets of Short Duration
Government. Until further notice, GSFM has voluntarily agreed not to impose .10%
of its investment advisory fee for Short Duration Government.
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 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.
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 Adjustable Rate Government Class A shares. During the period ended
April 30, 1997, Goldman Sachs retained approximately $110,300 of sales load
related to Class A shares. Goldman Sachs also serves as Transfer Agent of the
Funds for a fee.
The Trust, on behalf of Adjustable Rate Government, has adopted a
Distribution Plan (the "Plan") pursuant to Rule 12b-1 for the Class A shares.
Under the Plan, Goldman Sachs
- --------------------------------------------------------------------------------
34
<PAGE>
- --------------------------------------------------------------------------------
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.
The Trust, on behalf of Adjustable Rate Government, 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. Adjustable Rate Government pays a fee under the
Service Plan equal, on an annual basis, to .25% of its average daily net assets
attributable to Class A shares.
For the period ended April 30, 1997, the advisors and distributor have
voluntarily agreed to waive certain fees and reimburse other expenses as
follows(in thousands):
<TABLE>
<CAPTION>
Waivers
---------------
Reimburse-
Class A Reimburse- ment
Fund Advisor 12b-1 ment Outstanding
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustable Rate
Government -- $24 $192 $22
Short Duration
Government $52 -- 94 14
Short Duration
Tax-Free -- -- 109 28
Core Fixed
Income -- -- 120 28
</TABLE>
For the period ended April 30, 1997, Adjustable Rate Government, Short
Duration Government, and Core Fixed Income incurred commission expenses of
approximately $35,000, $8,500, and $900, respectively, in connection with
futures contracts entered into with Goldman Sachs. At April 30, 1997, Adjustable
Rate Government and Short Duration Government had approximately $87,000 and
$47,000, respectively, payable to Goldman Sachs related to variation margin on
futures contracts. Approximately $7,000 relating to variation margin was due to
Core Fixed Income from Goldman Sachs.
As of May 1, 1997, the Funds advisory agreements were changed to management
agreements encompassing the same services and fee structure.
4. 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 six months ended April
30, 1997, 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
six months ended April 30, 1997, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Short
Adjustable Rate Short Duration Duration Core Fixed
Government Government Tax-Free Income
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases of U.S.
Government and agency
obligations $ 150,343,674 $46,763,342 -- $115,895,051
- -----------------------------------------------------------------------------------------------
Purchases (excluding U.S.
Government and agency
obligations) -- -- $39,438,868 22,633,489
- -----------------------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 198,396,859 44,501,257 -- 118,193,576
- -----------------------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and agency
obligations) -- -- 35,970,076 12,305,124
- -----------------------------------------------------------------------------------------------
</TABLE>
At April 30, 1997, Core Fixed Income had an outstanding forward foreign
currency exchange contract, to sell foreign currency as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Value on
Foreign Currency Settlement Current Unrealized
Sell Contract Date Value Gain
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
Expiring 6/16/97 $ 1,897,856 $ 1,863,164 $ 34,692
- -----------------------------------------------------------------------------------------------
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered.
6. 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.
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 at the Funds' custodian.
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 April 30, 1997, Adjustable Rate Government, Short Duration Government and
Core Fixed Income had undivided interests in the repurchase agreements in the
following joint account which equaled $36,700,000, $600,000 and $16,200,000,
respectively, in principal amount.
As of April 30, 1997, the repurchase agreement in the joint account along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity data) were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns & Co., dated 4/30/97, repurchase price $680,103,889 (GNMA:
$59,497,211, 7.50%-9.00%, 12/15/21-12/15/26; FNMA: $267,568,394, 5.50%-8.00%,
02/01/09-04/01/27; FHLMC: $373,405,594, 5.50%-7.50%, 2/01/98-4/01/27)
$680,000,000 5.50% 5/01/97 $680,000,000
Nomura Securities International, Inc. dated 4/30/97, repurchase price $300,045,833
(FNMA: $182,812,268, 5.94%-8.01%, 7/22/97-5/11/05; FHLMC: $38,631,543, 6.02%-
6.75%, 1/28/00-12/04/01, FCSB: $49,581,430, 6.05%-6.25%, 5/10/99-12/03/99,
SLMA: $29,222,430, 6.00%, 1/16/01)
300,000,000 5.50 5/01/97 300,000,000
Credit Suisse First Boston, dated 4/30/97, repurchase price $52,307,845 (U.S.
Treasury Bill: $53,475,803, 2/05/98)
52,300,000 5.40 5/01/97 52,300,000
- ---------------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $1,032,300,000
- ---------------------------------------------------------------------------------------
</TABLE>
9. Other Matters
As of April 30, 1997, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 33% of the
outstanding shares of the Short Duration Government Fund.
- --------------------------------------------------------------------------------
36
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10. Summary of Share Transactions
Share activity for the six months ended April 30, 1997 is as follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Short Duration Government
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 18,594,775 $182,930,563 1,584,839 $15,518,375
Reinvestment of dividends
and distributions 1,001,545 9,856,991 234,064 2,288,677
Shares repurchased (26,271,346) (258,542,996) (1,756,576) (17,174,153)
-------------------------------------------------------------
(6,675,026) (65,755,442) 62,327 632,899
-------------------------------------------------------------
Administration shares
Shares sold 105,099 1,034,098 136,265 1,337,724
Reinvestment of dividends
and distributions 5,632 55,427 2,467 24,158
Shares repurchased (72,390) (712,347) (10,477) (102,683)
-------------------------------------------------------------
38,341 377,178 128,255 1,259,199
-------------------------------------------------------------
Service shares
Shares sold 2,161 21,270 92,780 907,987
Reinvestment of dividends
and distributions 11 107 6,702 65,487
Shares repurchased (1) (10) (26,330) (257,236)
-------------------------------------------------------------
2,171 21,367 73,152 716,238
-------------------------------------------------------------
Class A shares
Shares sold 4,131,161 40,651,245 -- --
Reinvestment of dividends
and distributions 58,940 580,548 -- --
Shares repurchased (1,320,999) (13,001,438) -- --
-------------------------------------------------------------
2,869,102 28,230,355 -- --
-------------------------------------------------------------
Net increase (decrease) (3,765,412) $(37,126,542) 263,734 $2,608,336
==============================================================
<CAPTION>
Short Duration Tax-Free Core Fixed Income
-------------------------------------------------------------
Shares Dollars Shares Dollars
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 1,341,295 $13,363,572 212,032 $2,070,524
Reinvestment of dividends
and distributions 61,868 617,418 227,665 2,229,551
Shares repurchased (1,159,405) (11,559,759) (186,679) (1,835,467)
-------------------------------------------------------------
243,758 2,421,231 253,018 2,464,608
-------------------------------------------------------------
Administration shares
Shares sold 6,402 63,690 579,102 5,684,739
Reinvestment of dividends
and distributions 116 1,153 5,675 55,281
Shares repurchased -- -- (17,694) (174,314)
-------------------------------------------------------------
6,518 64,843 567,083 5,565,706
-------------------------------------------------------------
Service shares
Shares sold 171,797 1,715,986 88,974 875,509
Reinvestment of dividends
and distributions 1,487 14,840 2,423 23,649
Shares repurchased (137,880) (1,377,721) (16,145) (157,922)
-------------------------------------------------------------
35,404 353,105 75,252 741,236
-------------------------------------------------------------
Class A shares
Shares sold -- -- -- --
Reinvestment of dividends
and distributions -- -- -- --
Shares repurchased -- -- -- --
-------------------------------------------------------------
-- -- -- --
-------------------------------------------------------------
Net increase (decrease) 285,680 $2,839,179 895,353 $8,771,550
============================================================
</TABLE>
37
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(unaudited)
- -------------------------------------------------------------------------------
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Short Duration Government
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 39,981,299 $391,363,204 4,072,082 $39,855,638
Reinvestment of dividends
and distributions 1,780,288 17,432,484 422,559 4,137,041
Shares repurchased (46,666,343) (456,776,795) (4,893,286) (47,875,174)
- ---------------------------------------------------------------------------------------------
(4,904,756) (47,981,107) (398,645) (3,882,495)
- ---------------------------------------------------------------------------------------------
Administration shares
Shares sold 148,981 1,457,872 33,251 326,101
Reinvestment of dividends
and distributions 9,641 94,420 207 2,032
Shares repurchased (138,609) (1,356,764) (7,921) (77,312)
- ---------------------------------------------------------------------------------------------
20,013 195,528 25,537 250,821
- ---------------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 188,134 1,837,702
Reinvestment of dividends
and distributions -- -- 1,508 14,743
Shares repurchased -- -- (4,150) (40,626)
- ---------------------------------------------------------------------------------------------
-- -- 185,492 1,811,819
- ---------------------------------------------------------------------------------------------
Class A shares
Shares sold 1,404,698 13,765,298 -- --
Reinvestment of dividends
and distributions 66,854 654,744 -- --
Shares repurchased (1,936,518) (18,974,355) -- --
- ---------------------------------------------------------------------------------------------
(464,966) (4,554,313) -- --
- ---------------------------------------------------------------------------------------------
Net increase (decrease) (5,349,709) $(52,339,892) (187,616) $(1,819,855)
=============================================================================================
<CAPTION>
Short Duration Tax-Free Core Fixed Income
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 2,085,253 $20,777,050 2,094,833 $20,524,422
Reinvestment of dividends
and distributions 139,126 1,383,351 436,903 4,292,533
Shares repurchased (4,601,865) (45,664,878) (769,104) (7,431,360)
- ---------------------------------------------------------------------------------------------
(2,377,486) (23,504,477) 1,762,632 17,385,595
- ---------------------------------------------------------------------------------------------
Administration shares
Shares sold 10,672 105,302 106,074 1,029,912
Reinvestment of dividends
and distributions 203 2,017 1,847 17,883
Shares repurchased (10,644) (105,478) (36,681) (358,284)
- ---------------------------------------------------------------------------------------------
231 1,841 71,240 689,511
- ---------------------------------------------------------------------------------------------
Service shares
Shares sold 137,557 1,366,332 43,525 422,233
Reinvestment of dividends
and distributions 1,621 16,124 549 5,332
Shares repurchased (115,450) (1,148,044) (5,292) (50,931)
- ---------------------------------------------------------------------------------------------
23,728 234,412 38,782 376,634
- ---------------------------------------------------------------------------------------------
Class A shares
Shares sold -- -- -- --
Reinvestment of dividends
and distributions -- -- -- --
Shares repurchased -- -- -- --
- ---------------------------------------------------------------------------------------------
-- -- -- --
- ---------------------------------------------------------------------------------------------
Net increase (decrease) (2,353,527) $(23,268,224) 1,872,654 $18,451,740
=============================================================================================
</TABLE>
- -------------------------------------------------------------------------------
38
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ 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
--------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. $9.83 $0.2971/(a)/ $0.0216/(a)/ -- $0.3187 $(0.2887) --
1997-Administration
Shares .............. 9.83 0.2844/(a)/ 0.0221/(a)/ -- 0.3065 (0.2765) --
1997-Service
Shares/(m)/ ......... 9.84 0.0527/(a)/ 0.0200/(a)/ -- 0.0727 (0.0527) --
1997-Class A Shares ...... 9.83 0.2766/(a)/ 0.0300/(a)/ -- 0.3066 (0.2766) --
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 9.77 0.5759/(a)/ 0.0772/(a)/ -- 0.6531 (0.5725) --
1996-Administration
Shares .............. 9.77 0.5489/(a)/ 0.0797/(a)/ -- 0.6286 (0.5489) --
1996-Class A Shares ...... 9.77 0.5481/(a)/ 0.0806/(a)/ -- 0.6287 (0.5489) --
1995-Institutional
Shares .............. 9.74 0.5630/(a)/ 0.0717/(a)/ -- 0.6347 (0.5759) --
1995-Administration
Shares .............. 9.74 0.5366/(a)/ 0.0737/(a)/ -- 0.6103 (0.5528) --
1995-Class A
Shares/(c)/.......... 9.79 0.2721/(a)/ (0.0090)/(a) / -- 0.2631 (0.2697) --
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) --
1993-Administration
Shares/(e)/.......... 10.02 0.2146 (0.0173)/(d) / -- 0.1973 (0.2146) --
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) --
<CAPTION>
Distributions to shareholders
----------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. -- -- -- $(0.2887) $0.0300 $9.86 3.28%/(f)/
1997-Administration
Shares .............. -- -- -- (0.2765) 0.0300 9.86 3.16/(f)/
1997-Service
Shares/(m)/ ......... -- -- -- (0.0527) 0.0200 9.86 0.74/(f)/
1997-Class A Shares ...... -- -- -- (0.2766) 0.0300 9.86 3.16/(f)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. (0.0206) -- -- (0.5931) 0.0600 9.83 6.86
1996-Administration
Shares .............. (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1996-Class A Shares ...... (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1995-Institutional
Shares .............. (0.0287) -- -- (0.6046) 0.0301 9.77 6.75
1995-Administration
Shares .............. (0.0275) -- -- (0.5803) 0.0300 9.77 6.48
1995-Class A
Shares/(c)/.......... (0.0134) -- -- (0.2831) (0.0200) 9.77 2.74/(f)/
1994-Institutional
Shares .............. -- -- -- (0.4486) (0.2600) 9.74 1.88
1994-Administration
Shares .............. -- -- -- (0.4239) (0.2600) 9.74 1.63
1993-Institutional
Shares .............. (0.0024) -- -- (0.4421) (0.0400) 10.00 4.13
1993-Administration
Shares/(e)/.......... (0.0027) -- -- (0.2173) (0.0200) 10.00 2.01/(f)/
1992-Institutional
Shares .............. -- -- -- (0.5470) 0.0100 10.04 6.12
For the Period July 17, 1991/(g)/through October 31
- ------------------------------------------------------
1991-Institutional Shares. -- -- -- (0.1553) 0.0300 10.03 2.14/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
---------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. 0.45%/(b)/ 6.08%/(b)/ 25.64% $549,611 0.51%/(b)/ 6.02%/(b)/
1997-Administration
Shares .............. 0.70/(b)/ 5.83/(b)/ 25.64 4,182 0.76/(b)/ 5.77/(b)/
1997-Service
Shares/(m)/ ......... 0.95/(b)/ 5.64/(b)/ 25.64 22 1.01/(b)/ 5.58/(b)/
1997-Class A Shares ...... 0.70/(b)/ 5.61/(b)/ 25.64 39,063 1.01/(b)/ 5.30/(b)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 0.45 5.85 52.36 613,149 0.51 5.79
1996-Administration
Shares .............. 0.70 5.59 52.36 3,792 0.76 5.53
1996-Class A Shares ...... 0.70 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares .............. 0.46 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares .............. 0.71 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares/(c)/.......... 0.69/(b)/ 5.87/(b)/ 24.12 15,203 1.01/(b)/ 5.55/(b)/
1994-Institutional
Shares .............. 0.46 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares .............. 0.71 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares .............. 0.45 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares/(e)/.......... 0.70/(b)/ 3.81/(b)/ 103.74 5,326 0.73/(b)/ 3.78/(b)/
1992-Institutional
Shares .............. 0.42 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g)through October 31,
- ------------------------------------------------------
1991-Institutional
Shares .............. 0.20/(b)/ 7.31/(b)/ 145.67/(b)/ 239,642 1.02/(b)/ 6.49/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ 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
-------------------------------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. $9.83 $0.3287/(a)/ $(0.0700)/(a)/ -- $0.2587 $(0.3287) --
1997-Administration
Shares .............. 9.85 0.3175/(a)/ (0.0700)/(a)/ -- 0.2475 (0.3175) --
1997-Service Shares ...... 9.82 0.3043/(a)/ (0.0700)/(a)/ -- 0.2343 (0.3043) --
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>
Distributions to shareholders
-----------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. -- -- -- $(0.3287) $(0.0700) $9.76 2.67%/(f)/
1997-Administration
Shares .............. -- -- -- (0.3175) (0.0700) 9.78 2.55/(f)/
1997-Service Shares ...... -- -- -- (0.3043) (0.0700) 9.75 2.42/(f)/
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. -- -- -- (0.6326) 0.0100 9.83 6.75
1996-Administration
Shares/(h)/.......... -- -- -- (0.3940) (0.0100) 9.85 4.00/(f)/
1996-Service
Shares/(i)/.......... -- -- -- (0.3152) 0.1000 9.82 4.35/(f)/
1995-Institutional Shares. -- -- -- (0.6518) 0.1800 9.82 8.97
1995-Administration
Shares .............. -- -- -- (0.2051) (0.0100) 9.63/(h)/ 2.10
1994-Institutional Shares. -- -- -- (0.6036) (0.5000) 9.64 0.99
1994-Administration
Shares .............. -- -- -- (0.5790) (0.5000) 9.64 0.73
1993-Institutional Shares. (0.0065) -- -- (0.5692) (0.0200) 10.14 5.55
1993-Administration
Shares/(e)/.......... -- -- -- (0.2725) (0.0900) 10.14 1.74
1992-Institutional Shares. -- -- -- (0.6703) (0.0600) 10.16 6.24
1991-Institutional Shares. -- -- -- (0.8020) 0.2200 10.22 10.93
1990-Institutional Shares. -- -- -- (0.8300) (0.0700) 10.00 8.23
1989-Institutional Shares. -- -- (0.0300) (0.9100) (0.0300) 10.07 9.08
For the Period August 15, 1988/(g)/through October 31
- ---------------------------------------------------------------
1988-Institutional Shares. -- -- -- (0.1800) 0.1000 10.10 3.30/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
-----------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. 0.45%/(b)/ 6.44%/(b)/ 43.72% $99,824 0.73%/(b)/ 6.16%/(b)/
1997-Administration
Shares .............. 0.70/(b)/ 6.22/(b)/ 43.72 1,504 0.98/(b)/ 5.94/(b)/
1997-Service Shares ...... 0.95/(b)/ 5.94/(b)/ 43.72 2,522 1.23/(b)/ 5.66/(b)/
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. 0.45 6.44 115.45 99,944 0.71 6.18
1996-Administration
Shares/(h)/.......... 0.70/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/.......... 0.95/(b)/ 6.05/(b)/ 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional Shares. 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares .............. 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional Shares. 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares .............. 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional Shares. 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/.......... 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional Shares. 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional Shares. 0.45 8.25 155.44 158,848 0.79 7.91
1990-Institutional Shares. 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional Shares. 0.46 8.71 137.37 31,015 1.39 7.78+
For the Period August 15, 1988/(g)/through October 31
- ---------------------------------------------------------------
1988-Institutional Shares. 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ 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
-------------------------------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. $9.96 $0.2097/(a)/ $(0.0200)/(a)/ -- $0.1897 $(0.2097) --
1997-Administration
Shares ................ 9.96 0.1976/(a)/ (0.0200)/(a)/ -- 0.1776 (0.1976) --
1997-Service Shares....... 9.97 0.1852/(a)/ (0.0300)/(a)/ -- 0.1552 (0.1852) --
For the Year Ended October 31,
- ---------------------------------------------------------------
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) --
<CAPTION>
Distributions to shareholders
---------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------------------
1997-Institutional Shares. -- -- -- $(0.2097) $(0.0200) $9.94 1.91%/(f)/
1997-Administration
Shares ................ -- -- -- (0.1976) (0.0200) 9.94 1.79/(f)/
1997-Service Shares....... -- -- -- (0.1852) (0.0300) 9.94 1.56/(f)/
For the Year Ended October 31,
- -------------------------------------------------------------------
1996-Institutional Shares. -- -- -- (0.4192) 0.0300 9.96 4.50
1996-Administration
Shares ................ -- -- -- (0.3944) 0.0300 9.96 4.24
1996-Service Shares....... -- -- -- (0.3697) 0.0200 9.97 3.98
1995-Institutional Shares. -- -- -- (0.4235) 0.1500 9.94 5.98
1995-Administration
Shares ................ -- -- -- (0.3989) 0.1500 9.94 5.76
1995-Service Shares ...... -- -- -- (0.3744) 0.1600 9.95 5.59
1994-Institutional Shares. -- -- -- (0.4612) (0.4400) 9.79 0.17
1994-Administration
Shares ................ -- -- -- (0.4362) (0.4400) 9.79 (0.11)
1994-Service Shares/(j)/.. -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/
1993-Institutional Shares. -- -- -- (0.3834) 0.3000 10.23 7.03
1993-Administration
Shares/(j)/............ -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
-----------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------------------
1997-Institutional Shares. 0.45%/(b)/ 4.24%/(b)/ 99.59% $37,159 1.05%/(b)/ 3.64%/(b)/
1997-Administration
Shares ................ 0.70/(b)/ 4.03/(b)/ 99.59 113 1.30/(b)/ 3.43/(b)/
1997-Service Shares....... 0.95/(b)/ 3.77/(b)/ 99.59 1,045 1.55/(b)/ 3.17/(b)/
For the Year Ended October 31,
- -------------------------------------------------------------------
1996-Institutional Shares. 0.45 4.21 231.65 34,814 1.01 3.65
1996-Administration
Shares ................ 0.70 3.96 231.65 48 1.26 3.40
1996-Service Shares....... 0.95 3.74 231.65 695 1.51 3.18
1995-Institutional Shares. 0.45 4.31 259.52 58,389 0.77 3.99
1995-Administration
Shares ................ 0.70 4.14 259.52 46 1.02 3.82
1995-Service Shares ...... 0.95 3.87 259.52 454 1.27 3.55
1994-Institutional Shares. 0.45 3.74 354.00 83,704 0.61 3.58
1994-Administration
Shares ................ 0.70 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/.. 0.95/(b)/ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares. 0.41 3.70 404.60 115,803 1.06 3.05
1993-Administration
Shares/(j)/............ 0.70/(b)/ 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. 0.05/(b)/ 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ 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
-------------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. $9.85 $0.3236 $(0.1403) $(0.0003) $0.1830 $(0.3230) --
1997-Administrative
Shares .............. 9.84 0.3108 (0.1398) (0.0003) 0.1707 (0.3107) --
1997-Service Shares ..... 9.86 0.2991 (0.1399) (0.0003) 0.1589 (0.2989) --
For the Year Ended October 31,
- ------------------------------------------------------
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) --
<CAPTION>
Distributions to shareholders
-----------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(k)/
------------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------
1997-Institutional
Shares .............. -- -- -- $(0.3230) $(0.1400) $9.71 1.87%/(f)/
1997-Administrative
Shares .............. -- -- -- (0.3107) (0.1400) 9.70 1.75/(f)/
1997-Service Shares ..... -- -- -- (0.2989) (0.1400) 9.72 1.63/(f)/
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares .............. -- -- -- (0.7244) (0.1500) 9.85 5.98
1996-Administrative
Shares/(l)/ ......... -- -- -- (0.4080) (0.0700) 9.84 3.56/(f)/
1996-Service
Shares/(l)/ ......... -- -- -- (0.3754) 0.0900 9.86 4.90/(f)/
1995-Institutional
Shares .............. -- -- -- (0.6433) 0.7600 10.00 15.72
For the Period January 5, 1994/(g)/through October 31,
- -------------------------------------------------------
1994-Institutional Shares. -- -- -- (0.4648) (0.7617) 9.24 (3.00)
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. 0.45%/(b)/ 6.66%/(b)/ 174.52% $73,483 0.76%/(b)/ 6.35%/(b)/
1997-Administrative
Shares .............. 0.70/(b)/ 6.49/(b)/ 174.52 6,194 1.01/(b)/ 6.18/(b)/
1997-Service Shares ..... 0.95/(b)/ 6.22/(b)/ 174.52 1,108 1.26/(b)/ 5.91/(b)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 0.45 6.51 414.20 72,061 0.83 6.13
1996-Administrative
Shares/(l)/ ......... 0.70/(b)/ 6.41/(b)/ 414.20 702 1.08/(b)/ 6.03/(b)/
1996-Service
Shares/(l)/ ......... 0.95/(b)/ 6.37/(b)/ 414.20 381 1.33/(b)/ 5.99/(b)/
1995-Institutional
Shares .............. 0.45 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994/(g)/through October 31,
- ------------------------------------------------------
1994-Institutional
Shares .............. 0.45/(b)/ 6.48/(b)/ 288.25 24,508 1.46/(b)/ 5.47/(b)/
</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)/ 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 no
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.
/(m)/ Service share activity commenced on March 27, 1997.
/(n)/ Includes the balancing effect of calculating per share amounts.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
- -------------------------------------------------------------------------------
This Semiannual 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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
John P. McNulty
Mary P. McPherson
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
FISARINST
- ------------------------------------------------------------------------------
The Goldman Sachs
Fixed Income Funds
- ------------------------------------------------------------------------------
Semiannual Report
April 30, 1997
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
[LOGO OF GOLDMAN SACHS APPEARS HERE]
- ------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders
- -------------------------------------------------------------------------------
Dear Shareholders:
A return of robust economic growth during the period under review fueled
fears of higher inflation, which pushed Treasury yields higher across the
maturity spectrum. In this semiannual report, we will review the performance of
the Goldman Sachs Fixed Income Funds for the six-month period ended April 30,
1997, as well as provide a brief overview of the U.S. economy and the bond
market. We are pleased to note that during the period, the Goldman Sachs Fixed
Income Funds performed well compared with their peers.
Economic Activity Rebounded, Led by Consumer Spending
After a sluggish third quarter, the pace of economic growth strengthened
during the period. During November and December, consumer spending rebounded,
the trade deficit narrowed and industrial production climbed significantly. As a
result, fourth-quarter real Gross Domestic Product (GDP) growth was 3.8%
(annualized), up from 2.1% in the prior quarter.
Economic activity continued to gain momentum during the first quarter of
1997, with real GDP surging 5.8%, the largest jump in a decade. Signs of
strength were led by a sharp increase in consumer spending, which resulted in
solid sales gains for automobile manufacturers and retailers. In addition,
upbeat reports on factory orders and inventories, construction outlays and labor
market conditions all pointed towards economic acceleration. Despite the growth
spurt, reported inflation remained surprisingly mild during the period.
Furthermore, several economic reports for April came in at the low end of
consensus expectations, which suggested that the economy could moderate during
the second quarter.
The Bond Market Rallied, Then Fell as Inflation Fears Reemerged
The U.S. fixed income market came under pressure during the period under
review. In November, bonds performed well in anticipation of a continued
slowdown in U.S. economic growth. However, the market experienced a reversal in
December when better-than-expected economic data, in particular, robust
employment figures, triggered a sell-off and drove interest rates higher. In
early February, bond prices briefly rebounded, but later faltered as it became
increasingly likely that the U.S. Federal Reserve would raise short term
interest rates in March. By the end of March, the yield on the benchmark 30-year
Treasury bond rose above the psychologically important 7% threshold. Despite the
lackluster performance of the U.S. bond market for the period as a whole, a
sharp rebound at the end of April helped bonds recoup part of their earlier
losses.
The Fed Raised the Federal Funds Rate in March
In March 1997, the Fed raised the federal funds rate by 25 basis points to
5.50%. Though there were few signs of actual inflation, the Fed tightening was
prompted by the economy's pervasive strength. The Fed's action was its first
since a quarter-point cut in January 1996.
During the period under review, the yield curve shifted higher across all
maturities. The yield on six-month Treasury bills rose from 5.26% on October 31,
1996 to approximately 5.52% on April 30, 1997. For the same period, the yield on
the 30-year U.S. Treasury bond rose more dramatically, climbing from 6.64% to
6.95%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 18
Goldman Sachs Government Income Fund 3 Notes to Financial Statements 22
Goldman Sachs Global Income Fund 8 Financial Highlights 29
Goldman Sachs Municipal Income Fund 13
----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
1
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders (continued)
- -------------------------------------------------------------------------------
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
10/31/96 4/30/97
<S> <C> <C>
3-Month 5.14% 5.23%
6-Month 5.26% 5.52%
1 5.40% 5.89%
2 5.73% 6.27%
3 5.86% 6.40%
5 6.07% 6.57%
10 6.34% 6.71%
30 6.64% 6.95%
</TABLE>
Source: Bloomberg, L.P.
The yield curve shifted upward across all maturities and steepened sharply at
the short end.
Outlook: Strengthening Economic Growth May Trigger Further Preemptive Rate Hikes
Despite reports of economic moderation and minimal price acceleration, the
economy's broad-based fundamental strength and resilient equity market make
additional Fed rate increases likely this year. Goldman Sachs' economists
believe that the speed and extent of Fed tightening will depend in large part on
the emergence of conclusive signs that the economy is nearing maximum capacity,
rather than immediate evidence of increased inflationary pressures.
In conclusion, we thank you for your support of the Goldman Sachs Fixed
Income Funds and we look forward to continuing our relationship.
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
May 30, 1997
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Government Income Fund seeks to provide shareholders with
a high level of current income consistent with safety of principal. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
U.S. government securities and in repurchase agreements collateralized by 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 Continued to Perform Well
During the period under review, mortgage-backed securities (MBS) performed
very well, buoyed by a surge in investor demand and stable prepayment activity.
Investor interest in the MBS market was triggered primarily by the favorable
interest rate environment. Throughout the period, rates remained in a fairly
tight range, allowing prepayment anxieties to subside. In addition, with other
highly rated fixed income instruments yielding approximately the same as
similar-duration Treasuries, investors turned to the mortgage-backed sector for
yield enhancement. Finally, an increase in collateralized mortgage obligation
(CMO) creation led to steady demand for underlying pass-through securities. As a
result of all of these positive factors, mortgage-backed securities became
increasingly expensive during the period as their yield spreads relative to
Treasuries tightened.
Performance Review
For the six-month period ended April 30, 1997, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to strong results from its investments in mortgage-backed
securities, particularly CMOs. The fund's Class B shares, which have higher
expenses, also achieved positive returns. The net asset value (NAV) of both
classes declined due to rising interest rates during the period.
We are pleased to report that the fund's Class A shares ranked within the
top 10% of intermediate U.S. government income funds (seventh out of 122) based
on total return for the 12 months ended April 30, 1997, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they have been
in existence less than 12 months.)
- -----------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
Total Return (based on net asset value) 1.83% 1.43%
- --------------------------------------------------------------------
Return From Monthly Distributions 3.67% 3.28%
- --------------------------------------------------------------------
Return From Price Depreciation -1.84% -1.85%
- --------------------------------------------------------------------
Total Return of Lehman Brothers 1.81% 1.81%
Government/Mortgage Index
- --------------------------------------------------------------------
NAV (as of 4/30/97) $14.10 $14.11
- --------------------------------------------------------------------
NAV Change -$0.26 -$0.26
- --------------------------------------------------------------------
</TABLE>
Portfolio Composition and Investment Strategies
The primary changes to the portfolio's sector allocations during the period
were a reduction of fixed rate mortgage pass-through and asset-backed securities
in favor of U.S. Treasuries and agency debentures.
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
U.S. Treasuries 36.7%
Fixed Rate Mortgage Pass-Throughs 26.1%
CMO's 13.0%
Asset-Backed Securities 11.0%
Agency Debentures 10.2%
Repos/Cash Equivalents 3.0%
</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.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio
held a 36.7% position in U.S. Treasuries, its single largest allocation as of
April 30. The fund's holdings in Treasuries more than doubled as we scaled back
exposure to the mortgage-backed and asset-backed sectors, both of which were
nearing full value.
.. Fixed Rate Mortgage Pass-Throughs. As of April 30, the fund's investment in
fixed rate mortgage pass-throughs accounted for 26.1% of the portfolio, down
from 40.4% six months earlier. The sector performed well during the period, as
many of the factors which supported MBS through 1996 remained in place: low
volatility, range-bound interest rates, tight yield spreads on alternative
sectors, and light issuance of corporate and asset-backed securities (ABS).
However, as the MBS market repriced to reflect the favorable environment, we
reduced the position.
We also used mortgage dollar rolls during the period, 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 liquid assets equal to the dollar
amount of the forward commitment in a segregated account with the fund's
custodian.
.. CMOs. The CMO market enjoyed strong demand from yield-seeking investors,
while the supply of CMOs, though rising, remained relatively low from a
historical perspective. As the sector became more expensive, we reduced the
fund's allocation to 13.0% from 22.0% last October. Specifically, we cut
sequential-pay/support CMOs to 7.2%, approximately half their weighting six
months ago, and planned amortization class (PAC) CMOs to 4.2% from 5.5%.
.. Asset-Backed Securities. As of April 30, the fund's ABS position was 11.0%,
down from 19.9% last October. During the period, the ABS sector experienced some
selling pressure, in part due to negative credit events among selected credit
card and sub-prime auto lenders. Overall, however, the sector performed well:
investor interest remained broad-based, ratings held firm and, relative to
similarly rated spread products, ABSs continued to offer attractive yield
enhancement opportunities.
.. Agency Debentures. Agency debentures represented 10.2% of the portfolio as
of the end of the period, constituting an overweighted position compared with
the benchmark's 8.0%. We added to the allocation during the period as
alternative sectors richened.
.. Issuer Composition. The portfolio composition of the fund's mortgage-backed
security holdings by issuer was 13.6% in Federal National Mortgage Association
(FNMA) issues and 13.2% in Government National Mortgage Association (GNMA)
issues.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
.. Credit Quality. As of April 30, 75.5% of the portfolio was invested in U.S.
government and agency securities, 21.5% of the portfolio was invested in triple-
A-rated securities and 3.0% of the portfolio was invested in cash equivalents.
.. Prudent Use of Derivatives. As discussed earlier, the fund held a 7.2%
position in sequential-pay/support CMOs and a 4.2% position in PAC CMOs,
securities that are generally considered to be lower risk derivative
instruments. In addition, the portfolio held small positions in inverse
floaters, interest-only (IO) CMOs and principal-only (PO) CMOs for their
potential to add incremental yield. The portfolio's combined position in these
higher risk derivatives was 1.6% as of the end of the period.
.. Duration. We seek excess return over the Index through sector weightings
and specific security selection rather than attempting to make interest rate
predictions. Therefore, we manage the fund's duration to approximate that of the
Index, partly through the use of futures. As of April 30, the fund's duration
was 4.4 years, in line with that of the Index.
Market Outlook
Despite some suggestion of economic moderation, we continue to believe that
interest rates are likely to move higher during the balance of the year. This
expectation is predicated on the economy's broad-based fundamental strength, as
well as the Fed's well-publicized commitment to monetary discipline.
Regarding specific fixed income sectors, investor demand for mortgage-
backed securities remains robust, but lower rates and rising volatility increase
the risk of refinancings and lead us to maintain a cautious outlook for mortgage
pass-throughs over the next few months. Similarly, while CMOs do not generally
offer significant value over mortgage pass-throughs, specific structures within
the CMO market present attractive investment opportunities. In the ABS sector,
anxiety regarding negative credit events during the first quarter appears to be
subsiding. However, we believe the market is now more alert to credit
distinctions among issuers, servicers and collateral types, and has begun
pricing securities accordingly. Consequently, it may become more challenging to
identify unrecognized value within the ABS sector, particularly among the higher
quality issues that we tend to emphasize.
Distribution Policy
The fund's Class A and Class B shares paid out monthly distributions of
approximately $0.52 and $0.47 per share, respectively, during the six-month
period ended April 30, 1997. 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.
/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
May 30, 1997
- --------------------------------------------------------------------------------
5
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--37.7%
Federal Home Loan Mortgage Corp. (FHLMC)--1.8%
$ 1,000,000 7.00% TBA 15-Yr /(a)/ $ 990,930
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--8.7%
$ 1,000,000/(h)/ 6.50% TBA 7-Yr /(a)/ $ 981,560
1,000,000 7.00 TBA 30-Yr /(a)/ 968,750
1,000,000 7.50 TBA 30-Yr /(a)/ 942,500
2,000,000/(h)/ 7.50 TBA 30-Yr /(a)/ 1,985,000
- --------------------------------------------------------------------------------
$ 4,877,810
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA) --13.0%
$ 238,209 9.00% 10/15/19 $ 253,098
97,383 9.00 12/15/19 103,470
315,821 7.50 04/15/23 314,933
610,646 7.50 07/15/23 608,930
368,845 7.00 08/15/23 359,162
695,669 7.00 10/15/23 677,408
61,762 7.00 11/15/23 60,141
877,541 7.00 12/15/23 854,506
1,005,084 8.00 12/15/26 1,018,690
2,000,000/(h)/ 7.50 TBA 30-Yr /(a)/ 1,982,500
1,000,000/(h)/ 8.00 TBA 30-Yr /(a)/ 1,013,430
- --------------------------------------------------------------------------------
$ 7,246,268
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--14.2%
Interest Only--0.4%
FNMA Interest-Only Stripped Security, Series 151, Class 2/(d)/
$ 643,343 11.30% 07/25/22 $ 213,024
- --------------------------------------------------------------------------------
$ 213,024
- --------------------------------------------------------------------------------
Inverse Floater--0.7%
FNMA Remic Trust, Series 1992-62, Class S
$ 404,038 9.27%/(c)/ 05/25/99 $ 405,941
- --------------------------------------------------------------------------------
$ 405,941
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC) CMOs--2.9%
FNMA Remic Trust, Series 1997-9, Class B
$ 1,000,000 6.50% 10/25/22 $ 962,510
GE Capital Mortgage Services, Inc., Series 1994-11, Class A1
644,342 6.50 03/25/24 644,941
- --------------------------------------------------------------------------------
$ 1,607,451
- --------------------------------------------------------------------------------
Principal Only--1.9%
FNMA Remic Trust, Series G-35, Class N/(d)/
$ 575,000 6.16% 10/25/21 $ 419,376
FNMA Remic Trust, Series 1993-205, Class C/(d)/
750,000 7.23% 09/25/23 625,545
- --------------------------------------------------------------------------------
$ 1,044,921
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--1.4%
Citicorp Mortgage Securities, Series 1993-11, Class A6
$ 818,108 6.25% 09/25/08 $ 788,362
- --------------------------------------------------------------------------------
$ 788,362
- --------------------------------------------------------------------------------
Support--7.0%
GE Capital Mortgage Services, Inc., Series 1994-10, Class A22
$ 996,703 6.50% 03/25/24 $ 865,497
Housing Securities, Inc., Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,329,852
Prudential Securities, Series 1995-2, Class A
797,338 5.77 11/15/15 799,578
Salomon Brothers Mortgage Securities VII, Series 1996-6H, Class A1
1,000,000 6.00 09/30/08 899,840
- --------------------------------------------------------------------------------
$ 3,894,767
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,954,466
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $21,101,884) $ 21,069,474
- --------------------------------------------------------------------------------
Asset-Backed Securities--11.6%
Asset Securitization Corp., Series 1996, Class A1
$ 300,000 6.88% 11/13/26 $ 295,699
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
720,000 6.23 06/15/03 710,546
CPS Auto Grantor Trust, Series 1993-3, Class A
855,634 6.30 08/15/02 850,107
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 589,263
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 622,980
JP Morgan Commercial Mortgage Finance Corp., Series 1997-C4
500,000 7.32 12/26/28 498,614
Morgan Stanley Capital Commercial Mortgage, Inc. Series 1997-C1
500,000 7.46 05/15/06 506,875
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
224,429 6.55 11/20/01 225,129
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset-Backed Securities(continued)
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
$ 420,638 6.85% 06/15/01 $ 424,099
Premier Auto Trust, Series 1993-6, Class A2
271,484 4.65 11/02/99 269,021
Premier Auto Trust, Series 1994-1, Class A3
176,500 4.75 02/02/00 175,672
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 473,368
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 860,533
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $6,623,680) $ 6,501,906
- --------------------------------------------------------------------------------
U.S. Government Agency Obligations--10.0%
Small Business Administration
$ 1,700,000 7.15% 03/01/17 $ 1,685,176
1,400,000 7.50 04/01/17 1,416,562
Sri Lanka Aid/(c)/
2,500,000 6.06 02/21/16 2,464,075
- --------------------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $5,562,500) $ 5,565,813
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--35.6%
United States Treasury Bonds
$ 140,000 8.75% 05/15/17 $ 165,484
270,000/(e)/ 8.88 08/15/17 322,988
3,450,000 8.75 05/15/20 4,109,813
180,000 8.75 08/15/20 214,565
690,000/(e)/ 7.63 02/15/25 740,025
United States Treasury Notes
1,460,000/(e)/ 7.38 11/15/97 1,471,636
700,000 5.88 04/30/98 699,342
5,650,000/(e)/ 6.88 08/31/99 5,712,659
3,700,000 6.13 07/31/00 3,664,739
1,100,000 5.63 11/30/00 1,070,091
1,200,000 7.50 02/15/05 1,256,436
United States Treasury Principal-Only Stripped Securities/(d)/
300,000 6.85 05/15/05 174,777
1,550,000 7.23 05/15/20 302,790
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $20,041,673) $ 19,905,345
- --------------------------------------------------------------------------------
Repurchase Agreement--19.9%
Joint Repurchase Agreement Account/(e)/
$ 11,100,000 5.49% 05/01/97 $ 11,100,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $11,100,000) $ 11,100,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $64,429,737/(f)/) $ 64,142,538
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long (Short)/(g)/ Month Gain (Loss)
- --------------------------- ------------------ -------------- -------------
<S> <C> <C> <C>
Euro Dollars 3 September 1997 $375
5 Year U.S. Treasury Notes 19 June 1997 4,312
U.S. Long Term Bond 3 June 1997 6,282
-------------
$10,969
- --------------------------------------------------------------------------------
</TABLE>
Federal Income Tax Information:
<TABLE>
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 118,460
Gross unrealized loss for investments in which cost
exceeds value (509,387)
- --------------------------------------------------------------------------------
Net unrealized loss $ (390,927)
- --------------------------------------------------------------------------------
</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
April 30, 1997.
/(d)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(e)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(f)/The aggregate cost for federal income tax purposes is $64,533,465.
/(g)/Each 5-Year U.S. Treasury Note and U.S. Long Term 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 at risk are $5,200,000 and $3,032,288, respectively. The
determination of notional amounts as presented here are indicative only of
volume of activity and not a measure of market risk.
/(h)/When-issued security.
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.
7
<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.
Special Event
To accommodate different clients' needs and preferences, on March 12, 1997,
the fund opened a new share class (Service).
Favorable Economic Factors Helped European Bonds While Rising Rates Impacted
Treasuries
Global bonds began the period under review on a strong note, but weakened
during the first quarter of 1997. European bonds were the best performers during
the period, while the United States lagged along with the dollar bloc markets.
The economic fundamentals that supported most European bonds throughout
1996 -- particularly weak economic growth and contained inflation -- remained
intact during the period. This favorable backdrop, plus yield convergence ahead
of European monetary union (EMU), helped the higher yielding bonds of Spain
achieve the best performance of all the major bond markets (hedged into U.S.
dollars). The "core" European markets such as Germany also fared well due to
increased expectations of tighter fiscal policies to help them meet EMU
criteria. In contrast, the U.K. gilt underperformed most European bonds as
sharply accelerating growth triggered fears of higher inflation. In Japan, the
performance of Japanese Government Bonds (JGBs) trailed nearly all of the major
European markets but still fared reasonably well (hedged into U.S. dollars). The
Japanese market strengthened following a sharp November sell-off when continued
weakness in the financial sector made near-term rate hikes by the Bank of Japan
unlikely.
In the United States, stronger than expected economic growth pushed yields
higher and prompted the Federal Reserve to raise the federal funds rate by a
quarter-percentage point in March. As a result, U.S. Treasuries posted the
poorest performance of all the major bond markets.
Performance Review: Country Allocations Contributed to Performance
During the period under review, the Goldman Sachs Global Income Fund's
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. The fund's
favorable results were primarily due to its overweighting in German bonds, one
of the strongest European markets during the period, and its underweighting in
the United States, the weakest market.
The fund's Class A and B shares, which have higher expenses than the
Institutional shares, lagged the benchmark. The fund's Service shares achieved
positive performance since their inception on March 12, 1997; however, a partial
period of approximately 1 1/2 months is obviously too brief a period to measure
performance meaningfully.
The fund's Institutional and Class A shares fared well compared with their
peers. For the 12-month period ended April 30, the Institutional and Class A
shares ranked 25th and 29th, respectively, out of 133 global income funds 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
- -------------------------------------------------------------------------------
8
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
performance is not a guarantee of future results. Class B and Service shares
were not ranked for this period because they were in existence less than 12
months.)
We are also pleased to announce that for the five-year period ended April
30, 1997, the fund's Class A shares were rated "four stars" (out of 641 taxable
bond funds) by Morningstar, Inc., an independent rating agency./1/
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
Institu-
Class A Class B tional Service*
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Total Return (based on net
asset value) 3.22% 2.94% 3.50% 0.21%
- ----------------------------------------------------------------------------------------------------------------------
Return From Monthly 2.80% 2.59% 3.08% 0.01%
Distributions
- ----------------------------------------------------------------------------------------------------------------------
Return From Price 0.42% 0.35% 0.42% 0.20%
Appreciation
- ----------------------------------------------------------------------------------------------------------------------
Total Return of J.P. 3.47% 3.47% 3.47% 0.50%
Morgan Global
Government Bond Index
- ----------------------------------------------------------------------------------------------------------------------
NAV (as of 4/30/97) $14.59 $14.58 $14.58 $14.59
- ----------------------------------------------------------------------------------------------------------------------
NAV Change +$0.06 +$0.05 +$0.06 -$0.10
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period. Performance and net asset value
(NAV) change are from its inception date on 3/12/97.
- ------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Class A shares received "four stars"
for both the three- and one-year periods and were rated among 1,193 and 1,709
taxable bond funds for the three- and one-year periods, respectively. The
Morningstar ratings apply only to the fund's Class A shares; the fund's Class B,
Institutional and Service shares have not been rated. Class B and Service shares
are subject to additional fees and expenses that may have the effect of lowering
performance and may affect any future Morningstar rating. Morningstar rates each
fund against its peers in the same category. In all, there are four Morningstar
categories (domestic equity, international equity, taxable bond and municipal).
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.
During the period, we successfully employed several currency strategies
relative to our neutral position, which is to be fully hedged into U.S. dollars.
The main contributors to the positive currency performance were the fund's long
U.S. dollar positions against the yen and long positions in the high-yielding
European currencies against the Deutschemark and Swiss franc. The U.S. dollar
was supported by strong growth and rising short-term rates while the high-
yielding European currencies benefited from the EMU process gaining momentum.
Portfolio Composition and Investment Strategies
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
U.S. 33.1%
Germany 11.0%
Cash 10.7%
Japan 10.4%
U.K. 10.1%
Australia 8.5%
Italy 6.3%
Sweden 4.3%
France 3.0%
Spain 2.6%
</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 April 30, 1997, the fund was slightly underweighted in
the dollar bloc countries (e.g., U.S., Canada and Australia) relative to the
Index, 41.6% versus 44.3%.
U.S. In the U.S., Treasury prices came under pressure when accelerating
economic growth drove bond yields
- -------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
higher and prompted a Fed rate hike. As noted, the fund was underweighted in
Treasuries, which significantly benefited its performance relative to the Index.
As of April 30, 33.1% of the portfolio was invested in U.S. Treasuries compared
with a 40.2% allocation for the benchmark.
Other Dollar Bloc. The fund was not invested in Australia when the period
began, but we took advantage of improving bond fundamentals and a widening of
the Australia/U.S. bond yield differential by reestablishing a position in
December 1996. As of April 30, Australian bonds accounted for 8.5% of the
portfolio, overweighted compared with the benchmark's 1.2%. The fund also
briefly held a position in Canada, which performed well and was sold at a
profit.
.. Europe. European bonds were the strongest performers and they contributed
to the fund's favorable results during the period. As of April 30, the region
accounted for 37.3% of the portfolio compared with a 41.4% weighting for the
Index.
Germany. Despite a pickup in growth in mid-1996, the period under review
was marked by a return of softening economic activity. The most dramatic
indication of Germany's continuing economic difficulties was a record increase
in unemployment in January to levels last seen in 1933. The belief that an end
of the Bundesbank's very easy monetary policy was not in sight continued to
support the bond market. The fund held an overweighted position in Germany
relative to the Index, 11.0% versus 8.9%.
Spain, Sweden and Italy. When the period began, increased optimism
regarding EMU particularly benefited the higher-yielding bonds of Spain and
Sweden. Though the prospects for EMU dimmed somewhat during the first quarter,
Spain, a 2.6% position as of April 30, continued to perform well due to
favorable economic fundamentals. Sweden's portfolio weighting was in line with
the Index for most of the period, then increased to 4.3% in April in
anticipation of further rate cuts on the back of favorable inflation reports.
Finally, as of April 30, the portfolio was overweighted in Italy, 6.3% versus
4.9% for the Index, because growth remains muted and we expect it to benefit
from further yield convergence.
U.K. The U.K.'s economy continued to grow at a pace well above that of the
rest of Europe. The prospect of higher rates, as well as concerns surrounding
the general election, raised investor uncertainty and impacted the performance
of the U.K. gilt. However, we increased the portfolio's U.K. position in January
in the belief that the forward interest rate curve reflected an overly
pessimistic view of potential monetary tightening. By April 30, the U.K. was
10.1% of the portfolio, overweighted compared with the benchmark (6.4%).
France. Though the fund was not invested in France during most of the
period, we established a 3.0% position in April, as we believed that the
underperformance of shorter term bonds in that market presented an attractive
investment opportunity relative to Germany.
Ireland, Denmark and the Netherlands. During the period, we sold the
portfolio's small positions in Ireland, Denmark and the Netherlands after they
performed well and fulfilled our return expectations.
.. Japan. The fund significantly underweighted Japan relative to the Index
(10.4% versus 14.3%) because economic growth, though muted, continued to point
towards economic recovery. To a significant extent, the Japanese bond market
shrugged off signs of strengthening growth as being "front loading" ahead of the
consumption tax hike on April 1. Instead, the market focused on the need for a
continuation of low rates to assist the troubled financial sector.
.. Cash Equivalents. We reduced the fund's cash equivalent position to 10.7%,
down from 15.5% six months ago, in favor of attractive investment opportunities.
.. Credit Quality. Throughout the period, the portfolio was 100% invested in
triple-A-rated securities.
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
.. Duration. As of the end of the period, the fund's duration was shorter
than that of the Index, 4.7 years compared with 5.1 years, primarily due to its
underweighting in Japan and its cash equivalent position. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's NAV should move in relation to interest rate
fluctuations.)
Distribution Policy
During the six-month period under review, the fund's Class A, B and
Institutional shares paid out distributions of $0.40, $0.37 and $0.44 per share,
respectively. From their inception on March 12 through April 30, the fund's
Service shares paid out $0.13 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.
Fund Outlook
The rapid pace of U.S. economic growth during the past two quarters leads
us to expect further Fed tightening. Despite early signs of a possible slowdown
in the second quarter, we continue to believe that bond yields will need to rise
from current levels to ensure that inflationary pressures remain in check.
European growth remains modest, but even more importantly, inflation
appears to be set for further declines (excluding the U.K.). Provided EMU
remains on track, short rates across Europe appear likely to stay at current
levels for a sustained period. Consequently, we expect European bonds to provide
reasonable returns, outperforming the weaker U.S. bond market. In the U.K., a
25-basis-point rate hike and greater independence for the Bank of England has
established the new Labor government's anti-inflation credentials. Any policy
that moves towards a closer relationship with continental Europe will further
highlight the fundamentally cheap levels for U.K. gilts relative to other
European bonds.
In Japan, a rate hike in the near future remains unlikely but JGBs are
vulnerable to the threat of a change in government policy or an asset allocation
shift. For example, the weakness of the life insurance companies may force the
authorities to consider the cost of maintaining historically low short-term
rates. Furthermore, the strong performance of the equity market at the end of
the period may prompt an asset allocation shift away from bonds into equities,
putting further upward pressure on Japanese yields.
/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, May 30, 1997
- -------------------------------------------------------------------------------
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount(a) Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--87.7%
Australian Dollar--8.4%
Commonwealth of Australia
AUD 21,700,000 10.00% 02/15/06 $ 19,262,621
- --------------------------------------------------------------------------------
British Pound Sterling--9.8%
United Kingdom Treasury
BPS 8,000,000 8.50% 12/07/05 $ 13,833,063
5,300,000 7.50 12/07/06 8,528,207
- --------------------------------------------------------------------------------
$ 22,361,270
- --------------------------------------------------------------------------------
Deutschemark--10.8%
Federal Republic of Germany
DEM 28,000,000 7.50% 11/11/04 $ 18,101,859
2,000,000 6.50 10/14/05 1,216,538
9,000,000 6.25 04/26/06 5,383,994
- --------------------------------------------------------------------------------
$ 24,702,391
- --------------------------------------------------------------------------------
French Franc--3.0%
Government of France
FRF 40,000,000 4.75% 03/12/02 $ 6,851,366
- --------------------------------------------------------------------------------
Italian Lira--6.1%
Republic of Italy
ITL 22,000,000,000 9.50% 05/01/01 $ 13,922,058
- --------------------------------------------------------------------------------
Japanese Yen--10.2%
International Bank for Reconstruction & Development
JPY 1,400,000,000 4.50% 06/20/00 $ 12,132,194
700,000,000 6.75 06/18/01 6,665,813
500,000,000 4.50 03/20/03 4,497,873
- --------------------------------------------------------------------------------
$ 23,295,880
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 700,000,000 10.15% 01/31/06 $ 5,841,114
- --------------------------------------------------------------------------------
Swedish Krona--4.2%
Kingdom of Sweden
SEK 50,000,000 5.50% 04/12/02 $ 6,157,023
30,000,000 6.00 02/09/05 3,586,638
- --------------------------------------------------------------------------------
$ 9,743,661
- --------------------------------------------------------------------------------
United States Dollar--32.7%
United States Treasury Notes
USD 15,000,000 5.25% 01/31/01 $ 14,392,950
17,000,000 6.38 03/31/01 16,909,730
8,200,000 6.25 02/15/03 8,059,042
10,000,000 7.88 11/15/04 10,684,400
4,000,000 6.50 08/15/05 3,940,640
14,700,000 7.00 07/15/06 14,947,989
6,200,000 6.50 10/15/06 6,098,258
- --------------------------------------------------------------------------------
$ 75,033,009
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $204,539,209) $ 201,013,370
- --------------------------------------------------------------------------------
Short-Term Obligations--13.6%
State Street Bank & Trust Euro-Time Deposit
USD 31,090,625 5.66% 05/01/97 31,090,625
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $31,090,625) $ 31,090,625
- --------------------------------------------------------------------------------
<CAPTION>
Contracts Description Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Options--0.0%
FRF 60,000,000 Government of France 4.75% Call, $ 71,961
exp 7/97, Strike yield 4.85%
FRF 40,000,000 Government of France 4.75% Put, $ 39,750
exp 7/97, Strike yield 4.85%
- --------------------------------------------------------------------------------
Total Options
(Cost $124,428) $ 111,711
- --------------------------------------------------------------------------------
Total Investments
(Cost $235,754,262(b)) $ 232,215,706
- --------------------------------------------------------------------------------
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value $ 1,972,384
exceeds cost
Gross unrealized loss for investments in which cost (5,579,488)
exceeds value
- --------------------------------------------------------------------------------
Net unrealized loss $ (3,607,104)
- --------------------------------------------------------------------------------
</TABLE>
(a)The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
AUD = Australian Dollar JPY = Japanese Yen
BPS = British Pound Sterling ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
FRF = French Franc USD = United States Dollar
ITL = Italian Lira
/(b)/The aggregate cost for federal income tax purposes is $235,822,810.
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.
12
<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, securities 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.
A Stable Municipal Bond Market
The municipal market has remained at relatively rich levels compared with
the taxable market since the end of 1996, as light primary and secondary supply
has been consumed easily by stable demand. The average price of a 15-year
municipal bond (as calculated from data provided by Municipal Market Data, an
independent municipal market information provider) declined approximately 1.07%,
while yields rose from 5.30% on October 31, 1996 to 5.40% on April 30, 1997.
Supply increased throughout most of the period, though it remained light
compared with historical averages. In November, municipal bond issuance was up
30% versus the prior three-month average. As is typical, increased supply
continued in early December due to the approaching year-end. The 1997 new issue
supply has followed historical early-month patterns, with January and February
supply well below annual averages (slightly more than $10 billion each month)
and March and April supply closer to normal levels ($13 to $14 billion).
Demand from individual investors (who control approximately two-thirds of
municipal bond ownership either through mutual funds or direct investment)
remained stable, but not strong, as long-term municipal yields were below the
psychologically significant 6% level. While yields have not yet cracked that
barrier, President Clinton's reelection and the loss of Republican momentum have
put talk of tax reform and talk of significant changes in the tax-exempt status
of municipal bonds on the back burner, comforting some of the investors
concerned about the market. In addition, the emergence of "nontraditional"
buyers during April has helped support the long end of the market.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Yield
Year of Maturity 4/30/97 10/31/96
<S> <C> <C>
1998 3.85% 3.90%
1999 4.40% 4.15%
2000 4.60% 4.30%
2001 4.70% 4.40%
2002 4.80% 4.50%
2003 4.85% 4.60%
2004 4.90% 4.70%
2005 4.95% 4.80%
2006 5.00% 4.90%
2007 5.05% 5.00%
2008 5.10% 5.10%
2009 5.20% 5.20%
2010 5.30% 5.25%
2011 5.35% 5.30%
2012 5.40% 5.35%
2013 5.45% 5.40%
2014 5.50% 5.40%
2015 5.50% 5.45%
2016 5.55% 5.45%
2017 5.55% 5.45%
2018 5.55% 5.50%
2019 5.55% 5.50%
2020 5.60% 5.50%
2021 5.60% 5.50%
2022 5.60% 5.50%
2023 5.60% 5.50%
2024 5.60% 5.50%
2025 5.60% 5.50%
2026 5.60% 5.50%
2027 5.60% 5.50%
</TABLE>
The yield curve steepened and shifted upward at the short end, remained nearly
the same in the mid-range, and shifted marginally upward at the longer end, in
contrast to six months ago.
Performance Review: The Fund's Positive Performance Reflects Active Management
of Term Structure, Sector Weightings and Security Selection
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 also performed well, although slightly below the
Index.
We are pleased to report that the fund's Class A shares outperformed most
of their peers. For the one-year period ended April 30, 1997, Class A shares
ranked in the top 10% of general municipal debt funds (20 out of 231) based on
total return, according to Lipper Analytical Services, Inc. The fund's Class B
shares were not in existence for the entire one-year period and were not
included in the ranking. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.)
- -------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
Class A Class B
------- -------
<S> <C> <C>
Total Return (based on net asset 2.57% 2.18%
value (NAV))
- --------------------------------------------------------------------------------
Return From Monthly Distributions 2.36% 1.97%
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.21% 0.21%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal 2.49% 2.49%
Bond Index
- --------------------------------------------------------------------------------
NAV (as of 4/30/97) $14.40 $14.40
- --------------------------------------------------------------------------------
NAV Change +$0.03 +$0.03
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
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
municipal and Treasury futures contracts to manage sector allocation and
duration.
.. The portfolio's 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 10-year maturities on the short end of the
curve. This strategy allows us to extract extra yield from the shorter end of
the market while maintaining higher quality on the more interest-rate-sensitive
long end of the market. However, during the period, we regularly adjusted the
credit and term structure to take advantage of changing market conditions.
.. During the period, we employed several strategies using municipal and/or
treasury futures contracts. These trades are designed to exploit relative
pricing discrepancies between different markets, and are not designed to incur
additional interest rate risk. The fund stood at a 100% municipal bond weighting
(no Treasury or municipal contracts) at the end of the reporting period,
indicating attractive opportunities across the length of the municipal yield
curve.
.. 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:
Emphasis on Revenue Bonds
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Revenue Bonds 44.1%
Insured Revenue Bonds 35.4%
Insured General Obligations 20.5%
</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.
.. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of April 30, the fund held a 79.5% 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 April 30, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 20.5% versus 45.6%. Though the fund's total
GO allocation of 20.5% was down from 29.8% six months ago, the GO category is
now exclusively
- -------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- -------------------------------------------------------------------------------
weighted in insured GOs. Security-specific investment opportunities and the
relative cheapness of bond insurance for issuers enable the fund to purchase
higher yielding insured GOs without sacrificing quality.
.. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. VRDNs fell
from 7.6% to 4.4% of the portfolio. The 4.4% VRDN allocation consists of 3.0%
GOs and 1.4% Revenue-Backed VRDNs.
.. Credit Quality. During the period, the fund's average credit quality has
remained double-A. The fund's credit quality maintained a "barbell" structure,
with higher quality securities at the long end of the yield curve and lower
quality securities (but still investment grade) at the short end, though there
have been slight increases in the double-A and single-A categories. As of April
30, 59.8% of the fund was invested in triple-A-rated securities, down from 70.5%
six months ago, while double-A- and single-A-rated securities were increased to
14.4% and 9.8% from 9.3% and 1.8%, respectively. We continued to maintain a
position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 16.0% of the portfolio, down
slightly from 18.4%. 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
Our long-term outlook for municipal bond supply is essentially neutral, as
rates are at high levels compared with one year ago. As a result, the current
rate environment encourages neither supply (low rates bring refinancing) nor
demand (high rates attract buyers). At this point, the municipal market does not
perceive any real threats from the federal budget accord. Without any
fundamental problems in view for tax-exempts, we are left with technical forces
as the key driver in relative market performance.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the period
under review, the fund's Class A and B shares paid out distributions of $0.34
and $0.32 per share, respectively. The fund intends to distribute substantially
all of its investment company tax-exempt and taxable income, as required by tax
law.
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
May 30, 1997
- -------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--95.6%
Arizona--7.6%
Maricopa County MFH IDA (A)
$1,795,000 5.85% 01/01/08 $1,824,546
Maricopa County Unified School District No. 41 GO (FSA)
(AAA/Aaa)
2,500,000 6.25 07/01/15 2,618,500
- --------------------------------------------------------------------
$4,443,046
- --------------------------------------------------------------------
California--3.4%
Contra Costa Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $2,014,700
- --------------------------------------------------------------------
Colorado--4.3%
Englewood MFH RB (BBB)/(d)/
$2,500,000 6.65% 12/01/26 $2,495,575
- --------------------------------------------------------------------
Connecticut--3.6%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $2,107,780
- --------------------------------------------------------------------
Florida--6.7%
Escambia County Housing Authority, Single Family
Multi-County (FNMA/GNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $1,460,070
Santa Rosa Bay Bridge Authority RB (BBB-)
2,500,000 6.25 07/01/28 2,472,900
- --------------------------------------------------------------------
$3,932,970
- --------------------------------------------------------------------
Illinois--14.6%
Chicago Midway Airport RB (MBIA)(AAA/Aaa)
$2,500,000 5.50% 01/01/10 $2,498,800
Lake County Unified School District No. 116 GO (FSA)
(AAA/Aaa)
2,000,000 7.60 02/01/14 2,423,180
1,525,000 6.10 02/01/16 1,555,988
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,104,080
- --------------------------------------------------------------------
$8,582,048
- --------------------------------------------------------------------
Indiana--7.0%
Indiana Bond Bank for Hendricks County RB (AA-)/(b)/
$1,420,000 6.00% 02/01/12 $1,472,540
Indiana Transportation Airport Series A RB (AAA/Aaa)
2,500,000 6.00 11/01/11 2,618,025
- --------------------------------------------------------------------
$4,090,565
- --------------------------------------------------------------------
Kentucky--1.8%
Nelson County Industrial Building RB for Mabex
Universal Corp. Project (A3)
$1,000,000 6.50% 04/01/05 $1,060,850
- --------------------------------------------------------------------
Louisiana--4.3%
South Louisiana Port RB for Cargill Corp. (Aa3)
$2,500,000 5.85% 04/01/17 $2,499,950
- --------------------------------------------------------------------
Maine--1.2%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 675,000 6.80% 12/01/07 $ 721,177
- --------------------------------------------------------------------
Missouri--3.6%
St. Louis Municipal Finance Leasehold RB (A/Aa3)
$2,100,000 5.30% 07/15/02 $2,128,854
- --------------------------------------------------------------------
Nevada--3.1%
Washoe County GO (MBIA)(AAA/Aaa)
$2,000,000 5.00% 06/01/17 $1,822,080
- --------------------------------------------------------------------
New York--3.4%
Syracuse IDA RB (AA)
$2,000,000 5.13% 10/15/02 $1,992,580
- --------------------------------------------------------------------
North Dakota--3.5%
Mercer County PCRB for Basin Electric & Power 2nd
Series (AMBAC) (AAA/Aaa)/(d)/
$2,000,000 6.05% 01/01/19 $2,051,720
- --------------------------------------------------------------------
Ohio--1.0%
Cuyahoga County for Rock & Roll Hall of Fame RB (BBB)
$ 600,000 5.45% 12/01/05 $ 594,018
- --------------------------------------------------------------------
Oklahoma--4.0%
Holdenville IDA RB (BBB/Baa)
$1,245,000 5.95% 07/01/02 $1,279,001
Tulsa County Public Facilities RB (A-)
1,000,000 6.60 11/01/08 1,070,250
- --------------------------------------------------------------------
$2,349,251
- --------------------------------------------------------------------
Pennsylvania--3.5%
Bethlehem School District GO Bond (MBIA)(AAA/Aaa)
$2,000,000 6.00% 03/01/16 $2,035,940
- --------------------------------------------------------------------
South Carolina--2.5%
Piedmont Municipal Power Agency RB (MBIA)(AAA/Aaa)
$1,465,000 5.50% 01/01/10 $1,461,718
- --------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations(continued)
Tennessee--2.6%
McMinnville Housing Authority RB (A2)
$1,550,000 6.00% 10/01/09 $ 1,551,240
- --------------------------------------------------------------------
Texas--5.2%
Denison Water & Sewer RB (AMBAC)(AAA/Aaa)
$1,000,000 5.50% 09/01/09 $ 1,014,700
East Texas Criminal Justice Facilities Financing Corp.
RB (AMBAC) (AAA/Aaa)
2,000,000 5.75 11/01/09 2,035,100
- --------------------------------------------------------------------
$ 3,049,800
- --------------------------------------------------------------------
Washington--8.7%
Chelan County Public Utility RB (MBIA)(AAA/Aaa)
$2,500,000 6.35% 07/01/28 $ 2,586,650
Washington State Public Power Supply System Series A RB
(AMBAC)(AAA/Aaa)
2,500,000 5.70 07/01/11 2,491,850
- --------------------------------------------------------------------
$ 5,078,500
- --------------------------------------------------------------------
Total Debt Obligations
(Cost $55,481,930) $ 56,064,362
- --------------------------------------------------------------------
Short-Term Obligations--5.0%
Alabama--0.7%
Phenix City IDA RB (Toronto Dominion LOC)(AA)/(a)/
$ 400,000 5.05% 05/01/97 $ 400,000
- --------------------------------------------------------------------
New York--3.4%
New York GO (Kredietbank LOC)(AA-)/(a)/
$2,000,000 4.45% 05/01/97 $ 2,000,000
- --------------------------------------------------------------------
Texas--0.9%
Sabine River PCRB (Union Bank of Switzerland
LOC)(AA+)/(a)/
$ 500,000 5.55% 05/01/97 $ 500,000
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $2,900,000) $ 2,900,000
- --------------------------------------------------------------------
Total Investments
(Cost $58,381,930/(c)/) $58,964,362
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value $739,962
exceeds cost
Gross unrealized loss for investments in which cost (157,530)
exceeds value
- --------------------------------------------------------------------
Net unrealized gain $582,432
- --------------------------------------------------------------------
</TABLE>
/(a)/ Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/(b)/ When-issued security.
/(c)/ The amount stated also represents aggregate cost for federal income
tax purposes.
/(d)/ 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.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Abbreviations:
<S> <C>
AMBAC --Insured by American Municipal
Bond Assurance Corp.
FNMA --Insured by Federal National
Mortgage Association
FSA --Financial Security Assurance Co.
GNMA --Insured by Government National
Mortgage Association
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $64,429,737, $235,754,262 and $58,381,930) $64,142,538 $232,215,706 $58,964,362
Cash, at value 94,169 324,863 90,406
Receivables:
Investment securities sold 1,004,854 -- --
Interest 587,522 3,982,620 1,009,894
Forward foreign currency exchange contracts -- 2,735,490 --
Fund shares sold 664,318 373,902 93,800
Variation margin 6,413 -- --
Foreign tax withheld -- 87,755 --
Deferred organization expenses, net 14,677 -- 21,390
Other assets 63,375 3,239 9,208
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 66,577,866 239,723,575 60,189,060
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 10,549,108 8,691,808 1,387,075
Forward foreign currency exchange contracts -- 1,125,990 --
Fund shares repurchased 23,074 332,497 10,350
Income distribution 81,478 7,496 92,940
Investment adviser fees 10,999 82,520 19,312
Administration fees -- 28,132 7,242
Authorized dealer service fees 10,285 38,021 9,984
Distribution fees 1,290 30,045 169
Accrued expenses and other liabilities 19,056 98,644 12,103
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,695,290 10,435,153 1,539,175
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 56,393,312 222,342,678 58,551,259
Accumulated undistributed net investment income 53,331 6,196,133 60,331
Accumulated net realized loss on investment transactions (287,837) (989,524) (544,137)
Accumulated net realized foreign currency gain -- 3,713,328 --
Net unrealized gain (loss) on investments and futures (276,230) 682,535 582,432
Net unrealized loss on translation of assets and liabilities denominated
in foreign currencies -- (2,656,728) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $55,882,576 $229,288,422 $58,649,885
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:/(a)/
Class A $14.10 $14.59 $14.40
Class B $14.11 $14.58 $14.40
Institutional -- $14.58 --
Service -- $14.59 --
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Class A 3,754,506 11,765,253 4,031,092
Class B 208,089 75,162 42,867
Institutional -- 3,870,161 --
Service -- 6,466 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 3,962,595 15,717,042 4,073,959
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $14.76, $15.28 and $15.08 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.
18
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Operations
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $ 1,346,191 $ 7,675,570 $1,514,540
- ----------------------------------------------------------------------------------------------------------------------------------
Total income 1,346,191 7,675,570 1,514,540
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 98,534 915,292 109,080
Administration fees 29,560 183,102 40,904
Authorized dealer service fees 49,266 235,877 68,174
Distribution fees 51,745 237,238 69,406
Custodian fees 31,954 76,892 20,721
Transfer agent fees 42,728 53,004 44,706
Professional fees 30,344 40,805 29,494
Registration fees 13,207 28,146 14,522
Amortization of deferred organization expenses 9,321 -- 8,700
Trustee fees 332 2,324 553
Other 6,659 23,235 6,641
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 363,650 1,795,915 412,901
Less--expenses reimbursable and fees waived by Goldman Sachs (261,399) (513,953) (179,441)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 102,251 1,281,962 233,460
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income 1,243,940 6,393,608 1,281,080
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions (102,548) 3,647,163 384,465
Futures transactions 19,662 -- 96,288
Foreign currency related transactions -- 3,669,694 --
Net change in unrealized gain (loss) on:
Investments (363,801) (4,182,327) (408,697)
Futures (63,631) -- --
Translation of assets and liabilities denominated in foreign currencies -- (1,445,970) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, futures and foreign
currency transactions (510,318) 1,688,560 72,056
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 733,622 $ 8,082,168 $1,353,136
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Net of $94,607 in foreign withholding tax for the Global Income Fund.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
-------------------------------------------
<S> <C> <C> <C>
From operations:
Net investment income $ 1,243,940 $ 6,393,608 $1,281,080
Net realized gain (loss) from investment transactions (82,886) 3,647,163 480,753
Net realized gain from foreign currency related transactions -- 3,669,694 --
Net change in unrealized gain (loss) on investments and futures (427,432) (4,182,327) (408,697)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- (1,445,970) --
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 733,622 8,082,168 1,353,136
- -------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,217,324) (5,196,561) (1,272,366)
Class B (26,616) (15,612) (8,714)
Institutional Class -- (1,688,968) --
Service Class -- (559) --
Net realized gain on investment transactions
Class A (157,412) -- --
Class B (1,780) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,403,132) (6,901,700) (1,281,080)
- -------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 32,392,263 19,707,735 10,342,628
Reinvestment of dividends and distributions 1,137,480 4,631,079 756,256
Cost of shares repurchased (7,815,079) (49,406,305) (5,043,455)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 25,714,664 (25,067,491) 6,055,429
- -------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 25,045,154 (23,887,023) 6,127,485
Net assets:
Beginning of period 30,837,422 253,175,445 52,522,400
- -------------------------------------------------------------------------------------------------------------------------------
End of period $ 55,882,576 $ 229,288,422 $58,649,885
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income $ 53,331 $ 6,196,133 $ 60,331
- -------------------------------------------------------------------------------------------------------------------------------
Summary of share transactions:
Shares sold 2,285,678 1,345,225 716,106
Reinvestment of dividends and distributions 80,099 316,808 52,251
Shares repurchased (550,966) (3,368,115) (349,613)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 1,814,811 (1,706,082) 418,744
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<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 and futures (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.
21
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
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 April 30, 1997, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. Effective May 1, 1997, the Trust was reorganized from a
Massachusetts business trust to a Delaware business trust and various
operational changes were approved, including updating certain investment
restrictions and amending the management contracts.
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. 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 the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account principal prepayment
experience and estimates of future principal prepayments. Certain mortgage
security paydown gains and losses are taxable as ordinary income. Such paydown
gains and losses increase or decrease taxable ordinary income available 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
- -------------------------------------------------------------------------------
22
<PAGE>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
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.
F. Option Accounting Principles
- -------------------------------
The Funds may purchase or write call and put options to hedge against changes in
security prices. When call or put options are written, an amount equal to the
premium received is recorded as a liability in the Statement of Assets and
Liabilities which is subsequently marked-to-market to reflect the current value
of the written option. 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 a closing
transaction has been entered into, a gain or loss may be realized on the written
or purchased option. When options expire, the premium received from a written
option is treated as a realized gain while the cost of a purchased option is
treated as a realized loss. If an option is exercised, the premium paid or
received will be offset against the proceeds on the sale or the purchase cost of
the underlying security to determine realized gains or losses. Gains and losses
are reported in the Statement of Operations.
Certain risks arise upon entering into options contracts. The risk in
writing a call option is that the Fund gives up the opportunity to profit if the
underlying security's market value increases beyond the exercise price and the
option is exercised. The risk in writing a put option is that the Fund may
realize a loss if the market price of an underlying security declines and the
option is exercised. A premium must be paid for purchased options regardless of
whether or not the option is exercised. The Fund also has the risk of not being
able to enter into a closing transaction if a liquid secondary market does not
exist.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices,
- -------------------------------------------------------------------------------
23
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
currency exchange rates (in the case of Global Income) or to seek to increase
total return.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Payments for futures contracts ("variation margin") are paid or received by the
Funds daily, dependent on the daily fluctuations in the value of the contracts,
and are recorded for financial reporting purposes, as unrealized gains or
losses. When contracts are closed, the Funds realize a gain or loss equal to the
difference between the value of the futures contract to sell and the value of
the futures contract to buy. Gains and losses are reported in the Statement of
Operations.
The use of futures contracts involve, to varying degrees, elements of
market and counterparty risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities. Changes in the value of the futures
contract may not directly correlate with changes in the value of the underlying
securities decreasing the effectiveness of the Funds' hedging strategies
potentially resulting in a loss.
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
substantially all investment company tax-exempt and taxable income to its
shareholders each year. 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.
The Funds, at their most recent tax year-ends (October 31, 1996 for Global
Income and December 31, 1996 for Government Income and Municipal Income) had
approximately the following amounts of capital loss carryforwards for U.S.
federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ---------------- --------------
<S> <C> <C>
Global Income $4,471,734 2004
Municipal Income $ 702,691 2004
</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 generally 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. Shareholders of
Service shares bear all expenses and fees paid to service organizations for
their services with respect to such shares as well as other expenses (subject to
expense limitations) which are directly attributable to such shares.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as 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
- -------------------------------------------------------------------------------
24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 period ended April 30, 1997,
Goldman Sachs retained approximately $134,700, $46,600 and $40,300 of sales
loads related to sales of 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. 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 six months ended April 30, 1997, 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 $49 $30 $48 $134 $24
Global
Income 378 -- 38 98 --
Municipal
Income --- -- 68 111 9
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such
waivers and limitations in the future at their discretion.
For the six months ended April 30, 1997, Government Income and Municipal
Income incurred commissions expense of approximately $877 and $500 respectively,
in connection with futures contracts entered into with Goldman Sachs. At April
30, 1997, Goldman Sachs owes approximately $6,400 to Government Income related
to variation margin on futures contracts.
As of May 1, 1997 each Fund's advisory and administration agreements were
combined into a single management agreement encompassing the same services and
fee structure. The investment adviser for Global Income changed from GSAM to
GSAM International.
4. Line of Credit Facility
The Funds participate in a $250,000,000 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
- -------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
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 period ended April 30, 1997, 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
six months ended April 30, 1997, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and agency
obligations $89,868,153 $31,460,469 $ --
- --------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 2,626,912 251,582,253 52,647,833
- --------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 66,314,796 46,245,813 --
- --------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and agency
obligations) 2,926,850 234,275,222 50,202,452
- --------------------------------------------------------------------
</TABLE>
At April 30, 1997, Global Income had outstanding forward foreign currency
exchange contracts, both to purchase and sell foreign currencies as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Value on
Foreign Currency Settlement Current Unrealized
Purchase Contracts Date Value (Loss)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Finnish Markka
Expiring 7/10/97 $ 5,769,651 $ 5,743,713 $ (25,938)
Norwegian Krone
Expiring 7/18/97 6,967,220 6,931,393 (35,827)
- ----------------------------------------------------------------------------
Total Foreign Currency
Purchase Contracts $12,736,871 $12,675,106 $ (61,765)
- ----------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
Expiring 6/16/97 $ 19,731,038 $ 19,370,358 $ 360,680
British Pound Sterling
Expiring 5/15/97 22,990,248 22,842,002 148,246
Deutschemark
Expiring 5/23/97 9,189,539 9,098,874 90,665
Expiring 7/10/97 5,769,651 5,746,603 23,048
French Franc
Expiring 7/22/97 19,223,491 18,986,663 236,828
Italian Lira
Expiring 5/23/97 14,576,014 14,452,635 123,379
Japanese Yen
Expiring 7/24/97 46,975,472 46,670,841 304,631
Spanish Peseta
Expiring 6/11/97 5,856,184 5,819,307 36,877
Swedish Krona
Expiring 6/12/97 10,186,641 9,919,416 267,225
Swiss Franc
Expiring 5/23/97 240,202 240,493 (291)
Expiring 5/23/97 11,211,600 11,103,780 107,820
- ----------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $165,950,080 $164,250,972 $1,699,108
- ----------------------------------------------------------------------------
</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 April 30, 1997, 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 $2,735,490 and $1,125,990 respectively, in the
accompanying Statement of Assets and Liabilities. Included in the "Receivable
and Payable for forward foreign currency exchange contracts" are $1,036,091 and
$1,063,934 respectively, related to forward contracts closed but not settled as
of April 30, 1997.
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the six months ended April 30, 1997 is as follows:
<TABLE>
<CAPTION>
Government Income Global Income Municipal Income
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 2,087,525 $29,588,339 1,091,068 $15,982,653 687,045 $9,922,452
Reinvestment of dividends and
distributions 78,520 1,115,153 240,916 3,522,418 51,831 750,177
Shares repurchased (543,006) (7,702,748) (3,237,001) (47,484,511) (345,221) (4,979,641)
--------------------------------------------------------------------------------------
1,623,039 23,000,744 (1,905,017) (27,979,440) 393,655 5,692,988
--------------------------------------------------------------------------------------
Class B shares
Shares sold 198,153 2,803,924 65,331 958,124 29,061 420,176
Reinvestment of dividends and
distributions 1,579 22,327 715 10,428 420 6,079
Shares repurchased (7,960) (112,331) (8,487) (124,059) (4,392) (63,814)
--------------------------------------------------------------------------------------
191,772 2,713,920 57,559 844,493 25,089 362,441
--------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 182,398 2,673,084 -- --
Reinvestment of dividends and
distributions -- -- 75,139 1,097,674 -- --
Shares repurchased -- -- (122,627) (1,797,735) -- --
--------------------------------------------------------------------------------------
-- -- 134,910 1,973,023 -- --
--------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 6,428 93,874 -- --
Reinvestment of dividends and
distributions -- -- 38 559 -- --
Shares repurchased -- -- -- -- -- --
--------------------------------------------------------------------------------------
-- -- 6,466 94,433 -- --
--------------------------------------------------------------------------------------
Net increase (decrease) 1,814,811 $25,714,664 (1,706,082)$(25,067,491) 418,744 $6,055,429
=====================================================================================-
</TABLE>
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Global Income Municipal Income
- --------------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 607,156 $8,675,868 1,089,521 $15,545,777 431,736 $6,139,212
Reinvestment of dividends and
distributions 112,752 1,611,387 947,846 13,419,614 104,074 1,482,976
Shares repurchased (626,797) (8,971,389) (5,376,065) (76,216,894) (694,685) (9,874,431)
--------------------------------------------------------------------------------------
93,111 1,315,866 (3,338,698) (47,251,503) (158,875) (2,252,243)
--------------------------------------------------------------------------------------
Class B shares
Shares sold 17,470 246,680 18,628 265,053 17,760 250,553
Reinvestment of dividends and
distributions 225 3,200 119 1,708 127 1,802
Shares repurchased (1,378) (19,531) (1,144) (16,373) (109) (1,551)
--------------------------------------------------------------------------------------
16,317 230,349 17,603 250,388 17,778 250,804
--------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 1,703,165 23,936,542 -- --
Reinvestment of dividends and
distributions -- -- 250,603 3,546,724 -- --
Shares repurchased -- -- (406,888) (5,786,481) -- --
--------------------------------------------------------------------------------------
-- -- 1,546,880 21,696,785 -- --
--------------------------------------------------------------------------------------
Net increase (decrease) 109,428 $1,546,215 (1,774,215)$(25,304,330) (141,097) $(2,001,439)
======================================================================================
</TABLE>
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
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 at the Funds' custodian.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSAM, transfer uninvested cash balances into joint accounts, the
daily aggregate balance of which is invested in one or more repurchase
agreements. The underlying securities for the repurchase agreements are U.S.
Treasury and agency obligations. At April 30, 1997, Government Income had an
undivided interest in the repurchase agreement in the following joint account
which equaled $11,100,000 in principal amount. At April 30, the repurchase
agreements held in this joint account, along with the corresponding underlying
securities (including the type of security, market value, interest rate and
maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns & Co., dated 4/30/97, repurchase price
$680,103,889 (GNMA: $59,497,211, 7.50%-9.00%,
12/15/21-12/15/26; FNMA: $267,568,394, 5.50%,
02/01/09-04/01/27; FHLMC: $373,405,594, 5.50%-7.50%,
2/01/98-4/01/27)
$680,000,000 5.50% 5/01/97 $680,000,000
Nomura Securities International, Inc. dated 4/30/97,
repurchase price $300,045,833 (FNMA: $182,812,268,
5.94%-8.01%, 7/22/97-5/11/05; FHLMC: $38,631,543,
6.02%-6.75%, 1/28/00-12/04/01, FCSB: $49,581,430,
6.05%-6.25%, 5/10/99-12/03/99, SLMA: $29,222,430,
6.00%, 1/16/01)
300,000,000 5.50 5/01/97 300,000,000
Credit Suisse First Boston, dated 4/30/97, repurchase
price $52,307,845 (U.S. Treasury Bill: $53,475,803,
2/05/98)
52,300,000 5.40 5/01/97 52,300,000
- --------------------------------------------------------------------
Total Joint Repurchase Agreement Account $1,032,300,000
- --------------------------------------------------------------------
</TABLE>
9. Other
As of April 30, 1997, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 16% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
28
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions/(a)/ transactions operations income transactions
--------------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997-Class A shares $14.36 $0.46 $(0.20) -- $0.26 $(0.45) $(0.07)
1997-Class B shares 14.37 0.40 (0.19) -- 0.21 (0.40) (0.07)
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)
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 Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares $14.53 $0.25 $(0.07) $0.28 $0.46 $(0.40) --
1997-Class B shares 14.53 0.36 (0.02) 0.08 0.42 (0.37) --
1997-Institutional shares 14.52 0.42 (0.02) 0.10 0.50 (0.44) --
1997-Service shares/(i)/ 14.69 0.10 0.02 (0.09) 0.03 (0.13) --
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>
Distributions to shareholders
-----------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(b)/
-----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997-Class A shares -- -- -- $(0.52) $(0.26) $14.10 1.83%/(g)/
1997-Class B shares -- -- -- (0.47) (0.26) 14.11 1.43/(g)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares -- -- -- (0.92) (0.11) 14.36 5.80
1996-Class B shares/(c)/ -- -- -- (0.41) 0.26 14.37 4.85/(g)/
1995-Class A shares -- -- -- (0.94) 1.00 14.47 14.90
1994-Class A shares (0.02) (0.01) -- (1.00) (1.43) 13.47 (2.98)
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares -- -- -- (0.56) 0.58 14.90 8.03/(g)/
GLOBAL INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares -- -- -- $(0.40) $0.06 $14.59 3.22%/(g)/
1997-Class B shares -- -- -- (0.37) 0.05 14.58 2.94/(g)/
1997-Institutional shares -- -- -- (0.44) 0.06 14.58 3.50/(g)/
1997-Service shares/(i)/ -- -- -- (0.13) (0.10) 14.59 0.21/(g)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares -- -- -- (1.43) 0.08 14.53 11.05
1996-Class B shares/(c)/ -- -- -- (0.36) 0.50 14.53 6.24/(g)/
1996-Institutional shares -- -- -- (1.50) 0.07 14.52 11.55
1995-Class A shares -- -- -- (0.94) 1.02 14.45 15.08
1995-Institutional shares/(f)/ -- -- -- (0.26) 0.36 14.45 4.42/(g)/
1994-Class A shares -- -- (0.61) (0.99) (1.64) 13.43 (4.49)
1993-Class A shares -- -- -- (1.12) 0.38 15.07 10.75
1992-Class A shares -- -- -- (1.14) 0.09 14.69 8.77
For the Period August 2, 1991/(d)/through October 31,
- ---------------------------------------------------------------------
1991-Class A shares -- -- -- (0.24) 0.05 14.60 2.00
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Net Ratio of
Ratio of net assets net
net investment at end Ratio of investment
expenses income Portfolio of expenses income
to average to average turnover period to average to average
net assets net assets rate/(h)/ (in 000s) net assets net assets
--------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997-Class A shares 0.50%/(e)/ 6.34%/(e)/ 182.25%/(g)/ $52,946 1.83%/(e)/ 5.01%/(e)/
1997-Class B shares 1.25/(e)/ 5.37/(e)/ 182.25/(g)/ 2,937 2.33/(e)/ 4.29/(e)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 0.50 6.42 485.09 30,603 1.89 5.03
1996-Class B shares/(c)/ 1.25/(e)/ 5.65/(e)/ 485.09 234 2.39/(e)/ 4.51/(e)/
1995-Class A shares 0.47 6.67 449.53 29,503 2.34 4.80
1994-Class A shares 0.11 6.06 654.90 14,452 2.86 3.31
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares 0.00/(e)/ 4.87/(e)/ 725.41/(g)/ 12,860 4.00/(e)/ 0.87/(e)/
GLOBAL INCOME FUND
- ---------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares 1.17%/(e)/ 5.12%/(e)/ 136.72%/(g)/ $171,668 1.60%/(e)/ 4.69%/(e)/
1997-Class B shares 1.71/(e)/ 4.73/(e)/ 136.72/(g)/ 1,095 2.10/(e)/ 4.34/(e)/
1997-Institutional shares 0.65/(e)/ 5.64/(e)/ 136.72/(g)/ 56,431 1.04/(e)/ 5.25/(e)/
1997-Service shares/(i)/ 1.15/(e)/ 5.85/(e)/ 136.72/(g)/ 94 1.54/(e)/ 5.46/(e)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 1.16 5.81 232.15 198,665 1.64 5.33
1996-Class B shares/(c)/ 1.70/(e)/ 5.16/(e)/ 232.15 256 2.14/(e)/ 4.72/(e)/
1996-Institutional shares 0.65 6.35 232.15 54,254 1.11 5.89
1995-Class A shares 1.29 6.23 265.86 245,835 1.58 5.94
1995-Institutional shares/(f)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.28 5.73 343.74 396,584 1.53 5.48
1993-Class A shares 1.30 5.78 313.88 675,662 1.55 5.53
1992-Class A shares 1.37 7.85 270.75 588,893 1.62 7.60
For the Period August 2, 1991/(d)/through October 31,
- -----------------------------------------------------------------
1991-Class A shares 0.38/(g)/ 1.72/(g)/ 34.22/(g)/ 388,744 0.44/(g)/ 1.66/(g)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
29
<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,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions/a/ transactions operations income transactions
---------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares $14.37 $0.34 $0.03 -- $0.37 $(0.34) --
1997-Class B shares 14.37 0.28 0.03 -- 0.31 (0.28) --
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
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 Total
income transactions capital shareholders value period return/(b)/
------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares -- -- -- $(0.34) $0.03 $14.40 2.57%/(g)/
1997-Class B shares -- -- -- (0.28) 0.03 14.40 2.18/(g)/
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares -- -- -- (0.65) 0.20 14.37 6.13
1996-Class B shares/(c)/ -- -- -- (0.27) 0.34 14.37 4.40/(g)/
1995-Class A shares -- -- -- (0.67) 1.09 14.17 13.79
1994-Class A shares -- -- -- (0.78) (1.56) 13.08 (5.51)
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares -- -- -- (0.22) 0.32 14.64 3.73/(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Net Ratio of
Ratio of net assets net
net investment at end Ratio of investment
expenses income Portfolio of expenses income
to average to average turnover period to average to average
net assets net assets rate/(h)/ (in 000s) net assets net assets
------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares 0.85%/(e)/ 4.70%/(e)/ 90.46%/(g)/ $58,033 1.51%/(e)/ 4.04%/(e)/
1997-Class B shares 1.60/(e)/ 3.92/(e)/ 90.46/(g)/ 617 2.01/(e)/ 3.51/(e)/
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares 0.85 4.58 344.13 52,267 1.55 3.88
1996-Class B shares/(c)/ 1.60/(e)/ 3.55/(e)/ 344.13 255 2.05/(e)/ 3.10/(e)/
1995-Class A shares 0.76 4.93 335.55 53,797 1.49 4.20
1994-Class A shares 0.45 5.28 357.54 47,373 1.55 4.18
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares 0.00/(e)/ 5.15/(e)/ 99.99/(g)/ 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.
/(i)/ Service Class shares commenced operations on March 12, 1997.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Semiannual 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
John P. McNulty
Mary P. McPherson
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
FISARRET
The Goldman Sachs
Fixed Income Funds
- --------------------------------------------------------------------------------
Semiannual Report
April 30, 1997
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
- -------------------------------------------------------------------------------
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/1/
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
- ----------
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings indicated do not
necessarily represent ratings which will be given to these securities on the
date of a Fund's fiscal year end.
1-A
<PAGE>
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-1
have a superior capacity for repayment. Notes bearing the designation P-2 have
a strong capacity for repayment.
2-A
<PAGE>
Description of Ratings of State and Municipal
Commercial Paper
---------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an original
maturity in excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
3-A
<PAGE>
AA: Bonds and debt rated AA have a very strong capacity to pay interest
and repay principal and differ from the higher rated issues only in small
degree.
A: Bonds and debt rated A have a very strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB: Bonds and debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB-rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
4-A
<PAGE>
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC-debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A plus sign (+) is added for those issues determined to possess
overwhelming safety characteristics. An SP-2 designation indicates a
satisfactory capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by Standard & Poor's is described as having a strong
degree of safety regarding timely payment.
5-A
<PAGE>
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issued carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable t the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity
for timely payment.
C: This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
FITCH INVESTORS SERVICE, L.P.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories
6-A
<PAGE>
are not significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated F-1+.
A: Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
PLUS (+) AND MINUS (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA, DDD, DD, or D Categories.
7-A
<PAGE>
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
8-A
<PAGE>
DUFF & PHELPS
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
BBB+, BBB, BBB-: Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
9-A
<PAGE>
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
DUFF 3: Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
DUFF 4: Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DUFF 5: Issuer failed to meet scheduled principal and/or interest
payments.
Notes: Bonds which are unrated may expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to
the risks of lower-rated bonds. The Fund is dependent on the
Investment Adviser's judgment, analysis and experience in the
evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
10-A
<PAGE>
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- - Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- - Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
11-A
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of
the interests of the firm and its clients.
INTEGRITY AND HONESTY ARE THE HEART OF OUR BUSINESS. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
.. Privately owned and ranked among Wall Street's best capitalized firms, with
partners' capital of approximately $5.3 billion as of November 29, 1996.
.. Thirty-four offices worldwide where professionals focus on identifying
financial opportunities.
.. The number one underwriter of all international equity issues for 1993,
1994 and 1995.*
.. Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
.. The number one lead manager of U.S. common stock offerings from (1989-
1995).*
* Source: Securities Data Corporation. Ranking excludes REITS, Trusts and
-----------------------------------
Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the
first talking film
1956 Goldman Sachs co-manages Ford's public offering, the
largest to date
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
3-B
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY STATE.
SUBJECT TO COMPLETION -- JUNE 13, 1997
PART B
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
GOLDMAN SACHS MUNICIPAL INCOME FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS HIGH YIELD FUND
(EACH A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is
not a prospectus. This Additional Statement should be read in conjunction with
the prospectuses for the Service Shares of each of Goldman Sachs Adjustable Rate
Government Fund, Goldman Sachs Short Duration Government Fund, Goldman Sachs
Short Duration Tax-Free Fund, Goldman Sachs Government Income Fund, Goldman
Sachs Municipal Income Fund, Goldman Sachs Core Fixed Income Fund, Goldman Sachs
Global Income Fund and Goldman Sachs High Yield Fund, each dated __________,
1997, as amended and/or supplemented from time to time (each a "Prospectus"),
which may be obtained without charge from institutions ("Service Organizations")
that hold Service Shares for the benefit of their customers, or by calling
Goldman, Sachs & Co. at the telephone number, or writing to one of the
addresses, listed below.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Introduction B-3
<S> <C>
Other Investments and Practices B-10
Investment Restrictions B-53
Management B-70
Portfolio Transactions B-86
Shares of the Trust B-87
Net Asset Value B-91
Taxation B-92
Performance Information B-104
Other Information B-116
Financial Statements B-117
Service Plan B-118
Appendix A 1-A
Appendix B 1-B
</TABLE>
The date of this Additional Statement is __________, 1997.
<PAGE>
<TABLE>
<S> <C>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN SACHS ASSET MANAGEMENT
ADVISER TO GOLDMAN SACHS SHORT INTERNATIONAL
DURATION TAX-FREE FUND, ADVISER TO GOLDMAN SACHS
GOLDMAN SACHS GOVERNMENT GLOBAL INCOME FUND
INCOME FUND, GOLDMAN SACHS 133 PETERBOROUGH COURT
MUNICIPAL INCOME FUND, LONDON EC4A 2BB, ENGLAND
GOLDMAN SACHS CORE FIXED
INCOME FUND AND GOLDMAN GOLDMAN, SACHS & CO.
SACHS HIGH YIELD FUND DISTRIBUTOR
ONE NEW YORK PLAZA 85 BROAD STREET
NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN, SACHS & CO.
MANAGEMENT, L.P. TRANSFER AGENT
ADVISER TO GOLDMAN SACHS 4900 SEARS TOWER
ADJUSTABLE RATE GOVERNMENT CHICAGO, ILLINOIS 60606
FUND AND GOLDMAN SACHS SHORT
DURATION GOVERNMENT FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
</TABLE>
TOLL FREE (IN U.S.) .......800-621-2550
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") was formed under the laws of the
state of Delaware on January 28, 1997. The Trust is a successor to a
Massachusetts business trust that was merged with the Trust on April 30, 1997.
The Trust assumed its current name on March 22, 1991. The Trustees of the Trust
have authority under the Declaration of Trust to create and classify shares into
separate series and to classify and reclassify any series of shares into one or
more classes without further action by shareholders. Pursuant thereto, the
Trustees have created the following series, among others: Goldman Sachs
Adjustable Rate Government Fund ("Adjustable Rate Fund"), Goldman Sachs Core
Fixed Income Fund ("Core Fund"), Goldman Sachs Global Income Fund ("Global
Income Fund"), Goldman Sachs Government Income Fund ("Government Income Fund"),
Goldman Sachs Municipal Income Fund ("Municipal Income Fund"), Goldman Sachs
Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund"), Goldman Sachs
Short Duration Government Fund ("Short Duration Government Fund") and Goldman
Sachs High Yield Fund ("High Yield Fund") and 27 other series of shares.
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund, Short Duration Government
Fund and High Yield Fund are each sometimes referred to herein as a "Fund" and
collectively as the "Funds." Short Duration Government Fund, Short Duration
Tax-Free Fund and Core Fund are each authorized to issue six classes of shares:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares. Adjustable Rate Fund is authorized to issue
four classes of shares: Institutional Shares, Administration Shares, Service
Shares and Class A Shares. Government Income Fund, Municipal Income Fund,
Global Income Fund and High Yield Fund are authorized to issue five classes of
shares: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. Additional series may be added in the future from time to time.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Government Income Fund, Municipal Income Fund, Short Duration Tax-
Free Fund and High Yield Fund. Goldman Sachs Asset Management International
("GSAMI"), an affiliate of Goldman Sachs, serves as investment adviser to the
Global Income Fund. Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate
of Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI and GSFM are each sometimes
referred to herein as the "Adviser" and collectively herein as the "Advisers."
In addition, Goldman Sachs serves as each Fund's distributor and transfer agent.
Each Fund's custodian is State Street Bank and Trust Company.
Because each Fund's shares may be redeemed upon request of a
shareholder on any business day at net asset value, the Funds offer greater
liquidity than many competing investments, such as certificates of deposit and
direct investments in certain securities in which the respective Fund may
invest. However,
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unlike certificates of deposits, shares of the Funds are not insured by the
Federal Deposit Insurance Corporation.
The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of each Fund's investment objective and policies.
Investing in the Funds entails certain risks and there is no assurance that a
Fund will achieve its objective.
EXPERIENCED MANAGEMENT. Successfully creating and managing a
----------------------
diversified portfolio of securities requires professionals with extensive
experience. Goldman Sachs' highly skilled portfolio management team brings
together many years of experience in the analysis, valuation and trading of U.S.
and foreign fixed-income securities.
ADJUSTABLE RATE FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Fund and Short Duration Government Fund are both
designed for investors who seek a high level of high current income, relative
stability of principal and the high credit quality of securities issued or
guaranteed by the U.S. government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and accounting
burdens involved in direct investment.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short Duration Government Fund differently than the investments
normally purchased by such investors. Relative to U.S. Treasury and non-
fluctuating money market instruments, the market value of adjustable rate
mortgage securities in which Adjustable Rate and Short Duration Government Funds
may invest may be adversely affected by increases in market interest rates.
Conversely, decreases in market interest rates may result in less capital
appreciation for adjustable rate mortgage securities in relation to U.S.
Treasury and money market investments.
HIGH CURRENT INCOME. Adjustable Rate and Short Duration Government
-------------------
Funds seek a higher current yield than a money market fund or than that offered
by bank certificates of deposit and money market accounts. However, the
Adjustable Rate and Short Duration Government Funds do not maintain a constant
net asset value per share and are subject to greater fluctuations in the value
of their shares than a money market fund. Unlike bank certificates of deposit
and money market accounts, investments in shares of the Funds are not insured or
guaranteed by any government agency. Each of the Adjustable Rate and Short
Duration Government Funds seeks to provide such high current income without
sacrificing credit quality.
RELATIVE LOW VOLATILITY OF PRINCIPAL. Adjustable Rate Fund seeks to
-------------------------------------
minimize net asset value fluctuations by investing primarily in adjustable rate
mortgage pass-through securities and
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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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<PAGE>
penalties for failure to comply with specific requirements in connection
with origination and servicing of mortgage loans.
4. "Due-on-Sale" Provisions. Fixed-rate mortgage loans may contain a so-
------------------------
called "due-on-sale" clause permitting acceleration of the maturity of the
mortgage loan if the borrower transfers the property. The Garn-St. Germain
Depository Institutions Act of 1982 sets forth nine specific instances in
which no mortgage lender covered by that Act may exercise a "due-on-sale"
clause upon a transfer of property. The inability to enforce a "due-on-
sale" clause or the lack of such a clause in mortgage loan documents may
result in a mortgage loan being assumed by a purchaser of the property that
bears an interest rate below the current market rate.
5. Usury Laws. Some states prohibit charging interest on mortgage loans in
----------
excess of statutory limits. If such limits are exceeded, substantial
penalties may be incurred and, in some cases, enforceability of the
obligation to pay principal and interest may be affected.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. There are several types
------------------------------------------------
of guaranteed Mortgage-Backed Securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), other collateralized mortgage obligations and stripped
Mortgage-Backed Securities. The Taxable Funds are permitted to invest in other
types of Mortgage-Backed Securities that may be available in the future to the
extent consistent with their respective investment policies and objectives.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States authorized to guarantee the timely payment
of the principal of and interest on certificates that are based on and backed
by a pool of mortgage loans insured by the Federal Housing Administration ("FHA
Loans"), or guaranteed by the Veterans Administration ("VA Loans"), or by pools
of other eligible mortgage loans. In order to meet its obligations, Ginnie Mae
is authorized to borrow from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the U.S. Congress. Each Fannie Mae Certificate is
issued and guaranteed by Fannie Mae and represents an undivided interest in a
pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool consists of
residential mortgage loans ("Mortgage Loans") either previously owned by Fannie
Mae or purchased by it in connection with the formation of the Pool. The
Mortgage Loans may be either conventional Mortgage Loans (i.e., not insured or
guaranteed by any U.S. government agency) or Mortgage Loans that are either
insured by the FHA or guaranteed by the VA. However, the Mortgage Loans in
Fannie Mae Pools are
B-16
<PAGE>
primarily conventional Mortgage Loans. The lenders originating and servicing
the Mortgage Loans are subject to certain eligibility requirements established
by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Corporation ("Freddie
------------------------
Mac") is a publicly held U.S. government sponsored enterprise. The principal
activity of Freddie Mac currently is the purchase of first lien, conventional,
residential mortgage loans and participation interests in such mortgage loans
and their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a
group of mortgage loans or participations in mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one- to four-family residential properties
or multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac
Certificate group may include whole loans, participation interests in whole
loans, undivided interests in whole loans and participations comprising another
Freddie Mac Certificate group.
CONVENTIONAL MORTGAGE LOANS. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-
rate mortgage loans with original terms to maturity of between five and thirty
years. Substantially all of these mortgage loans are secured by first liens on
one- to four-family residential properties or multi-family projects. Each
mortgage loan must meet the applicable standards set forth in the law creating
Freddie Mac or Fannie Mae. A Freddie Mac Certificate
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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
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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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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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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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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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premium and meeting the insurer's underwriting standards, the bond issuer is
able to obtain a high credit rating (usually, Aaa from Moody's or AAA from
Standard & Poor's) for the issued security. Such insurance is likely to
increase the purchase price and resale value of the security. New issue
insurance policies are non-cancelable and continue in force as long as the bonds
are outstanding.
A secondary market insurance policy is purchased by an investor (such as a
Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. The Funds may purchase bonds
which have already been insured under a secondary market insurance policy by a
prior investor, or the Funds may directly purchase such a policy from insurers
for bonds which are currently uninsured.
An insured Municipal Security acquired by a Fund will typically be covered
by only one of the above types of policies. All of the insurance policies used
by a Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by Standard & Poor's. The Municipal Securities
invested in by the High Yield Fund will not be subject to this requirement.
Standby Commitments. In order to enhance the liquidity of Municipal
-------------------
Securities, the Tax Exempt Funds may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a "standby commitment" or liquidity put, depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
a Tax Exempt Fund. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by a Tax Exempt Fund. In considering whether a security meets a Tax Exempt
Fund's quality standards, the particular Tax Exempt Fund will look to the
creditworthiness of the party providing the Fund with the right to sell as well
as the quality of the security itself.
The Tax Exempt Funds value Municipal Securities which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining a Tax Exempt
Fund's net asset value. The cost of a standby commitment is carried as
unrealized depreciation from the time of purchase until it is exercised or
expires. Since the value of a standby commitment is dependent on the ability of
the standby commitment writer to meet its obligation to repurchase, a Tax Exempt
Fund's policy is to enter into standby
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<PAGE>
commitment transactions only with banks, brokers or dealers which present a
minimal risk of default.
The Adviser understands that the Service has issued a favorable revenue
ruling to the effect that, under specified circumstances, a registered
investment company will be the owner of tax-exempt municipal obligations
acquired subject to a put option. The Service has subsequently announced that it
will not ordinarily issue advance ruling letters as to the identity of the true
owner of property in cases involving the sale of securities or participation
interests therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax Exempt Funds intend to take the position that they are the owner
of any Municipal Securities acquired subject to a standby commitment or acquired
or held with certain other types of put rights and that tax-exempt interest
earned with respect to such Municipal Securities will be tax-exempt in their
hands. There is no assurance that standby commitments will be available to the
Tax Exempt Funds nor have the Tax Exempt Funds assumed that such commitments
would continue to be available under all market conditions.
Call Risk and Reinvestment Risk. Municipal Securities may include "call"
-------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in a Fund's portfolio are called prior
to the maturity, the Fund will be required to reinvest the proceeds on such
securities at an earlier date and may be able to do so only at lower yields,
thereby reducing the Fund's return on its portfolio securities.
FOREIGN INVESTMENTS
Core, High Yield and Global Income Funds may invest in securities of
foreign issuers and in fixed-income securities quoted or denominated in a
currency other than U.S. dollars. Investing in the securities of foreign
issuers involves certain special considerations, including those set forth
below, which are not typically associated with investing in U.S. issuers. Since
investments in the securities of foreign issuers may involve currencies of
foreign countries, and since Core, High Yield and Global Income Funds may
temporarily hold funds in bank deposits in foreign currencies during completion
of investment programs, Core, High Yield and Global Income Funds may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations and may incur costs in connection with conversions between various
currencies.
Foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. In addition, there may be less publicly available
information about a foreign company than about a comparable U.S. company.
Volume and
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<PAGE>
liquidity in most foreign bond markets are less than in the United States
markets and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Commissions on foreign
securities exchanges are often fixed and generally are higher than negotiated
commissions or dealer mark-ups in the U.S. markets, although each Fund endeavors
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of securities markets
and exchanges, brokers, dealers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlement of portfolio transactions or loss of certificates for portfolio
securities.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of Core Fund, High Yield Fund or Global
Income Fund is uninvested and no return is earned thereon. The inability of
Core Fund, High Yield Fund or Global Income Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to Core Fund, High Yield Fund
or Global Income Fund due to subsequent declines in value of the portfolio
securities, or, if Core Fund, High Yield Fund or Global Income Fund has entered
into a contract to sell the securities, could result in possible liability to
the purchaser. In addition, with respect to certain foreign countries, there is
the possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could adversely affect Core, High
Yield or Global Income Funds' investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources self-sufficiency and balance of payments
position.
INVESTING IN EMERGING COUNTRIES
Market Characteristics. Debt securities of most emerging markets issuers
----------------------
may be less liquid and are generally subject to greater price volatility than
securities of issuers in the U.S. and other developed countries. The markets
for securities of emerging markets may have substantially less volume than the
market for similar securities in the U.S. and may not be able to absorb, without
price disruptions, a significant increase in trading volume or trade size.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The less liquid the market, the more
difficult it may be for the Fund to accurately price its portfolio securities or
to
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<PAGE>
dispose of such securities at the times determined to be appropriate. The risks
associated with reduced liquidity may be particularly acute to the extent that a
Fund needs cash to meet redemption requests, to pay dividends and other
distributions or to pay its expenses.
Securities markets of emerging markets may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and settlement
could result in temporary periods when a portion of the Fund's assets is
uninvested and no return is earned thereon. Inability to make intended security
purchases could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in
emerging markets may be higher than in the U.S. and other developed securities
markets. As legal systems in emerging markets develop, foreign investors may be
adversely affected by new or amended laws and regulations. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Economic, Political and Social Factors. Emerging markets may be subject to
--------------------------------------
a greater degree of economic, political and social instability than the U.S.,
Japan and most Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes or attempted changes
in government through extra-constitutional means; (ii) popular unrest associated
with demands for improved economic, political and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection and conflict. Many emerging
markets have experienced in the past, and continue to experience, high rates of
inflation. In certain countries inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate environment and
sharply eroding the value of outstanding financial assets in those countries.
The economies of many emerging markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging markets may differ unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
Restrictions on Investment and Repatriation. Certain emerging markets
-------------------------------------------
require governmental approval prior to investments by
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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
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for hedging purposes or are offset by cash or liquid assets, as permitted by
applicable law, maintained in a segregated account the Funds and the Advisers
believe that swaps do not constitute senior securities under the Act and,
accordingly, will not treat them as being subject to a Fund's borrowing
restriction.
The Funds will not enter into any swap transactions unless the unsecured
commercial paper, senior debt or claims-paying ability of the other party is
rated either AA or A-1 or better by Standard & Poor's or Aa or P-1 or better by
Moody's or their equivalent ratings. If there is a default by the other party
to such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
The staff of the Securities and Exchange Commission (the "SEC") currently takes
the position that swaps, caps, floors and collars are illiquid for purposes of
a Fund's limitation on illiquid investments.
The use of interest rate, mortgage and currency swaps, as well as interest
rate caps, floors and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a Fund would be less favorable than it would have been if this
investment technique were not used.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
-----------------------
options on any securities in which it may invest or on any securities index
based on securities in which it may invest. A Fund may purchase and write such
options on securities that are listed on national domestic securities exchanges
or foreign securities exchanges or traded in the over-the-counter market. A
call option written by a Fund obligates the Fund to sell specified securities to
the holder of the option at a specified price if the option is exercised at any
time before the expiration date. All call options written by a Fund are
covered, which means that the Fund will own the securities subject to the option
so long as the option is outstanding or use the other methods described below.
The purpose of a Fund in writing covered call options is to realize greater
income than would be realized in portfolio securities transactions alone.
However, in writing covered call options for additional income, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. The
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<PAGE>
purpose of writing such options is to generate additional income. However, in
return for the option premium, the Fund accepts the risk that it will be
required to purchase the underlying securities at a price in excess of the
securities' market value at the time of purchase.
All call and put options written by a Fund are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid assets, as
permitted by applicable law, either of which, in the case of Global Income Fund,
Core Fund or High Yield Fund, may be quoted or denominated in any currency, in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position.
A Fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases
are referred to as "closing purchase transactions."
Each Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
The Funds may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by their respective custodian) upon conversion or exchange of
other securities in its portfolio. The Funds may also cover call and put
options on a securities index by maintaining cash or liquid assets, as permitted
by applicable law, with a value equal to the exercise price in a segregated
account with their custodian or by using the other methods described above.
PURCHASING OPTIONS. Each Fund may also purchase put and call options on
------------------
any securities in which it may invest or on any securities index composed of
securities in which it may invest. A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options it had purchased.
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<PAGE>
A Fund would normally purchase call options in anticipation of an increase,
or put options in anticipation of a decrease ("protective puts") in the market
value of securities of the type in which it may invest. The purchase of a call
option would entitle a Fund, in return for the premium paid, to purchase
specified securities at a specified price during the option period. A Fund would
ordinarily realize a gain on the purchase of a call option if, during the option
period, the value of such securities exceeded the sum of the exercise price, the
premium paid and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the call option. The purchase of a put option
would entitle a Fund, in exchange for the premium paid, to sell specified
securities at a specified price during the option period. The purchase of
protective puts is designed to offset or hedge against a decline in the market
value of a Fund's securities. Put options may also be purchased by a Fund for
the purpose of affirmatively benefiting from a decline in the price of
securities which it does not own. A Fund would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased below
the exercise price sufficiently to cover the premium and transaction costs;
otherwise the Fund would realize either no gain or a loss on the purchase of the
put option. Gains and losses on the purchase of put options may be offset by
countervailing changes in the value of the underlying portfolio securities.
A Fund may purchase put and call options on securities indices for the same
purposes as it may purchase options on securities. Options on securities indices
are similar to options on securities, except that the exercise of securities
index options requires cash payments and does not involve the actual purchase or
sale of securities. In addition, securities index options are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security.
Transactions by a Fund in options on securities and securities indices will
be subject to limitations established by each of the exchanges, boards of trade
or other trading facilities on which such options are traded governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which a
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Advisers. An exchange, board of trade
or other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Core, Global Income
----------------------------------------------------
and High Yield Funds may write covered put and call options and purchase put and
call options on foreign currencies in
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an attempt to protect against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. Global Income, Core and High Yield Funds may use options on currency
to cross-hedge, which involves writing or purchasing options on one currency to
seek to hedge against changes in exchange rates for a different currency with a
pattern of correlation. In addition, Global Income, Core and High Yield Funds
may purchase call options on currency to seek to increase total return when the
Advisers anticipate that the currency will appreciate in value, but the
securities denominated or quoted in that currency do not present attractive
investment opportunities and are not included in the Fund's portfolios.
A call option written by Core, Global Income and High Yield Funds obligates
the Fund to sell specified currency to the holder of the option at a specified
price if the option is exercised at any time before the expiration date. A put
option written by a Fund obligates the Fund to purchase specified currency from
the option holder at a specified price if the option is exercised at any time
before the expiration date. The writing of currency options involves a risk
that a Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase currency subject to a put at a price that exceeds the
currency's market value.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one written. Such purchases are referred
to as "closing purchase transactions." A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
purchased options.
Core, Global Income and High Yield Funds would normally purchase call
options in anticipation of an increase in the U.S. dollar value of currency in
which securities to be acquired by the Fund are denominated or quoted. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified currency at a specified price during the option period. A
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
Core, Global Income and High Yield Funds would normally purchase put
options in anticipation of a decline in the U.S. dollar value of currency in
which securities in its portfolio are denominated or quoted ("protective puts").
The purchase of a put option would entitle Core, Global Income and High Yield
Funds, in exchange for the premium paid, to sell specified currency at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the U.S. dollar value of
a Fund's portfolio securities due to currency exchange rate fluctuations. A
Fund would ordinarily realize a gain if, during the option period, the value
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of the underlying currency decreased below the exercise price sufficiently to
more than cover the premium and transaction costs; otherwise the Fund would
realize either no gain or a loss on the purchase of the put option. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying currency.
In addition to using options for the hedging purposes described above,
Core, Global Income and High Yield Funds may use options on currency to seek to
increase total return. Global Income Fund, High Yield Fund and Core Fund may
write (sell) covered put and call options on any currency in an attempt to
realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Global Income, High Yield and Core Funds may forego the opportunity to
profit from an increase in the market value of the underlying currency. Also,
when writing put options, Global Income, High Yield and Core Funds accept, in
return for the option premium, the risk that it may be required to purchase the
underlying currency at a price in excess of the currency's market value at the
time of purchase.
Global Income, High Yield and Core Funds would normally purchase call
options to seek to increase total return in anticipation of an increase in the
market value of a currency. Global Income, High Yield and Core Funds would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the call option. Put
options may be purchased by the Global Income, High Yield and Core Funds for
the purpose of benefiting from a decline in the value of currencies which it
does not own. Global Income, High Yield and Core Funds would ordinarily realize
a gain if, during the option period, the value of the underlying currency
decreased below the exercise price sufficiently to more than cover the premium
and transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the put option.
YIELD CURVE OPTIONS. Each Fund may enter into options on the yield
-------------------
"spread," or yield differential between two securities. Such options are
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. For example, a Fund may purchase a call option on the yield spread
between two securities if it owns one of the securities and anticipates
purchasing the other security and
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wants to hedge against an adverse change in the yield spread between the two
securities. A Fund may also purchase or write yield curve options for other
than hedging purposes (i.e., in an attempt to increase its current income) if,
in the judgment of the Adviser, the Fund will be able to profit from movements
in the spread between the yields of the underlying securities. The trading of
yield curve options is subject to all of the risks associated with the trading
of other types of options. In addition, however, such options present a risk of
loss even if the yield of one of the underlying securities remains constant, or
if the spread moves in a direction or to an extent which was not anticipated.
Yield curve options written by a Fund must be "covered." A call (or put)
option is covered if the Fund holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or liquid assets, as permitted by applicable law, sufficient to
cover the Fund's net liability under the two options. Therefore, a Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter, and because they
have been only recently introduced, established trading markets for these
options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the
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secondary market on that exchange (or in that class or series of options) would
cease to exist although outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
A Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the SEC changes its position, the Funds will treat
purchased over-the counter options and all assets used to cover written over-the
counter options as illiquid securities, except that with respect to options
written with primary dealers in U.S. Government Securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to a formula
approved by the SEC.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options for
hedging purposes depends in part on the applicable Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
- --------------------------------------------------
To seek to increase total return or to hedge against changes in interest
rates or securities prices or, in the case of Core, High Yield and Global Income
Funds, currency exchange rates, each Fund may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. Each Fund may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), securities indices, foreign currencies in the case of Global
Income, Core and High Yield Funds and any other financial instruments and
indices. A Fund will engage in futures and related options transactions only
for bona fide hedging purposes as defined below or for purposes of seeking to
increase total return to the extent permitted by regulations of the CFTC. All
futures contracts entered into by a Fund are traded on U.S. exchanges or boards
of trade that are licensed and regulated by the CFTC or on foreign exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
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When interest rates are rising or securities prices are falling, a Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a Fund, through the purchase of futures contracts,
can attempt to secure better rates or prices than might later be available in
the market when it effects anticipated purchases. Core, Global Income and High
Yield Funds may each seek to offset anticipated changes in the value of a
currency in which its portfolio securities, or securities that it intends to
purchase, are quoted or denominated by purchasing and selling futures contracts
on such currencies.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currency are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
------------------
establish with more certainty than would otherwise be possible the effective
price or rate of return on portfolio securities or securities that a Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are quoted or denominated. A Fund may, for example, take a "short"
position in the futures market by selling futures contracts to seek to hedge
against an anticipated rise in interest rates or a decline in market prices or
foreign currency rates that would adversely affect the U.S. dollar value of the
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by a Fund or securities with
characteristics similar to those of a Fund's portfolio securities. Similarly,
Core Fund, High Yield Fund and Global Income Fund may each sell futures
contracts on any currencies in which its portfolio securities are quoted or
denominated or in one currency to seek to hedge against fluctuations in the
value of securities denominated in a different currency if there is an
established historical pattern of correlation between the two currencies. If,
in the opinion of the Advisers, there is a sufficient degree of correlation
between price trends for a Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Funds may also enter into such futures contracts as part of its hedging
strategy. Although under some circumstances prices of securities in a Fund's
portfolio may be more or less volatile than prices of such futures contracts,
the Advisers will attempt to estimate the extent of this volatility difference
based on historical patterns and compensate for any such differential by having
a Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting a
Fund's portfolio securities. When hedging of this character is successful, any
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depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position. On the other hand, any
unanticipated appreciation in the value of a Fund's portfolio securities would
be substantially offset by a decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium,
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that a Fund intends to
purchase. However, a Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Funds will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Each Fund will engage in futures and related options
--------------------
transactions only for bona fide hedging or to seek to increase total return as
permitted by CFTC regulations which permit principals of an investment company
registered under the Act to engage in such transactions without registering as
commodity pool operators. Each Fund will determine that the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price
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fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. Except as stated below, each Fund's futures
transactions will be entered into for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities (or the currency in which they are quoted or denominated) that a Fund
owns or futures contracts will be purchased to protect a Fund against an
increase in the price of securities (or the currency in which they are quoted or
denominated) it intends to purchase. As evidence of this hedging intent, each
Fund expects that on 75% or more of the occasions on which it takes a long
futures or option position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities (or assets denominated in the related currency) in
the cash market at the time when the futures or option position is closed out.
However, in particular cases, when it is economically advantageous for a Fund to
do so, a long futures position may be terminated or an option may expire without
the corresponding purchase of securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation permits the Funds to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish positions
to seek to increase total return in futures contracts and options on futures
will not exceed 5% of the net asset value of a Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Funds will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") for maintaining their
qualifications as regulated investment companies for federal income tax
purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
assets, as permitted by applicable law, in an amount equal to the underlying
value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of
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securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government Securities. The only
futures contracts available to hedge a Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies.
MORTGAGE DOLLAR ROLLS
- ---------------------
The Taxable Funds may enter into mortgage "dollar rolls" in which a Fund
sells securities for delivery in the current month and simultaneously contracts
with the same counterparty to repurchase similar (same type, coupon and
maturity), but not identical securities on a specified future date. During the
roll period, a Fund loses the right to receive principal and interest paid on
the securities sold. However, a Fund would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase (often referred to as the "drop") or fee
income plus the interest earned on the cash proceeds of the securities sold
until the settlement date of the forward purchase. Unless such benefits exceed
the income, capital appreciation and gain or loss due to mortgage prepayments
that would have been realized on the securities sold as part of the mortgage
dollar roll, the use of this technique will diminish the investment performance
of a Fund compared with what such performance would have been without the use of
mortgage dollar rolls. All cash proceeds will be invested in instruments that
are permissible investments for the applicable Fund. Each Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
assets, as permitted by applicable law, in an amount equal to its forward
purchase price.
For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions; one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if
the broker-dealer to whom a Fund sells the security becomes insolvent, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
CONVERTIBLE SECURITIES
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<PAGE>
Convertible securities include corporate notes or preferred stock but are
ordinarily long-term debt obligation of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline. Convertible
securities generally offer lower interest or dividend yields than non-
convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion price,
the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities in which the Core Fund and High Yield Fund invest will be
subject to the same rating criteria as its other investments in fixed-income
securities.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions, such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents, letters of credit or U.S. Government Securities maintained on a
current basis in an amount at least equal to the market value of the securities
loaned. Cash collateral may be invested in cash equivalents. A Fund has the
right to call a loan and obtain the securities loaned at any time on five days'
notice. For the duration of a loan, a Fund continues to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned and
also receives compensation from investment of the collateral. A Fund would not
have the right to vote any securities having voting rights during the existence
of the loan, but a Fund would call the loan in anticipation of an important vote
to be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovering, or even loss of
rights in, the collateral should the borrower of the securities fail
financially. However, the loans are made only to firms deemed by the applicable
Adviser to be of good standing, and when, in the judgment of the applicable
Adviser, the consideration which can be earned currently from securities loans
of this type justifies the attendant risk. If an Adviser determines to make
securities loans, the value of the securities loaned will not exceed one-third
of the value of the total assets of each Fund.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
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<PAGE>
However, a Fund will not invest more than 15% of its net assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate, currency and mortgage swaps, interest rate caps, floors and
collars, certain SMBS, municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted Securities, unless the
Board of Trustees determines, based upon a continuing review of the trading
markets for the specific Restricted Securities, that such Restricted Securities
are liquid. Certain commercial paper issued in reliance on Section 4(2) of the
1933 Act is treated like Rule 144A Securities. The Trustees have adopted
guidelines and delegated to the Advisers the daily function of determining and
monitoring the liquidity of the Funds' portfolio securities. The Board of
Trustees, however, will retain sufficient oversight and be ultimately
responsible for the determinations. Since it is not possible to predict with
assurance exactly how the market for Restricted Securities sold and offered
under Rule 144A or Section 4(2) will develop, the Trustees will carefully
monitor the Funds' investments in these securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
This investment practice could have the effect of increasing the level of
illiquidity in a Fund to the extent that qualified institutional buyers become
for a time uninterested in purchasing these Restricted Securities.
The purchase price and subsequent valuation of Restricted Securities
normally reflect a discount from the price at which such securities trade when
they are not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the Restricted Securities and prevailing
supply and demand conditions.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. The Funds will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, the Funds may dispose of or negotiate a
commitment after entering into it. A Fund also may sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Funds may realize a capital gain or loss in connection
with these transactions. For purposes of determining each Fund's duration,
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<PAGE>
the maturity of when-issued or forward commitment securities will be calculated
from the commitment date. Each Fund is required to hold and maintain in a
segregated account with the Fund's custodian until three days prior to
settlement date, cash or liquid assets, in an amount sufficient to meet the
purchase price. Alternatively, each Fund may enter into offsetting contracts
for the forward sale of other securities that it owns. Securities purchased or
sold on a when-issued or forward commitment basis involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date or
if the value of the security to be sold increases prior to the settlement date.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets,
calculated at the time of purchase, in the securities of other investment
companies, but may not invest more than 5% of its total assets in the securities
of any one investment company or acquire more than 3% of the voting securities
of any other investment company. Pursuant to an exemptive order obtained from
the SEC, the Funds may invest in money market funds for which the Adviser or any
of its affiliates serves as investment adviser. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that a Fund invests in a money
market fund for which the Adviser acts as adviser, the management fees payable
by the Fund to the Adviser will be reduced by an amount equal to the Fund's
proportionate share of the management fees paid by such money market fund to the
Adviser or any of its affiliates.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected broker-
dealers, banks or other financial institutions. A repurchase agreement is an
arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities will be maintained by each Fund's custodian. The
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the security subject to the repurchase agreement.
For purposes of the Act and, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the
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<PAGE>
security under a repurchase agreement, a Fund may encounter delay and incur
costs before being able to sell the security. Such a delay may involve loss of
interest or a decline in price of the security. If the court characterizes the
transaction as a loan and a Fund has not perfected a security interest in the
security, the Fund may be required to return the security to the seller's estate
and be treated as an unsecured creditor of the seller. As an unsecured
creditor, a Fund would be at risk of losing some or all of the principal and
interest involved in the transaction.
As with any unsecured debt instrument purchased for each Fund, the
applicable Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
security. Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the security subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), each Fund will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price. Certain repurchase agreements which provide for
settlement in more than seven days can be liquidated before the nominal fixed
term on seven days or less notice. Such repurchase agreements will be regarded
as liquid instruments.
In addition, the Funds, together with other registered investment companies
having management agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the affected Fund. The
investment objective of each Fund and all other investment policies or practices
of the Funds, except for Short Duration Tax-Free Fund's and Municipal Income
Fund's policy to invest under normal market conditions 80% of its net assets in
Municipal Securities, are considered by the Trust not to be fundamental and
accordingly may be changed without shareholder approval. See "INVESTMENT
OBJECTIVES AND POLICIES" in the Prospectuses. As defined in the Act, "a
majority of the outstanding voting securities" of a Fund means the vote (a) of
67% or more of the shares of the Fund present at a meeting, if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy or (b) more than 50% of the outstanding shares of the Fund, whichever
is less.
For the purposes of the limitations (except for the asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered
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violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by, a Fund. With respect to the Tax Exempt Funds, the identification
of the issuer of a Municipal Security that is not a general obligation is made
by the Adviser based on the characteristics of the Municipal Security, the most
important of which is the source of funds for the payment of principal and
interest on such securities.
AS A MATTER OF FUNDAMENTAL POLICY, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in municipal securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other municipal securities. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations.
(3) borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% or its total assets (including the amount borrowed), (b)
the Fund may, to
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the extent permitted by applicable law borrow up to an additional 5%
of its total assets for temporary purposes, (c) the Fund may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities, (d) the Fund may
purchase securities on margin to the extent permitted by applicable
law and (e) the Fund may engage in transactions in mortgage dollar
rolls which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted by
applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be an
underwriting.
(6)(a) for each Fund other than Core Fund, purchase, hold or deal in real
estate, although a Fund may purchase and sell securities that are
secured by real estate or interests therein, securities of real
estate investment trusts and mortgage-related securities and may
hold and sell real estate acquired by a Fund as a result of the
ownership of securities.
(6)(b) in the case of the Core Fund, purchase, hold or deal in real estate
(including real estate limited partnerships) or oil, gas or mineral
leases, although the Fund may purchase and sell securities that are
secured by real estate or interests therein, may purchase mortgage-
related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts that
are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same fundamental investment
objectives, restrictions and policies as the Fund.
In addition, as non-fundamental policies, a Fund may not:
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(1) Invest in companies for the purpose of exercising control or
management.
(2) Invest more than 15% of the Fund's net assets in illiquid
investments including repurchase agreements maturing in more than
seven days, securities which are not readily marketable and
restricted securities not eligible for resale pursuant to Rule 144A
under the 1933 Act.
(3) Purchase additional securities if the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
MANAGEMENT
TRUSTEES AND OFFICERS
- ---------------------
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees and Officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
Ashok N. Bakhru, Age 53, 1325 Avenue of the Americas, 34th Floor, New York, New
York 10019. Chairman and Trustee. Executive Vice President-Finance and
--------------------
Administration and Chief Financial Officer, Coty Inc. (since April 1996);
President, ABN Associates, Inc. (June 1994 through March 1996); Senior Vice
President, Scott Paper Company (until June 1994); Director, Arkwright Mutual
Insurance Company; Trustee, International House of Philadelphia; Member of
Cornell University Council; Trustee of Walnut Street Theater.
David B. Ford,* Age 51, One New York Plaza, New York, New York 10004. Trustee.
-------
Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs,
(1986-1996); Co-Head of GSAM since December 1994.
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Vice President, Goldman Sachs since May 1996; President,
- ---------------------
MFS Retirement Services Inc., of Massachusetts Financial Services prior thereto.
John P. McNulty,* Age 44, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
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Mary P. McPherson, Age 60, Taylor Hall, Bryn Mawr College, Bryn Mawr, PA 19010.
Trustee. President of Bryn Mawr College since 1978; Director of Josiah Macy,
- -------
Jr. Foundation since 1977; Director of the Philadelphia Contributionship since
1985; Director of Amherst College since 1986; Director of Dayton Hudson
Corporation since 1988; Director of the Spencer Foundation since 1993; and
member of PNC Advisory Board since 1993.
Alan A. Shuch,* Age 48, One New York Plaza, New York, New York 10004. Trustee.
-------
Limited Partner, Goldman Sachs (since 1994); Director and Vice President,
Goldman Sachs Funds Management, Inc. from April 1990 to November 1994; President
and Chief Operating Officer, GSAM from September 1988 to November 1994; Limited
Partner, Goldman Sachs since December 1994.
Jackson W. Smart, Jr., Age 66, One Northfield Plaza, #218, Northfield, Illinois
60093. Trustee. Chairman, Executive Committee, First Commonwealth, Inc. (a
-------
managed dental care company, since January 1996); Chairman and Chief Executive
Officer, MSP Communications Inc. (a company engaged in radio broadcasting) since
November 1988; Director, Federal Express Corporation since 1976; Evanston
Hospital Corporation (since 1980) and First Commonwealth,Inc. (since 1988) and
North American Private Equity Group (a venture capital fund).
William H. Springer, Age 67, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman and Chief Financial and Administrative Officer,
- -------
Ameritech (a telecommunications holding company) from February 1987 to
retirement in June 1992; Director, Walgreen Co. (a retail drugstore business);
and Baker, Fentress & Co. (a closed-end non-diversified management investment
company) April 1992 to present.
Richard P. Strubel, Age 57, 70 West Madison Street, Suite 1400, Chicago,
Illinois 60602. Trustee. Managing Director, Tandem Partners, Inc. (since
-------
1990); President and Chief Executive Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and connectors) from January 1984 to October
1994.
Pauline Taylor,* Age 50, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Director of
- ---------
Shareholder Servicing since June 1992.
Nancy L. Mucker,* Age 47, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
Scott M. Gilman,* Age 37, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds
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Management, Inc. since March 1993. Vice President, Goldman Sachs since March,
1990.
John M. Perlowski,* Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 36, 85 Broad Street, New York, New York 10004.
Secretary. Associate General Counsel of GSAM since February 1994; Vice
- ---------
President and Assistant General Counsel of Goldman Sachs; Counsel to the Funds
Group, GSAM since June 1992; Partner, Hale and Dorr from September 1991 to June
1992.
Howard B. Surloff,* Age 31, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General Counsel, Goldman Sachs since
- ---------
November 1993 and May 1994, respectively; Counsel to the Funds Group, GSAM since
November 1993; Associate of Shereff, Friedman, Hoffman & Goodman, LLP prior
thereto.
Valerie A. Zondorak,* Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Vice President, Goldman Sachs (since March 1997); Counsel
- --------------------
to the Funds Group, GSAM (since March 1997); Associate of Shereff, Friedman,
Hoffman & Goodman, LLP (prior thereto).
Steven E. Hartstein*, Age 33, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs since June 1993;
- -------------------
Funds Compliance Officer, Citibank Global Asset Management from August 1991 to
June 1993); Legal Assistant, Brown & Wood prior thereto.
Deborah A. Farrell*, Age 25, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman Sachs since January
- -------------------
1994. Formerly at Cleary, Gottlieb, Stein and Hamilton.
Kaysie Uniacke*, Age 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Senior Portfolio Manager, GSAM since
- -------------------
1988.
Elizabeth D. Anderson*, Age 27, One New York Plaza, New York, New York 10004.
Assistant Secretary. Portfolio Manager, GSAM since April 1996; Junior Portfolio
- -------------------
Manager, Goldman Sachs 1995-1996. Funds Trading Assistant, GSAM 1993-1995.
Compliance Analyst, Prudential Insurance, from 1991 to 1993.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or GSFM is the
investment adviser, administrator and/or distributor. As of _______, 1997, the
Trustees and officers as a
B-62
<PAGE>
group owned less than 1% of the outstanding shares of beneficial interest of
each Fund.
B-63
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended October
31, 1996:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Funds
from the as of Part of (including
Funds/1/ Trust's Expenses the Funds)/2/
------------ ---------------- --------------
<S> <C> <C> <C>
Name of Trustees
Ashok N. Bakhru $4,109 $0 $77,375
Marcia L. Beck/3/ $0 $0 $0
David B. Ford $0 $0 $0
Douglas C. Grip $0 $0 $0
Paul C. Nagel, Jr./4/ $2,525 $0 $50,500
Alan A. Shuch $0 $0 $0
Jackson W. Smart $3,169 $0 $65,750
William H. Springer $3,169 $0 $65,750
Richard P. Strubel $3,169 $0 $65,750
</TABLE>
/1/ Reflects amount paid by Goldman Sachs Trust, a Massachusetts business
trust, during fiscal year ended October 31, 1996.
/2/ The Goldman Sachs Funds consisted of 29 mutual funds, including the seven
series of the Trust, on October 31, 1996.
/3/ Resigned as of May 1, 1996.
/4/ Retired as of June 30, 1996.
B-64
<PAGE>
INVESTMENT ADVISERS
- -------------------
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Municipal Income
Fund, Government Income Fund, Short Duration Tax-Free Fund, High Yield Fund and
Core Fund pursuant to a management agreement. GSFM, One New York Plaza, New
York, New York 10004, serves as the investment adviser to Adjustable Rate Fund
and Short Duration Government Fund pursuant to a management agreement. GSFM, a
Delaware limited partnership, is an affiliate of Goldman Sachs. GSAMI, 133
Peterborough Court, London EC4A 2BB, England, serves as investment adviser to
Global Income Fund pursuant to a management agreement. As a company with
unlimited liability under the laws of England, GSAMI is regulated by the
Investment Management Regulatory Organization Limited, a United Kingdom self-
regulatory organization, in the conduct of its investment advisory business.
See "MANAGEMENT" in the Funds' Prospectuses for a description of the applicable
Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24 hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico,
Milan, Montreal, Osaka, Paris, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs, whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching
$160 million, Goldman Sachs' Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers. The Advisers manage money for
some of the world's largest institutional investors.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry
B-65
<PAGE>
surveys conducted in the U.S. and abroad. Goldman Sachs is also among the
leading investment firms using quantitative analytics (now used by a growing
number of investors) to structure and evaluate portfolios. For example, Goldman
Sachs' options evaluation model analyzes each security's term, coupon and call
option, providing an overall analysis of the security's value relative to its
interest risk.
In planning the Tax Exempt Funds' strategies, the portfolio managers also
evaluate and monitor individual issues by using analytical techniques that have
traditionally been applied to corporate bonds and Mortgage-Backed Securities.
In particular, the Adviser's embedded option valuation model provides a picture
of an individual security's relative value and the portfolio's overall interest
rate risk. By constantly reviewing the positions of securities within the
portfolio, the Adviser looks for opportunities to enhance the Tax Exempt Funds'
yields by fine-tuning the portfolio, using quantitative tools designed for
municipal portfolio management. The Adviser, which managed approximately $3
billion in tax-free securities in 1996, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
In structuring Adjustable Rate Fund's and Short Duration Government Fund's
respective securities portfolio, the Adviser will review the existing overall
economic and mortgage market trends. The Adviser will then study yield spreads,
the implied volatility and the shape of the yield curve. The Adviser will then
apply this analysis to a list of eligible securities that meet the respective
Fund's investment guidelines. With respect to Adjustable Rate Fund, this
analysis is used to plan a two-part portfolio, which will consist of a "core"
portfolio of ARMs and a "relative value" portfolio of other mortgage assets that
can enhance portfolio returns and lower risk (such as investments in CMO
floating-rate tranches and interest only stripped Mortgage-Backed Securities).
With respect to Adjustable Rate Fund, Government Income Fund, Short
Duration Government Fund, High Yield Fund and Core Fund, the applicable Adviser
expects to utilize Goldman Sachs' sophisticated option-adjusted analytics to
help make strategic asset allocations within the markets for U.S. government,
Mortgage-Backed and other securities and to employ this technology periodically
to re-evaluate the Funds' investments as market conditions change. Goldman
Sachs has also developed a prepayment model designed to estimate mortgage
prepayments and cash flows under different interest rate scenarios. Because a
Mortgage-Backed Security incorporates the borrower's right to prepay the
mortgage, the Advisers use a sophisticated option-adjusted spread (OAS) model to
measure expected returns. A security's OAS is a function of the level and shape
of the yield curve, volatility and the applicable Adviser's expectation of how a
change in interest rates will affect prepayment levels. Since the OAS model
assumes a relationship between prepayments and interest rates, the Advisers
consider it a better way to measure a security's expected return and absolute
and relative values than yield to maturity. In using OAS
B-66
<PAGE>
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and prepayment
sensitivity. The Advisers will then analyze its value relative to alternative
investments and to its own investments. The Advisers will also measure a
security's interest rate risk by computing an option adjusted duration (OAD).
The Advisers believe a security's OAD is a better measurement of its price
sensitivity than cash flow duration, which systematically misstates portfolio
duration. The Advisers also evaluate returns for different mortgage market
sectors and evaluate the credit risk of individual securities. This
sophisticated technical analysis allows the Advisers to develop portfolio and
trading strategies using Mortgage-Backed Securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility
to meet the respective Fund's duration targets and cash flow pattern
requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to calculate projected
security returns under different, discrete interest rate scenarios, and Goldman
Sachs' proprietary prepayment model to generate yield estimates under these
scenarios. The OAS, scenario returns, expected returns, and yields of
securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The Advisers will use OAS analytics to choose what they believe is an
appropriate portfolio of investments for Adjustable Rate Fund, Government Income
Fund, Short Duration Government Fund and Core Fund from a universe of eligible
investments. In connection with initial portfolio selections, in addition to
using OAS analytics as an aid to meeting each Fund's particular composition and
performance targets, the Advisers will also take into account important market
criteria like the available supply and relative liquidity of various mortgage
securities in structuring the portfolio.
The Advisers also expect to use OAS analytics to evaluate the mortgage
market on an ongoing basis. Changes in the relative value of various Mortgage-
Backed Securities could suggest tactical trading opportunities for the Funds.
The Advisers will have access to both current market analysis as well as
historical information on the relative value relationships among different
Mortgage-Backed Securities. Current market analysis and historical information
is available in the Goldman Sachs database for most actively traded Mortgage-
Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive basis,
use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
B-67
<PAGE>
services to third parties or using such services as a basis for trading for its
own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments
in U.S. and foreign fixed-income markets, assesses the outlooks for various
sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed
Income Research Department is at the forefront in developing and using computer-
based tools for analyzing fixed-income securities and markets, developing new
fixed income products and structuring portfolio strategies for investment policy
and tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed-income research and credit research, the Advisers in
managing Global Income Fund are supported by Goldman Sachs' economics research.
The Economics Research Department, based in London, conducts economic, financial
and currency markets research which analyzes economic trends and interest and
exchange rate movements worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In allocating assets in the Global Income Fund's portfolio among
currencies, the Adviser will have access to the Global Asset Allocation Model.
The model is based on the observation that the prices of all financial assets,
including foreign currencies, will adjust until investors globally are
comfortable holding the pool of outstanding assets. Using the model, the
Adviser will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with Goldman Sachs' research
professionals' expectations to produce an optimal currency and asset allocation
for the level of risk suitable for the Fund's investment objective and criteria.
Each Fund's management agreement, (the "Management Agreements"), was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 23, 1997. The applicable Fund's
B-68
<PAGE>
Management Agreement was approved by the shareholders of Adjustable Rate Fund on
October 30, 1991, the shareholders of Short Duration Government Fund on March
27, 1989, the sole initial shareholder of Short Duration Tax-Free Fund on
September 25, 1992, the sole initial shareholder of Core Fund on October 29,
1993, and the shareholders of each other Fund on April 21, 1997. Each
Management Agreement will remain in effect until June 30, 1998 and will continue
in effect with respect to the applicable Fund from year to year thereafter
provided such continuance is specifically approved at least annually by (a) the
vote of a majority of the outstanding voting securities of such Fund or a
majority of the Trustees of the Trust, and (b) the vote of a majority of the
non-interested Trustees of the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
Each Management Agreement will terminate automatically if assigned (as
defined in the Act). Each Management Agreement is also terminable at any time
without penalty by the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund on 60 days' written notice to the
applicable Adviser or by the Adviser on 60 days' written notice of the Trust.
The Management Agreements provide that GSAM, GSFM and GSAMI, in their
capacity as advisers may each render similar services to others so long as the
services under the Management Agreements are not impaired thereby. Pursuant to
the Management Agreements, the Advisers are entitled to receive the fee set
forth below and the Advisers are currently limiting the fee to the rate set
forth below:
<TABLE>
<CAPTION>
Contractual Current
Fund Rate* Rate
- ---- ---- ----
<S> <C> <C>
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .55% .40%
Core Fixed Income .55% .40%
High Yield .70% .65%
GSFM
Short Duration Government .65% .40%
Adjustable Rate Government .55% .40%
GSAMI
Global Income .90% .59%
- ----------------------------
</TABLE>
* The Contractual Rate is identical to the aggregate advisory and
administration fee rates payable by each Fund under the previous separate
advisory (including subadvisory in the case of Global Income Fund) and
administration agreements. For the fiscal year ended October 31, 1996, the
annual rate expressed is the combined advisory and administration fees paid
(after fee waivers). Such reduction or limits, if any, are calculated
B-69
<PAGE>
monthly on a cumulative basis and may be discontinued or modified by the
applicable Adviser at its discretion at any time, although they have no
current intention to do so.
For the fiscal years ended October 31, 1996, 1995 and 1994, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Adjustable Rate Fund $2,535,709 $2,947,492 $6,798,185
Short Duration Government 411,360 517,091 1,063,867
Fund/(1)/
Short Duration Tax-Free Fund 169,796 260,970 468,868
Core Fund/(2)/ 246,568 137,158 56,255
Global Income Fund/(3)(6)/ 1,117,226 706,460 1,518,814
Government Income Fund/(4)(6)/ 74,060 44,037 0
Municipal Income Fund/(5)(6)/ 211,283 154,707 35,494
</TABLE>
_________________________
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $514,200, $646,364 and $1,329,834,
respectively, for such years.
/(2)/ Core Fund commenced operations January 5, 1994.
/(3)/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of
$837,920, $1,412,921 and $3,037,627, respectively. If expense limitations
had not been in effect, Global Income Fund would have paid advisory and
subadvisory fees of $1,474,204 and $491,401, respectively, for the year
ended October 31, 1996 and $789,127 and $1,578,254, respectively, for the
year ended October 31, 1995.
/(4)/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $148,120, $101,737 and $65,604, respectively,
for such years.
/(5)/ Had expense limitations not been in effect for the years ended October 31,
1995 and 1994, Municipal Income Fund would have paid advisory fees of
$200,207 and $174,161, respectively, for such years.
/(6)/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
The fees and services under the Investment Advisory and Administration
Agreements are identical to the fees and services under the Management
Agreement.
Each Adviser performs administrative services for the applicable Funds
under the Management Agreement. Such
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<PAGE>
administrative services include, subject to the general supervision of the
Trustees of the Trust, (a) providing supervision of all aspects of the Funds'
non-investment operations (other than certain operations performed by others
pursuant to agreements with the Funds), (b) providing the Funds, to the extent
not provided pursuant to the agreement with the Trust's custodian, transfer and
dividend disbursing agent or agreements with other institutions, with personnel
to perform such executive, administrative and clerical services as are
reasonably necessary to provide effective administration of the Funds, (c)
arranging, to the extent not provided pursuant to such agreements, for the
preparation, at the Funds' expense, of each Fund's tax returns, reports to
shareholders, periodic updating of the Funds' prospectuses and statements of
additional information, and reports filed with the SEC and other regulatory
authorities, (d) providing the Funds, to the extent not provided pursuant to
such agreements, with adequate office space and certain related office equipment
and services, and (e) maintaining all of the Funds' records other than those
maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
- ----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed-income markets, in each case on a proprietary basis and
for the accounts of customers. As such, Goldman Sachs and its affiliates are
actively engaged in transactions in the same securities, currencies, and
instruments in which the Funds invest. Such activities could affect the prices
and availability of the securities, currencies, and instruments in which the
Funds invest, which could have an adverse impact on each Fund's performance.
Such transactions, particularly in respect of proprietary accounts or customer
accounts other than those included in the Advisers' and their advisory
affiliates' asset management activities, will be executed independently of the
Funds' transactions and thus at prices or rates that may be more or less
favorable. When the Advisers and their advisory affiliates seek to purchase or
sell the same assets for their managed accounts, including the Funds, the assets
actually purchased or sold may be allocated among the accounts on a basis
determined in its good faith discretion of such entitles to be equitable. In
some cases, this system may adversely affect the size or the price of the assets
purchased or sold for the Funds.
B-71
<PAGE>
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which, or in securities of issuers for
which, the Advisers and/or their affiliates are performing services or when
position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs
B-72
<PAGE>
or their affiliated entities. As a result, the performance by these principals
and employees of their obligations to such other entities may be a consideration
of which investors in the Funds should be aware.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income, High Yield and Core Funds, currencies on behalf of
the applicable Funds in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Funds, and such party may
have no incentive to assure that the Funds obtain the best possible prices or
terms in connection with the transactions. Goldman Sachs and its affiliates may
also create, write or issue derivative instruments for customers of Goldman
Sachs or its affiliates, the underlying securities currencies or instruments of
which may be those in which the Funds invest or which may be based on the
performance of a Fund. The Funds may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter into transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the Funds. At times, these activities may cause
departments of the Firm to give advice to clients that may cause these clients
to take actions adverse to the interest of the client. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on a Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
B-73
<PAGE>
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust. Pursuant to the distribution agreement, after the Funds'
Prospectuses and periodic reports have been prepared, set in type and mailed to
shareholders, Goldman Sachs will pay for the printing and distribution of copies
thereof used in connection with the offering to prospective investors. Goldman
Sachs will also pay for other supplementary sales literature and advertising
costs. Goldman Sachs has entered into sales agreements with certain investment
dealers and financial service firms (the "Authorized Dealers") to solicit
subscriptions for Class A, Class B and Class C Shares of each of the Funds that
offer such classes of shares. Goldman Sachs receives a portion of the sales
load imposed on the sale, in the case of Class A Shares, or redemption in the
case of Class B and Class C Shares, of such Fund shares. No Class B Shares were
outstanding during the fiscal years ended October 31, 1994 and 1995. No Class C
Shares were outstanding during the fiscal years ended October 31, 1994, 1995 and
1996. Goldman Sachs retained approximately the following combined commissions
on sales of Class A and B shares during the following periods:
<TABLE>
<CAPTION>
1996** 1995* 1994
------- -------- --------
<S> <C> <C> <C>
Adjustable Rate Fund* $79,000 $40,000 N/A
Municipal Income Fund $24,900 $48,000 $ 76,000
Government Income Fund $17,300 $22,000 $ 5,000
Global Income Fund $52,600 $15,000 $350,000
- ---------------------
</TABLE>
* Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
** Prior to May 1, 1997, the Municipal, Government Income and Global Income
Funds did not offer Class B shares.
Goldman Sachs serves as the Trust's transfer and dividend disbursing agent.
Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken
with the Trust with respect to each Fund to (i) record the issuance, transfer
and redemption of shares, (ii) provide confirmations of purchases and
redemptions, and quarterly statements, as well as certain other statements,
(iii) provide certain information to the Trust's custodian and the relevant
subcustodian in connection with redemptions, (iv) provide dividend crediting and
certain disbursing agent services, (v) maintain shareholder accounts, (vi)
provide certain state Blue Sky and other information, (vii) provide shareholders
and certain regulatory authorities with tax-related information, (viii) respond
to shareholder inquiries, and (ix) render certain other miscellaneous services.
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer and dividend disbursing agent and the
B-74
<PAGE>
assumption by Goldman Sachs of the expenses related thereto, Goldman Sachs
received fees for the fiscal years ended October 31, 1996, 1995 and 1994 by each
Fund then in existence as follows:
Fund 1996 1995 1994
- ---- ------- ------- -------
Adjustable Rate Fund 278,337 306,662 679,819
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 16,980 26,098 46,887
Core Fund/(1)/ 24,657 13,716 5,637
Global Income Fund 121,212 106,764 132,123
Municipal Income Fund 90,284 63,695 70,811
Government Income Fund 72,237 94,095 57,960
- ------------------------
/(1)/ Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
each provides thereunder to the Funds are not impaired thereby. Each such
agreement also provides that the Trust will indemnify Goldman Sachs against
certain liabilities.
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser, the fees and expenses of
the Trust's custodian, transfer agent fees, brokerage fees and commissions,
filing fees for the registration or qualification of the Trust's shares under
federal or state securities laws, expenses of the organization of the Trust,
fees and expenses incurred by the Trust in connection with membership in
investment company organizations, taxes, interest, costs of liability insurance,
fidelity bonds or indemnification, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal, tax and auditing fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
B-75
<PAGE>
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees (in the
case of Global Income Fund and High Yield Fund) and other extraordinary
expenses) to the following percentage of each Fund's average daily net assets:
Short Duration Government Fund 0.05%
Adjustable Rate Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fund 0.05%
Global Income Fund 0.06%
High Yield Fund 0.01%
Such reductions or limits are calculated monthly on a cumulative
basis. Although the Advisers have no current intention of modifying or
discontinuing such expense limitations or the limitations on the management
fees, described above under "Management -- Investment Advisers," each may do so
in the future at its discretion. For the fiscal year ended October 31, 1996,
October 31, 1995 and October 31, 1994, Other Expenses of each Fund were reduced
by the Advisers in the following amounts:
1996 1995 1994
------- ------- -------
Adjustable Rate Fund 386,863 551,405 442,880
Short Duration
Government Fund 169,069 219,994 115,389
Short Duration
Tax-Free Fund 238,097 213,139 192,696
Core Fund* 233,065 176,469 141,815
Municipal Income Fund 238,203 196,265 198,806
Government Income Fund 219,091 242,036 224,285
Global Income Fund** 337,079 70,195 0
- ----------------------
* Core Fund commenced operations on January 5, 1994.
** For the fiscal year ended October 31, 1994, there was no expense
limitation.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by the
Advisers in performing certain accounting services not being provided by the
Trust's custodian.
CUSTODIAN AND SUB-CUSTODIANS
- ----------------------------
B-76
<PAGE>
State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, is the custodian of the Trust's portfolio
securities and cash. State Street also maintains the Trust's accounting
records. State Street may appoint sub-custodians from time to time to hold
certain securities purchased by the Trust in foreign countries and to hold cash
and currencies for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------
Arthur Andersen LLP, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the Trust.
In addition to audit services, Arthur Andersen LLP prepares the Trust's federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a dealer is dealing with a Fund as
principal and receives compensation equal to the spread between the dealer's
cost for a given security and the resale price of such security). In certain
foreign countries, debt securities in which the Global Income Fund, Core Fund
and High Yield Fund may invest are traded on exchanges at fixed commission
rates. In connection with portfolio transactions, the Management Agreement
provides that the Advisers shall attempt to obtain the best net price and the
most favorable execution. The Management Agreement provides that, on occasions
when an Adviser deems the purchase or sale of a security to be in the best
interests of a Fund as well as its other customers (including any other fund or
other investment company or advisory account for which the Advisers or an
affiliate act as investment adviser), a Fund, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution. In
such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the applicable Adviser in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to the applicable Fund and such other customers. In some instances,
this procedure may adversely affect the size and price of the position
obtainable for a Fund. The Management Agreement permits each Adviser, in its
discretion, to purchase and sell portfolio securities to and from dealers who
provide the Trust with brokerage or research services in which dealers may
execute brokerage transactions at a higher cost to the Fund. Brokerage and
research services furnished by firms through which the Fund's effect their
securities transactions may be used by the Advisers in servicing other accounts
and not all of these services may be used by the Adviser in connection with the
specific Fund generating the brokerage credits. The fees received under the
Management Agreement
B-77
<PAGE>
are not reduced by reason of the Adviser receiving such brokerage and research
services. In addition, in selecting brokers and dealers, the Advisers may take
into account sales of shares of the Funds and other funds in the Goldman Sachs
Group of Funds by such brokers and dealers.
For the fiscal years ended October 31, 1995 and 1994, the Funds then in
existence paid no brokerage commissions.
B-78
<PAGE>
For the fiscal year ended October 31, 1996, the Funds then in existence paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid/3/ Research
=========== ================= ======================= ==========
<S> <C> <C> <C> <C>
Fiscal Year Ended
October 31, 1996:
Adjustable Rate Fund $108,000 $108,000(100%)/1/ $2,121,317,579(100%)/2/ $N/A
Short Duration Government Fund 24,000 24,000(100%)/1/ 447,205,928(100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000(100%)/1/ 8,559,280(100%)/2/ N/A
Core Fixed Income Fund 4,000 4,000(100%)/1/ 43,548,299(100%)/2/ N/A
Government Income Fund 1,200 1,200(100%)/1/ 24,437,288(100%)/2/ N/A
Municipal Income Fund 2,750 2,750(100%)/1/ 51,101,625(100%)/2/ N/A
</TABLE>
_______________________________
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Refers to Market Value of Futures Contracts.
B-79
<PAGE>
During the fiscal year ended October 31, 1996, the Funds acquired and
sold securities of their regular broker-dealers: Chase Securities, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1996, Short Duration Tax-Free Fund, Global Income Fund
and Municipal Income Fund held no securities of their regular broker-dealers.
As of the same date, Short Duration Government Fund, Adjustable Rate Fund,
Government Income Fund and Core Fund held the following amounts of securities of
their regular broker-dealers, as defined in Rule 10b-1 under the 1940 Act, or
their parents ($ in thousands): Short Duration Government Fund: Lehman
Brothers, Inc. ($370), Nomura Securities ($280) and Bear Stearns ($280);
Adjustable Rate Fund: Lehman Brothers, Inc. ($4,531), Bear Stearns ($3,430) and
Nomura Securities ($3,430); Government Income Fund: Lehman Brothers, Inc.
($2,774), Nomura Securities (2,774) and Bear Stearns ($2,100); Nomura Securities
(2,774); Core Fund: Lehman Brothers, Inc. ($4,808), Nomura Securities ($3,640)
and Bear Stearns ($3,640).
SHARES OF THE TRUST
The Funds were reorganized from series of a Massachusetts business
trust as part of Goldman Sachs Trust, a Delaware business trust, by a
Declaration of Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees have authority to classify and reclassify any series of shares into one
or more classes of shares. As of the date of this Additional Statement, the
Trustees have authorized: (i) the issuance of six classes of shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares; (ii) the issuance of four classes of shares
of Adjustable Rate Fund: Institutional Shares, Administration Shares, Service
Shares and Class A Shares; and (iii) the issuance of five classes of shares of
Global Income Fund, Government Income Fund, Municipal Income Fund and High Yield
Fund: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. As of October 31, 1996, no Service Shares of the Adjustable
Rate Fund were outstanding; no Class A, Class B or Class C Shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund were
outstanding; no Class C Shares of Government Income Fund and Municipal Income
Fund were outstanding; and no shares of High Yield Fund were outstanding.
B-80
<PAGE>
Each Institutional Share, Administration Share, Service Share, Class A
Share, Class B Share and Class C Share of a Fund represents a proportionate
interest in the assets belonging to the applicable class of the Fund. All
expenses of a Fund are borne at the same rate by each class of shares, except
that fees under Administration and Service Plans are borne exclusively by
Administration and Service Shares, fees under Distribution and Authorized Dealer
Service Plans are borne exclusively by Class A, Class B or Class C Shares and
transfer agency fees are borne at different rates by Class A, Class B or Class C
Shares than Institutional, Administration and Service Shares. The Trustees may
determine in the future that it is appropriate to allocate other expenses
differently between classes of shares and may do so to the extent consistent
with the rules of the SEC and positions of the Internal Revenue Service. Each
class of shares may have different minimum investment requirements and be
entitled to different shareholder services. Currently, shares of a class may
only be exchanged for shares of the same or an equivalent class of another fund.
See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the institution's customers.
Administration Shares may be purchased for accounts held in the name
of an institution that provides certain account administration services to its
customers, including maintenance of account records and processing orders to
purchase, redeem and exchange Administration Shares. Administration Shares bear
the cost of account administration fees at the annual rate of up to 0.25% of the
average daily net assets of such Administration Shares.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge, through brokers
and dealers who are members of the National Association of Securities Dealers,
Inc. and certain other financial service firms that have sales agreements with
Goldman Sachs. Class A Shares of the Funds bear the cost of distribution (Rule
12b-1) fees at the aggregate rate of up to 0.25% of the average daily net assets
of such Class A Shares. Class A Shares also bear the cost of an Authorized
Dealer Service Plan at an annual rate of up to 0.25% of average daily net assets
attributable to Class A Shares.
B-81
<PAGE>
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge through brokers and dealers who are members of the National
Association of Securities Dealers, Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. Class B shares bear the
cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of
the average daily net assets attributable to Class B shares. Class B shares
also bear the cost of an Authorized Dealer Service Plan at an annual rate of up
to 0.25% of the average daily net assets attributable to Class B shares.
Class C Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 1.0% through brokers and dealers who are members of the
National Association of Securities Dealers Inc. and certain other financial
services firms that have sales arrangements with Goldman Sachs. Class C Shares
bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to
0.75% of the average daily net assets attributable to Class C Shares. Class C
Shares also bear the cost of an Authorized Dealer Service Plan at an annual rate
of up to 0.25% of the average daily net assets attributable to Class C Shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A, Class B and Class C Shares) to its customers and thus receive different
compensation with respect to different classes of shares of each Fund.
Dividends paid by each Fund, if any, with respect to each class of shares will
be calculated in the same manner, at the same time on the same day and will be
in the same amount, except for differences caused by the fact that the
respective account administration, service, authorized dealer service plan and
distribution fees relating to a particular class will be borne exclusively by
that class. Similarly, the net asset value per share may differ depending upon
the class of shares purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, each Fund's shares are fully paid and non-assessable by
the Trust. In the event of liquidation of a Fund, shareholders of that Fund are
entitled to share pro rata in the net assets of that Fund available for
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of July 15, 1997, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following Funds: Adjustable
Rate Fund:
Short Duration Government Fund:
Short Duration Tax-Free Fund:
Government Income Fund:
Core Fund:
B-82
<PAGE>
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act, applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company (such as
the Trust) shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of Trustees from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the election of Trustees (this method of voting being
referred to at "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for
any act or obligation of the series and satisfy any judgment thereon from the
assets of the series.
B-83
<PAGE>
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have
the right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of the Delaware Trust, all the powers and authorities of
Trustees under the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations
B-84
<PAGE>
of a Fund. Notice of such disclaimer will normally be given in each agreement,
obligation or instrument entered into or executed by a series or the Trustees.
The Declaration of Trust provides for indemnification by the relevant Fund for
all loss suffered by a shareholder as a result of a obligation of the series.
The Declaration of Trust also provides that a series shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of the series and satisfy any judgment thereon. In view of the above, the risk
of personal liability of shareholders is remote.
In addition to the requirement under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the series or class to which such action relates, shall join in the request for
the Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of other advisers in considering the merits of the request
and shall require an undertaking by the shareholders making such request to
reimburse the Fund for the expense of any such advisers in the event that the
Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason or willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
NET ASSET VALUE
Under the Act, the Trustees of the Trust are responsible for
determining in good faith the fair value of securities of the Funds. In
accordance with procedures adopted by the Trustees of the Trust, the net asset
value per share of each class of each Fund is calculated by determining the
value of the net assets attributable to each class of that Fund (assets,
including securities at value, minus liabilities) and dividing by the number of
outstanding shares of that class. All securities are valued as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time) on each Business Day (as defined in each Fund's Prospectus).
For the purpose of calculating the net asset value of the Funds,
investments are valued under valuation procedures established by the Trustees.
Portfolio securities, other than money market instruments and with the exception
of Global Income Fund, for which accurate market quotations are readily
available are valued as follows: (a) via electronic feeds to the custodian bank
containing dealer-supplied bid quotations or bid quotations
B-85
<PAGE>
from a nationally recognized pricing service; (b) securities for which the
custodian bank is unable to obtain an external price or with respect to which
the Adviser believes an external price does not reflect accurate market values,
will be valued by the Adviser in good faith based on valuation models that take
into account daily spread and yield changes on U.S. Treasury securities (i.e.,
matrix pricing); (c) overnight repurchase agreements will be valued by the
Adviser at cost; (d) term repurchase agreements (i.e., those whose maturity
exceeds seven days) and interest rate swaps, caps, collars and floors will be
valued at the average of the bid quotations obtained daily from at least two
dealers or, for term repurchase agreements, recognized counterparties; (e) debt
securities with a remaining maturity of 60 days or less are valued by the
Adviser at amortized cost, which the Trustees have determined to approximate
fair value; (f) spot and forward foreign currency exchange contracts will be
valued using a pricing service such as Reuters then calculating then mean
between the last bid and asked quotations supplied by certain independent
dealers in such contracts; (g) exchange-traded options and futures contracts
will be valued by the custodian bank at the last sale price on the exchange
where such contracts and options are principally traded; and (h) over-the-
counter options will be valued by an independent unaffiliated broker identified
by the portfolio manager/trader and contacted by the custodian bank.
Portfolio securities of the Global Income Fund for which accurate
market quotations are available are valued as follows: (a) securities listed on
any U.S. or foreign stock exchange or on the National Association of Securities
Dealers Automated Quotations System ("NASDAQ") will be valued at the last sale
price on the exchange or system in which they are principally traded, on the
valuation date. If there is no sale on the valuation day, securities traded
principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean between
the closing bid and asked prices, and (ii) on a foreign exchange will be valued
at the official bid price. The last sale price and official bid price for
securities traded principally on a foreign exchange will be determined as of the
close of the London Foreign Exchange; (b) over-the-counter securities not quoted
on NASDAQ will be valued at the last sale price on the valuation day or, if no
sale occurs, at the mean between the last bid and asked prices; (c) options and
futures contracts will be valued at the last sale price in the market where such
contract is principally traded; and (d) forward foreign currency exchange
contracts will be valued at the mean between the last bid and asked quotations
supplied by a dealer in such contracts.
All other securities, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved by the Board of Trustees.
Money market instruments held by a Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost
B-86
<PAGE>
method, which the Trustees have determined approximates market value.
The value of all assets and liabilities expressed in foreign
currencies will be converted into U.S. dollar values at current exchange rates
of such currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the time the Global Income, Core and High
Yield Funds calculate their net asset value. Occasionally, events affecting the
values of such securities may occur between the times at which they are
determined and the calculation of net asset value which will not be reflected in
the computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value, in which case an adjustment
may be made.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies and financial institutions. Each prospective
shareholder is urged to consult his own tax adviser with respect to the specific
federal, state, local and foreign tax consequences of investing in the Funds.
This summary is based on the laws in effect on the date of this Additional
Statement, which are subject to change.
GENERAL
- -------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect to
be treated and intends to continue to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its gross
income (including tax-exempt interest) for its taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks or securities, or foreign currencies or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"); (b) a Fund derive less than 30% of its
gross income for its taxable year from the sale or other disposition of any of
the following which was held for less than three months: (i) stock or
securities,
B-87
<PAGE>
(ii) options, futures or forward contracts (other than options, futures or
forward contracts on foreign currencies) and (iii) foreign currencies and
foreign currency options, futures and forward contracts that are not directly
related to the Fund's principal business of investing in stocks or securities or
options and futures with respect to stocks or securities (the "short-short
test"); and (c) a Fund diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the market value of its total
(gross) assets is comprised of cash, cash items, United States Government
Securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (gross) assets is invested in the securities of any
one issuer (other than United States Government Securities and securities of
other regulated investment companies) or two or more issuers controlled by a
Fund and engaged in the same, similar or related trades or businesses. Gains
from the sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that are not directly related to Core
Fund's or Global Income Fund's principal business of investing in stock or
securities or options and futures with respect to stock or securities will be
treated as gains from the sale of investments held for less than three months
under the short-short test (even though characterized as ordinary income for
some purposes) if such currencies or instruments were held for less than three
months. In addition, future Treasury regulations could provide that qualifying
income under the 90% gross income test will not include gains from foreign
currency transactions that are not directly related to Core Fund's or Global
Income Fund's principal business of investing in stock or securities or options
and futures with respect to stock or securities. Using foreign currency
positions or entering into foreign currency options, futures and forward
contracts for purposes other than hedging currency risk with respect to
securities in Core Fund's or Global Income Fund's portfolio or anticipated to be
acquired may not qualify as "directly related" under these tests.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on the portion of its income and capital gains that it
distributes to its shareholders in any taxable year for which it distributes, in
compliance with the Code's timing and other requirements, at least 90% of its
"investment company taxable income" (which includes dividends, taxable interest,
taxable original issue discount income, market discount income, income from
securities lending, net short-term capital gain in excess of net long-term
capital loss, certain net realized foreign exchange gains, and any other taxable
income other than "net capital gain" as defined below and is reduced by
deductible expenses) and at least 90% of the excess of its gross tax-exempt
interest income over certain disallowed deductions ("net tax-exempt interest").
A Fund may retain for investment its "net capital gain" (which consists of the
excess of its net long-term capital gain over its
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net short-term capital loss). However, if a Fund retains any investment company
taxable income or net capital gain, it will be subject to tax at regular
corporate rates on the amount retained. If a Fund retains any net capital gain,
that Fund may designate the retained amount as undistributed net capital gain in
a notice to its shareholders who, if subject to U.S. federal income tax on long-
term capital gains, (i) will be required to include in income for federal income
tax purposes, as long-term capital gain, their shares of such undistributed
amount, and (ii) will be entitled to credit their proportionate shares of the
tax paid by that Fund against their U.S. federal income tax liabilities, if any,
and to claim refunds to the extent the credit exceeds such liabilities. For
U.S. federal income tax purposes, the tax basis of shares owned by a shareholder
of the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute for each taxable year to its
shareholders all or substantially all of its investment company taxable income
(if any), net capital gain and any net tax-exempt interest. Exchange control or
other foreign laws, regulations or practices may restrict repatriation of
investment income, capital or the proceeds of securities sales by foreign
investors such as Global Income Fund or Core Fund and may therefore make it more
difficult for Global Income Fund or Core Fund to satisfy the distribution
requirements described above, as well as the excise tax distribution
requirements described below. However, Global Income Fund and Core Fund
generally expect to be able to obtain sufficient cash to satisfy such
requirements from new investors, the sale of securities or other sources. If
for any taxable year a Fund does not qualify as a regulated investment company,
it will be taxed on all of its investment company taxable income and net capital
gain at corporate rates, its net tax-exempt interest (if any) may be subject to
the alternative minimum tax, and its distributions to shareholders will be
taxable as ordinary dividends to the extent of its current and accumulated
earnings and profits.
For federal income tax purposes, each Fund is permitted to carry
forward a net capital loss in any year to offset its own capital gains, if any,
during the eight years following the year of the loss. At October 31, 1996, the
Funds had approximately the following amounts of capital loss carry forwards:
Years of
Amount Expiration
----------- ----------
Adjustable Rate Fund $47,923,000 2000-2003
Short Duration
Government Fund $13,272,000 2002-2003
Short Duration
Tax-Free Fund $ 4,271,000 2002-2003
Core Fixed Income Fund $ 77,000 2004
Global Income Fund $ 4,472,000 2002
Municipal Income Fund $ 1,535,000 2002
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These amounts are available to be carried forward to offset future capital
gains to the extent permitted by the Code and applicable tax regulations.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year) and 100% of any taxable
ordinary income and the excess of capital gains over capital losses for the
prior year that were not distributed during such year and on which the Fund did
not pay federal income tax. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will be treated as if they were received by
shareholders on December 31 of the year declared.
The Tax Exempt Funds may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." The Tax Exempt Funds may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, the Tax
Exempt Funds may purchase beneficial interests in Municipal Securities held by
trusts, custodial arrangements or partnerships and/or combined with third-party
puts and other types of features such as interest rate swaps; those investments
may require the Fund to pay "tender fees" or other fees for the various features
provided.
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that tax-
exempt interest received by a regulated investment company with respect to such
obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax Exempt Funds intends to take
the position that it
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is the owner of any municipal obligations acquired subject to a standby
commitment or other third party put and that tax-exempt interest earned with
respect to such municipal obligations will be tax-exempt in its hands. There is
no assurance that the Service will agree with such position in any particular
case. Additionally, the federal income tax treatment of certain other aspects
of these investments, including the treatment of tender fees paid by these
Funds, in relation to various regulated investment company tax provisions is
unclear. However, the Adviser intends to manage the Tax Exempt Funds'
portfolios in a manner designed to minimize any adverse impact from the tax
rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging transactions entered into by a Fund, that
Fund may be required to defer the recognition of losses on futures or forward
contracts and options or underlying securities or foreign currencies to the
extent of any unrecognized gains on related positions held by the Fund and the
characterization of gains or losses as long-term or short-term may be changed.
The short-short test described above may limit each Fund's ability to use
options, futures and forward transactions as well as its ability to engage in
short sales. The tax provisions described above applicable to options, futures
and forward contracts may affect the amount, timing, and character of a Fund's
distributions to shareholders. Certain tax elections may be available to the
Funds to mitigate some of the unfavorable consequences described in this
paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by Core Fund and Global Income
Fund. Under these rules, foreign exchange gain or loss realized by Core Fund or
Global Income Fund with respect to foreign currencies and certain futures and
options thereon, foreign currency-denominated debt instruments, foreign currency
forward contracts, and foreign currency-denominated payables and receivables
will generally be treated as ordinary income or loss, although in some cases
elections may be available that would alter this treatment. If a net foreign
exchange loss treated as ordinary loss under Section 988 of the Code were to
exceed a Fund's investment company taxable income
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(computed without regard to such loss) for a taxable year, the resulting loss
would not be deductible by the Fund or its shareholders in future years. Net
loss, if any, from certain foreign currency transactions or instruments could
exceed net investment income otherwise calculated for accounting purposes with
the result being either no dividends being paid or a portion of Core Fund's,
High Yield Fund's or Global Income Fund's dividends being treated as a return of
capital for tax purposes, nontaxable to the extent of a shareholder's tax basis
in his shares and, once such basis is exhausted, generally giving rise to
capital gains.
Core and Global Income, and High Yield Funds may be subject to foreign
taxes on income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes in some cases. Because more than 50% of Global Income
Fund's total assets at the close of any taxable year will generally consist of
stock or securities of foreign corporations, Global Income Fund will generally
qualify to file an election with the Internal Revenue Service pursuant to which
shareholders of Global Income Fund would be required to (i) include in ordinary
gross income (in addition to taxable dividends actually received) their pro rata
shares of foreign income taxes paid by Global Income Fund that are treated as
income taxes under U.S. tax regulations (which excludes, for example, stamp
taxes, securities transaction taxes, and similar taxes) even though not actually
received by such shareholders, and (ii) treat such respective pro rata portions
as foreign income taxes paid by them. Global Income Fund may or may not make
this election for any particular taxable year. Core Fund will not satisfy the
50% requirement described above and, therefore, will not make this election.
Core Fund and, if it does not make the election, Global Income Fund will,
however, be entitled to deduct such taxes in computing the amounts they are
required to distribute.
If Global Income Fund makes this election, its shareholders may then deduct
such pro rata portions of qualified foreign taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of qualified foreign taxes paid by
Global Income Fund, although such shareholders will be required to include their
shares of such taxes in gross income if Global Income Fund makes the election
referred to above.
If a shareholder chooses to take a credit for the foreign taxes deemed paid
by such shareholder as a result of any such election by Global Income Fund, the
amount of the credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken which the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. For
this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by Global Income Fund
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will generally not be treated as income from foreign sources. This foreign tax
credit limitation may also be applied separately to certain specific categories
of foreign-source income and the related foreign taxes. As a result of these
rules, which have different effects depending upon each shareholder's particular
tax situation, certain shareholders of Global Income Fund may not be able to
claim a credit for the full amount of their proportionate shares of the foreign
taxes paid by the Fund.
Shareholders who are not liable for U.S. federal income taxes, including
tax-exempt shareholders, will ordinarily not benefit from this election. Each
year, if any, that Global Income Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of qualified foreign income taxes paid by Global Income Fund and (ii) the
portion of Fund dividends which represents income from each foreign country.
If Core, or Global Income or High Yield Funds acquire stock (including,
under proposed regulations, an option to acquire stock such as is inherent in a
convertible bond) in certain foreign corporations that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gain) or hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies") Core, Global Income or High Yield Funds could be subject to federal
income tax and additional interest charges on "excess distributions" received
from such companies or gain from the sale of such stock in such companies, even
if all income or gain actually received by Core, Global Income or High Yield
Funds is timely distributed to its shareholders. Core, Global Income or High
Yield Funds would not be able to pass through to their shareholders any credit
or deduction for such a tax. Certain elections may, if available, ameliorate
these adverse tax consequences, but any such election would require Core, Global
Income or High Yield Funds to recognize taxable income or gain without the
concurrent receipt of cash. Core, Global Income or High Yield Funds may limit
and/or manage their holdings in passive foreign investment companies to minimize
its tax liability or maximize its return from these investments.
A Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark-to-market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
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The federal income tax rules applicable to mortgage dollar rolls and
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations concerning the tax-exempt status of such obligations, nor does it
guarantee or represent that bond counsels' opinions are correct. Bond counsels'
opinions will generally be based in part upon covenants by the issuers and
related parties regarding continuing compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex requirements
that must be satisfied on a continuing basis in order for bonds to be and remain
tax-exempt. If the issuer of a bond or a user of a bond-financed facility fails
to comply with such requirements at any time, interest on the bond could become
taxable, retroactive to the date the obligation was issued. In that event, a
portion of a Tax Exempt Fund's distributions attributable to interest the Fund
received on such bond for the current year and for prior years could be
characterized or recharacterized as taxable income. The availability of tax-
exempt obligations and the value of a Tax Exempt Fund's portfolio may be
affected by restrictive federal income tax legislation enacted in recent years
or by similar, future legislation. If a Tax Exempt Fund satisfies the
applicable requirements, dividends paid by the Fund which are attributable to
tax exempt interest on Municipal Securities and designated by the Fund as
exempt-interest dividends in a written notice mailed to its shareholders within
sixty days after the close of its taxable year may be treated by shareholders
as items of interest excludable from their gross income under Section 103(a) of
the Code. Exempt-interest dividends a Tax Exempt Fund receives from other
regulated investment companies, including exempt-interest dividends on auction
rate preferred securities of such companies held by a Fund, are treated as
interest on Municipal Securities and may be distributed by a Tax Exempt Fund as
exempt-interest dividends. The recipient of tax-exempt income is required to
report such income on his federal income tax return. However, a shareholder is
advised to consult his tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Section 103(a) if such shareholder would be
treated as a
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"substantial user" under Section 147(a)(1) with respect to some or all of the
tax-exempt obligations held by a Tax Exempt Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of a
Tax Exempt Fund is not deductible to the extent attributable to exempt-interest
dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions from investment company taxable income, as
defined above, are taxable to shareholders who are subject to tax as ordinary
income whether paid in cash or reinvested in additional shares. Taxable
distributions include distributions from any Fund, including Short Duration Tax-
Free Fund and Municipal Income Fund, that are attributable to (i) taxable
income, including but not limited to dividends, taxable bond interest,
recognized market discount income, original issue discount income accrued with
respect to taxable bonds, income from repurchase agreements, income from
securities lending, income from dollar rolls, income from interest rate or
currency swaps, caps, floors and collars, and a portion of the discount from
certain stripped tax-exempt obligations or their coupons or (ii) capital gains
from the sale of securities or other investments (including from the disposition
of rights to when-issued securities prior to issuance) or from options, futures
or certain forward contracts. Any portion of such taxable distributions that is
attributable to a Fund's net capital gain, as defined above, may be designated
by the Fund as a "capital gain dividend," taxable to shareholders as long-term
capital gain whether received in cash or additional shares and regardless of the
length of time their shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less
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than a minimum period, generally 46 days. Receipt of certain distributions
qualifying for the deduction may result in reduction of the tax basis of the
corporate shareholder's shares and may give rise to or increase its liability
for federal corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes,
will first reduce a shareholder's basis in his shares and, after the
shareholder's basis is reduced to zero, will generally constitute capital gains
to a shareholder who holds his shares as capital assets. Amounts that are not
allowable as a deduction in computing taxable income, including expenses
associated with earning tax-exempt interest income, do not reduce a Fund's
current earnings and profits for these purposes. Consequently, the portion, if
any, of Short Duration Tax-Free Fund's or Municipal Income Fund's distributions
from gross tax-exempt interest income that exceeds its net tax-exempt interest
would be taxable as ordinary income to the extent of such disallowed deductions
even though such excess portion may represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash and will have a cost basis in the shares received equal
to such amount.
TAXABLE U.S. SHAREHOLDERS -- SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of in
a transaction that is treated as a sale for tax purposes, the shareholder will
generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale, such gain or loss should be capital in
character, and long-term if the shareholder has a tax holding period for the
shares of more than one year, otherwise short-term, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund Shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. All or a portion
of a sales charge paid in purchasing Class A shares of Adjustable Rate Fund or
Global Income Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of that Fund or another fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment or
exchange privilege. Any disregarded portion of such charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired. If
a shareholder received a capital gain dividend with respect to
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shares and such shares have a tax holding period of six months or less at the
time of the sale or redemption, then any loss the shareholder realizes on the
sale or redemption will be treated as a long-term capital loss to the extent of
such capital gain dividend. Also, any losses realized by shareholders who
dispose of shares of Short Duration Tax-Free or Municipal Income Funds with a
tax holding period of six months or less are disallowed to the extent of any
exempt-interest dividends received with respect to such shares. Additionally,
any loss realized on a sale or redemption of shares of a Fund may be disallowed
under "wash sale" rules to the extent the shares disposed of are replaced with
other shares of the same Fund within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of, such as pursuant to
a dividend reinvestment in shares of the Fund. If disallowed, the loss will be
reflected in an adjustment to the basis of the shares acquired.
After the close of each calendar year, each of Short Duration Tax-Free Fund
and Municipal Income Fund will inform shareholders of the federal income tax
status of its dividends and distributions for such year, including the portion
of such dividends that qualifies as tax-exempt and the portion, if any, that
should be treated as a tax preference item for purposes of the federal
alternative minimum tax. Shareholders who have not held shares of Short
Duration Tax-Free Fund or Municipal Income Fund for such Fund's full taxable
year may have designated as tax-exempt or as a tax preference item a percentage
of distributions which is not equal to the actual amount of tax-exempt income or
tax preference item income earned by Short Duration Tax-Free Fund or Municipal
Income Fund during the period of their investment in Short Duration Tax-Free
Fund or Municipal Income Fund, as the case may be.
All distributions, whether received in shares or in cash, as well as
redemptions and exchanges, must be reported by each shareholder who is required
to file a U.S. Federal income tax return.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of
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31% in the case of non-exempt shareholders who fail to furnish the Funds with
their correct taxpayer identification number and with certain required
certifications or if the Service or a broker notifies the Funds that the number
furnished by the shareholder is incorrect or that the shareholder is subject to
backup withholding as a result of failure to report interest or dividend income.
However, any taxable distributions from Short Duration Tax-Free Fund or
Municipal Income Fund will not be subject to backup withholding if the
applicable Fund reasonably estimates that at least 95% of its distributions will
be exempt-interest dividends. A Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment company taxable income distributed by a
Fund to a shareholder who is not a U.S. person will be subject to U.S.
withholding tax at the rate of 30% (or a lower rate provided by an applicable
tax treaty) unless the dividends are effectively connected with a U.S. trade or
business of the shareholder, in which case the dividends will be subject to tax
on a net income basis at the graduated rates applicable to U.S. individuals or
domestic corporations. Distributions of net capital gain, including amounts
retained by a Fund which are designated as undistributed capital gains, to a
shareholder who is not a U.S. person will not be subject to U.S. federal income
or withholding tax unless the distributions are effectively connected with the
shareholder's trade or business in the United States or, in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met. Non-U.S. shareholders may also be subject to U.S.
withholding tax on deemed income resulting from any election by Global Income
Fund to treat qualified foreign taxes it pays as passed through to shareholders
(as described above), but they may not be able to claim a U.S. tax credit or
deduction with respect to such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the
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United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Thirty-day yield and average annual total return values are computed pursuant to
formulas specified by the SEC. Each Fund may also from time to time quote
distribution rates in reports to shareholders and in sales literature.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price per share on the
last day of such period. Yield is then annualized by assuming that yield is
realized each month for twelve months and is reinvested every six months. Net
investment income per share is equal to the dividends and interest earned during
the period, reduced by accrued expenses for the period. The calculation of net
investment income for these purposes may differ from the net investment income
determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, a Tax Exempt Fund's tax-free yield. Tax equivalent yield is
calculated by dividing a Tax Exempt Fund's tax-exempt yield by one minus a
stated federal and/or state tax rate.
Distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share on the last day of the period.
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Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price applicable to the relevant
class (i.e., net asset value in the case of each class other than Class A) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption (and in the case
of Class B and Class C Shares payment of any contingent deferred sales charge)
at the end of the period. This calculation assumes a complete redemption of the
investment. It also assumes that all dividends and distributions are reinvested
at net asset value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price per share with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period.
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
Thirty-day yield, tax equivalent yield (Short Duration Tax-Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A, Class B or Class C Shares which is based upon a Fund's net asset value per
share would be reduced if a sales charge were taken into account.
B-100
<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- -------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 6.00% 5.94%
Administration Shares 5.75% 5.69%
Service Shares/2/
Class A Shares
- Assumes 1.5% sales charge 5.66% 5.35%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.43% 6.16%
Administration Shares 6.19% 5.93%
Service Shares 5.96% 5.71%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.34% 3.71%
Administration Shares 4.09% 3.42%
Service Shares 3.84% 3.22%
CORE FUND
Institutional Shares 6.60% 6.25%
Administration Shares 6.37% 6.03%
Service Shares 6.12% 5.78%
GLOBAL INCOME FUND
Institutional Shares 5.20% 4.76%
Service Shares/2/
Class A Shares
(Assumes 4.5% sales charge) 4.54% 4.08%
Class B Shares 4.23% 3.80%
MUNICIPAL INCOME FUND
Class A Shares 4.21% 3.56%
(assumes 4.5% sales charge)
Class B Shares 3.68% 3.25%
GOVERNMENT INCOME FUND
Class A Shares 6.04% 4.76%
(assumes 4.5% sales charge)
Class B Shares 5.57% 4.48%
</TABLE>
B-101
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION RATE
<S> <C> <C> <C>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- -------------------------------- ------------------ ----------- ------------
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 5.87% 5.81%
Administration Shares 5.62% 5.56%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.62% 5.31%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.24% 5.97%
Administration Shares 6.00% 5.72%
Service Shares 5.78% 5.49%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.19% 3.56%
Administration Shares 3.94% 3.28%
Service Shares 3.69% 3.06%
MUNICIPAL INCOME FUND
Class A Shares 4.27% 3.59%
-assumes no sales charge
Class B Shares 3.53% 3.09%
GOVERNMENT INCOME FUND
Class A Shares 6.33% 5.00%
-assumes no sales charge
Class B Shares 5.58% 4.50%
CORE FUND
Institutional Shares 6.46% 6.12%
Administration Shares 6.23% 5.89%
Service Shares 5.98% 5.63%
GLOBAL INCOME FUND
Institutional Fund 5.95% 6.18%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.44% 4.96%
Class B Shares 5.02% 4.59%
</TABLE>
B-102
<PAGE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---------------------------- --------------------- ------------- -----------------
<S> <C> <C> <C>
30-Days
ended
10/31/96
SHORT DURATION
TAX-FREE FUND/3/
Institutional Shares 6.94% 5.89%
Administration Shares 6.52% 5.43%
Service Shares 6.11% 5.07%
MUNICIPAL INCOME FUND/3/
Class A Shares 7.07% 5.94%
-assumes no sales charge
Class B Shares 5.84% 5.12%
_______________________________
</TABLE>
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to limit its advisory fees and to maintain
expenses at a specified level.
2 There were no Service Shares outstanding during the periods indicated.
3 The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 39.6% federal income tax rate.
The above tables should not be considered a representation of future
performance.
B-103
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-------------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Expense Expense
Fund Date Investment Period Limitations Limitations
- -------------------------------- ---------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/96 5.32% 5.19%
11/1/95 one year ended
10/31/96 6.86% 6.80%
11/1/91 five years ended
10/31/96 5.13% 5.05%
Administration Shares 4/15/93/1b/ ended 10/31/96 4.69% 4.64%
11/1/95 one year ended
10/31/96 6.60% 6.53%
Service Shares/1c/ N/A N/A
Class A Shares 5/12/95/1d/ ended 10/31/96
Assumes 1.5% Sales Charge 5.29% 4.96%
Assumes No Sales Charge 6.40% 6.07%
11/1/95 one year ended
Assumes 1.5% Sales Charge 10/31/96 4.99% 4.66%
Assumes No Sales Charge 6.60% 6.27%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/96 7.24% 6.84%
11/1/95 one year ended
10/31/96 6.75% 6.47%
11/1/91 five years
ended 10/31/96 5.67% 5.44%
Administration Shares 2/28/96/2b/ ended 10/31/96 4.00% 3.82%
Service Shares 4/10/96/2b/ ended 10/31/96 4.35% 4.20%
</TABLE>
B-104
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-----------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ------------------------------ -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
Institutional Shares 10/1/92/3a/ ended 10/31/96 4.21% 3.71%
11/1/95 one year ended
10/31/96 4.50% 3.92%
Administration Shares 5/20/93/3b/ ended 10/31/96 3.51% 3.15%
11/1/95 one year ended
10/31/96 4.24% 3.66%
Service Shares 9/20/94/3c/ ended 10/31/96 4.36% 3.92%
11/1/95 one year ended
10/31/96 3.98% 3.40%
CORE FUND
Institutional Shares 1/15/94/4a/ 10/31/96 6.34% 5.70%
11/1/95 one year ended
10/31/96 5.98% 5.58%
Administration Shares 2/28/96/4b/ ended
10/31/96 3.56% 3.29%
Service Shares 3/13/96/4b/ ended
10/31/96 4.90% 4.69%
</TABLE>
B-105
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-----------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ------------------------------ -------------- ------------------- --------------- ------------
<S> <C> <C> <C> <C>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/96
Assumes 4.5% Sales Charge 7.08% 6.76%
Assumes No Sales Charge 8.02% 7.71%
Assumes 4.5% Sales Charge 11/1/95 one year 6.08% 5.57%
Assumes No Sales Charge ended 10/31/96 11.05% 10.53%
Assumes 4.5% Sales Charge 11/1/91 five years 7.02% 6.73%
Assumes No Sales Charge ended 10/31/96 8.01% 7.69%
Class B Shares/5b/ 5/1/96 ended 10/31/96/5d/ 6.24% 6.01%
Institutional Shares 8/1/95/5e/ ended 10/31/96 12.95% 12.45%
11/1/95 one year
ended 10/31/96 11.55% 11.05%
Service Shares/5f/
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/96
Assumes 4.5% Sales Charge 3.80% 2.78%
Assumes No Sales Charge 5.27% 4.23%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.35% 0.65%
Assumes No Sales Charge 6.13% 5.40%
Class B Shares/6b/ 5/1/96 ended 10/31/96 4.40% 4.07%
</TABLE>
B-106
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
--------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ----------------------------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/96
Assumes 4.5% Sales Charge 5.41% 2.92%
Assumes No Sales Charge 6.72% 4.21%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.06% -0.33%
Assumes No Sales Charge 5.80% 4.35%
Class B Shares/7b/ 5/1/96 ended 10/31/96 4.85% 4.17%
- ----------------
</TABLE>
1a Institutional Shares of Adjustable Rate Fund commenced operations on
July 17, 1991.
1b Administration Shares of Adjustable Rate Fund commended operations on
April 15, 1993.
1c No Service Shares of Adjustable Rate Fund were outstanding during the
periods indicated.
1d Class A shares of Adjustable Rate Fund commenced operations on May 12,
1995.
2a Institutional Shares of Short Duration Government Fund commenced
operations on August 15, 1988.
2b Administration Shares of Short Duration Government Fund commenced
operations on February 28, 1996. Service Shares of Short Duration
Government Fund commenced operations on April 10, 1996. An aggregate
total return (not annualized) is shown instead of an average annual
total return since Administration and Service Shares have not
completed a full 12 months of operation as of October 31, 1996.
3a Institutional Shares of Short Duration Tax-Free Fund commenced
operations on October 1, 1992.
3b Administration Shares of Short Duration Tax-Free Fund commenced
operations on May 20, 1993.
3c Service Shares of Short Duration Tax-Free Fund commenced operations on
September 20, 1994.
4a Institutional Shares of Core Fund commenced operations on January 5,
1994.
4b Administration Shares of Core Fund commenced operations on February
28, 1996. Service Shares of Core Fund commenced operations on March
13, 1996. An aggregate total return (not annualized) is shown instead
of an average annual total return since Administration and Service
Shares have not completed a full 12 months of operation as of October
31, 1996.
5a Class A Shares of Global Income Fund commenced operations on August 2,
1991.
5b Class B Shares of Global Income Fund commenced operations on May 1,
1996.
5c On November 27, 1992, the maximum sales charge was changed from 3% to
4.5% of the offering price. All performance figures in this table
incorporate the sales charge currently in effect.
5d An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a
full 12 months of operation as of October 31, 1996.
5e Institutional Shares of Global Income Fund commenced operations on
August 1, 1995.
5f No Service Shares of Global Income Fund were outstanding during the
periods indicated.
6a Class A shares of Municipal Income Fund commenced operations on July
20, 1993.
6b Class B Shares of Municipal Income Fund commenced operations on May 1,
1996. An aggregate total return (not annualized) is shown instead of
an average annual total return since Class B Shares have not completed
a full 12 months of operation as of October 31, 1996.
B-107
<PAGE>
7a Class A Shares of Government Income Fund commenced operations on
February 10, 1993.
7b Class B Shares of Government Income Fund commenced operations on May
1, 1996. An aggregate total return (not annualized) is shown instead
of an average annual total return since Class B Shares have not
completed a full 12 months of operation as of October 31, 1996.
The above table should not be considered a representation of future
performance.
B-108
<PAGE>
Occasionally statistics may be used to specify a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare a Fund's net
asset value or performance relative to a market index. One measure of volatility
is beta. Beta is the volatility of a fund relative to the total market. A beta
of more than 1.00 indicates volatility greater than the market, and a beta of
less than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
Each Fund may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to, Lipper
------
Analytical Services, Inc., Donaghues Money Fund Report, Barron's, The Wall
- ------------------------- --------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- ----------------- -------------------------------- -----
In addition, Adjustable Rate, Government Income and Short Duration
Government Funds may from time to time advertise their performance relative to
certain indices and benchmark investments, including: (a) the Shearson Lehman
Government/Corporate (Total) Index, (b) Shearson Lehman Government Index, (c)
Merrill Lynch 1-3 Year Treasury Index, (d) Merrill Lynch 2-Year Treasury Curve
Index, (e) the Salomon Brothers Treasury Yield Curve Rate of Return Index, (f)
the Payden & Rygel 2-Year Treasury Note Index, (g) 1 through 3 year U.S.
Treasury Notes, (h) constant maturity U.S. Treasury yield indices, (i) the
Consumer Price Index, (j) the London Interbank Offered Rate, (k) other taxable
investments such as certificates of deposit, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds, repurchase
agreements, commercial paper and (l) historical data concerning the performance
of adjustable and fixed-rate mortgage loans.
Short Duration Tax-Free and Municipal Income Funds may from time to
time advertise their performance relative to certain indices, any components of
such indices and benchmark investments, including but not limited to: (a) the
Lipper Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed Income
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
Lehman Brothers Municipal Bond Indices; (c) the Merrill Lynch Municipal Bond
Institutional Total Rate of Return Indices; (d) Bond Buyer Indices; (e)
IBC/Donoghue's Money Fund Averages/Institutional Only Tax Free; and constant
maturity U.S. Treasury yield indices.
Core, Global Income and High Yield Funds may each from time to time
advertise its performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income
B-109
<PAGE>
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
CDA Mutual Fund Report published by CDA Investment Technologies, Inc. (which
analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Salomon Brothers' World Bond Index (which measures the total
return in U.S. dollar terms of government bonds, Eurobonds and foreign bonds of
ten countries, with all such bonds having a minimum maturity of five years); (f)
the Lehman Brothers Aggregate Bond Index or its component indices; (g) the
Standard & Poor's Bond Indices (which measure yield and price of corporate,
municipal and U.S. government bonds); (h) the J.P. Morgan Global Government Bond
Index; (i) other taxable investments including certificates of deposit (CDs),
money market deposit accounts (MMDAs), checking accounts, savings accounts,
money market mutual funds and repurchase agreements; (j) historical investment
data supplied by the research departments of Goldman Sachs, Lehman Brothers
Inc., First Boston Corporation, Morgan Stanley & Co. Incorporated, Salomon
Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson
Lufkin and Jenrette Securities Corporation; and (k) Donoghue's Money Fund Report
(which provides industry averages for 7-day annualized and compounded yields of
taxable, tax-free and U.S. government money funds).
The composition of the investments in the above-referenced indices and
the characteristics of a Fund's benchmark investments are not identical to, and
in some cases may be very different from, those of a Fund's portfolio. These
indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by the a Fund to calculate its performance figures.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Goldman Sachs as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
regulated matters believed to be of relevance to a Fund.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
.. The performance of various types of securities (taxable money market funds,
U.S. Treasury securities, adjustable rate mortgage securities, government
securities, municipal bonds) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
B-110
<PAGE>
.. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/ All
Taxable Index) over varying periods of time.
.. Credit Ratings of domestic government bonds in various countries
.. Price volatility comparisons of types of securities over different periods
of time.
.. Price and yield comparisons of a particular security over different periods
of time.
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other material
which highlight or summarize the services provided in support of an asset
allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein.
Performance data is based on historical results and is not intended to
indicate future performance. Total return, thirty-day yield, tax equivalent
yield and distribution rate will vary based on changes in market conditions,
portfolio expenses, portfolio investments and other factors. The value of a
Fund's shares will fluctuate and an investor's shares may be worth more or less
than their original cost upon redemption. The Trust may also, at its
discretion, from time to time make a list of a Fund's holdings available to
investors upon request.
OTHER INFORMATION
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value of each Fund during any 90-day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net
B-111
<PAGE>
asset value of each respective Fund at the time of redemption by a distribution
in kind of securities (instead of cash) from such Fund. The securities
distributed in kind would be readily marketable and would be valued for this
purpose using the same method employed in calculating each Fund's net asset
value per share. See "Net Asset Value." If a shareholder receives redemption
proceeds in kind, the shareholder should expect to incur transaction costs upon
the disposition of the securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such other period as the
SEC may by order permit for the protection of shareholders of a Fund.
The Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen LLP,
independent public accounts, for each Fund contained in each Fund's 1996 Annual
Report are hereby incorporated by reference and attached hereto. A copy of the
annual reports may be obtained without charge by writing Goldman, Sachs & Co.,
4900 Sears Tower, Chicago, Illinois 60606 or by calling Goldman, Sachs & Co., at
the telephone number on the back cover of each Fund's Prospectus. Unaudited
financial statements for each Fund for the six months ended April 30, 1997 are
also attached hereto.
B-112
<PAGE>
SERVICE PLAN
Each Fund has adopted a service plan (the "Plan") with respect to its
Service Shares which authorizes it to compensate Service Organizations for
providing certain administration services and personal and account maintenance
services to their customers who are or may become beneficial owners of such
Shares. Pursuant to the Plan, a Fund will enter into agreements with Service
Organizations which purchase Service Shares of the Fund on behalf of their
customers ("Service Agreements"). Under such Service Agreements the Service
Organizations may perform some or all of the following services: (a) act,
directly or through an agent, as the sole shareholder of record and nominee for
all customers, (b) maintain account records for each customer who beneficially
owns Service Shares of a Fund, (c) answer questions and handle correspondence
from customers regarding their accounts, (d) process customer orders to
purchase, redeem and exchange Service Shares of a Fund, and handle the
transmission of funds representing the customers' purchase price or redemption
proceeds, (e) issue confirmations for transactions in shares by customers, (f)
provide facilities to answer questions from prospective and existing investors
about Service Shares of a Fund, (g) receive and answer investor correspondence,
including requests for prospectuses and statements of additional information,
(h) display and make prospectuses available on the Service Organization's
premises, (i) assist customers in completing application forms, selecting
dividend and other account options and opening custody accounts with the Service
Organization and (j) act as liaison between customers and a Fund, including
obtaining information from a Fund, working with a Fund to correct errors and
resolve problems and providing statistical and other information to a Fund. As
compensation for such services, a Fund will pay each Service Organization a
service fee in an amount up to 0.50% (on an annualized basis) of the average
daily net assets of the Service Shares of such Fund attributable to or held in
the name of such Service Organization; provided, however, that the fee paid for
personal and account maintenance services shall not exceed 0.25% such average
daily net assets. For the fiscal years ended October 31, 1996, October 31, 1995
and October 31, 1994, service fees were paid by the Funds as follows:
B-118
<PAGE>
<TABLE>
<CAPTION>
Fund 1996 1995 1994
- -------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Adjustable Rate Fund /(1)/ /(1)/ /(1)/
Short Duration Government Fund $1,222 /(2)/ /(2)/
Short Duration Tax-Free Fund $2,322 $1,797 $ 325
Government Income Fund /(3)/ /(3)/ /(3)/
Municipal Income Fund /(4)/ /(4)/ /(4)/
Core Fund $ 422 /(3)/ /(3)/
Global Income Fund /(4)/ /(4)/ /(4)/
</TABLE>
/(1)/ No Service Shares of Adjustable Rate Fund were outstanding at October 31,
1996, 1995 and 1994.
/(2)/ No Service Shares of Short Duration Government Fund were outstanding at
October 31, 1995 and 1994.
/(3)/ No Service Shares of Government Income Fund were outstanding at October
31, 1996, 1995 and 1994.
/(4)/ No Service Shares of Municipal Income Fund were outstanding at October 31,
1996, 1995 and 1994.
/(5)/ No Service Shares of Core Fund were outstanding at October 31, 1995 and
1994.
/(6)/ No Service Shares of Global Income Fund were outstanding at October 31,
1996, 1995 and 1994.
Each Fund has adopted its Plan pursuant to Rule 12b-1 under the 1940 Act in
order to avoid any possibility that payments to the Service Organizations
pursuant to the Service Agreements might violate the 1940 Act. Rule 12b-1,
which was adopted by the SEC under the Act, regulates the circumstances under
which an investment company or series thereof may bear expenses associated with
the distribution of its shares. In particular, such an investment company or
series thereof cannot engage directly or indirectly in financing any activity
which is primarily intended to result in the sale of shares issued by the
company unless it has adopted a plan pursuant to, and complies with the other
requirements of, such Rule. The Trust believes that fees paid for the services
provided in the Plan and described above are not expenses incurred primarily for
effecting the distribution of Service Shares. However, should such payments be
deemed by a court or the SEC to be distribution expenses, such payments would be
duly authorized by the Plan.
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling or
distribution securities, although institutions such as national banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. In addition, under some state securities laws, banks and other
financial institutions purchasing Service Shares on behalf of their customers
may be required to register as dealers. Should future legislative or
administrative action or judicial or administrative decisions or interpretations
prohibit or restrict the activities of one or more of the Service Organizations
in
B-119
<PAGE>
connection with the Funds, such Service Organizations might be required to alter
materially or discontinue the services performed under their Service Agreements.
If one or more of the Service Organizations were restricted from effecting
purchases or sales of Service Shares automatically pursuant to pre-authorized
instructions, for example, effecting such transactions on a manual basis might
affect the size and/or growth of a Fund. Any such alteration or discontinuance
of services could require the Board of Trustees to consider changing a Fund's
method of operations or providing alternative means of offering Service Shares
of a Fund to customers of such Service Organizations, in which case the
operation of such Fund, its size and/or its growth might be significantly
altered. It is not anticipated, however, that any alternation of a Fund's
operations would have any effect on the net asset value per share or result in
financial losses to any shareholder.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in Service Shares of such Fund. Service Organizations, including banks
regulated by the Comptroller of the Currency, the Federal Reserve Board or the
Federal Deposit Insurance Corporation, and investment advisers and other money
managers subject to the jurisdiction of the SEC, the Department of Labor or
state securities regulators, are urged to consult legal advisers before
investing fiduciary assets in Service Shares of the Funds.
The Plans with respect to Adjustable Rate Fund, Short Duration Government
Fund, Short Duration Tax-Free Fund and Core Fund were approved by The Goldman
Sachs Group, L.P., as the sole shareholder of Service Shares of each Fund. The
Trustees, including a majority of the Trustees who are not interested persons of
the Trust and who have no direct or indirect financial interest in the operation
of the Plans or the related Service Agreements, most recently voted to approve
each Fund's Plan and Service Agreements at a meeting called for the purpose of
voting on such Plans and Service Agreements on April 23, 1997, including Global
and High Yield Funds. Each Plan and Service Agreement will remain in effect
until April 30, 1998 and will continue in effect thereafter only if such
continuance is specifically approved annually by a vote of the Board of Trustees
in the manner described above. No Plan may be amended to increase materially
the amount to be spent for the services described therein without approval of
the Service Shareholders of the applicable Fund, and all material amendments of
each Plan must also be approved by the Board of Trustees in the manner described
above. Each Plan may be terminated at any time by a majority of the Board of
Trustees as described above or by vote of a majority of the outstanding Service
Shares of the applicable Fund. The Service Agreements may be terminated at any
time, without payment of any penalty, by vote of a majority of the Board of
Trustees as
B-120
<PAGE>
described above or by a vote of a majority of the outstanding Service Shares of
the applicable Fund on not more than sixty (60) days' written notice to any
other party to the Service Agreements. The Service Agreements will terminate
automatically if assigned. So long as the Plans are in effect, the selection
and nomination of those Trustees who are not interested persons will be
committed to the discretion of the Trust's Nominating Committee, which consists
of all of the non-interested members of the Board of Trustees. The Board of
Trustees has determined that, in its judgment, there is a reasonable likelihood
that a Fund's Plan will benefit such Fund and its holders of Service Shares. In
the Board of Trustees' quarterly review of the Plans and Service Agreements, the
Board will consider their continued appropriateness and the level of
compensation provided therein.
B-121
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders
- -------------------------------------------------------------------------------
Dear Shareholders:
A return of robust economic growth during the period under review fueled
fears of higher inflation, which pushed Treasury yields higher across the
maturity spectrum. In this semiannual report, we will review the performance of
the Goldman Sachs Fixed Income Funds for the six-month period ended April 30,
1997, as well as provide a brief overview of the U.S. economy and the bond
market. We are pleased to note that during the period, the Goldman Sachs Fixed
Income Funds performed well compared with their peers.
Economic Activity Rebounded, Led by Consumer Spending
After a sluggish third quarter, the pace of economic growth strengthened
during the period. During November and December, consumer spending rebounded,
the trade deficit narrowed and industrial production climbed significantly. As a
result, fourth-quarter real Gross Domestic Product (GDP) growth was 3.8%
(annualized), up from 2.1% in the prior quarter.
Economic activity continued to gain momentum during the first quarter of
1997, with real GDP surging 5.8%, the largest jump in a decade. Signs of
strength were led by a sharp increase in consumer spending, which resulted in
solid sales gains for automobile manufacturers and retailers. In addition,
upbeat reports on factory orders and inventories, construction outlays and labor
market conditions all pointed towards economic acceleration. Despite the growth
spurt, reported inflation remained surprisingly mild during the period.
Furthermore, several economic reports for April came in at the low end of
consensus expectations, which suggested that the economy could moderate during
the second quarter.
The Bond Market Rallied, Then Fell as Inflation Fears Reemerged
The U.S. fixed income market came under pressure during the period under
review. In November, bonds performed well in anticipation of a continued
slowdown in U.S. economic growth. However, the market experienced a reversal in
December when better-than-expected economic data, in particular, robust
employment figures, triggered a sell-off and drove interest rates higher. In
early February, bond prices briefly rebounded, but later faltered as it became
increasingly likely that the U.S. Federal Reserve would raise short term
interest rates in March. By the end of March, the yield on the benchmark 30-year
Treasury bond rose above the psychologically important 7% threshold. Despite the
lackluster performance of the U.S. bond market for the period as a whole, a
sharp rebound at the end of April helped bonds recoup part of their earlier
losses.
The Fed Raised the Federal Funds Rate in March
In March 1997, the Fed raised the federal funds rate by 25 basis points to
5.50%. Though there were few signs of actual inflation, the Fed tightening was
prompted by the economy's pervasive strength. The Fed's action was its first
since a quarter-point cut in January 1996.
During the period under review, the yield curve shifted higher across all
maturities. The yield on six-month Treasury bills rose from 5.26% on October 31,
1996 to approximately 5.52% on April 30, 1997. For the same period, the yield on
the 30-year U.S. Treasury bond rose more dramatically, climbing from 6.64% to
6.95%.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Table of Contents
<S> <C>
Market Overview 1
Goldman Sachs Adjustable Rate Government Fund 3
Goldman Sachs Short Duration Government Fund 9
Goldman Sachs Short Duration Tax-Free Fund 14
Goldman Sachs Core Fixed Income Fund 20
Financial Statements 28
Notes to Financial Statements 32
Financial Highlights 39
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
1
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
10/31/96 4/30/97
<S> <C> <C>
3-Month 5.14% 5.23%
6-Month 5.26% 5.52%
1 5.40% 5.89%
2 5.73% 6.27%
3 5.86% 6.40%
5 6.07% 6.57%
10 6.34% 6.71%
15 6.64% 6.95%
</TABLE>
Source: Bloomberg, L.P.
The yield curve shifted upward across all maturities and steepened sharply at
the short end.
Outlook: Strengthening Economic Growth May
Trigger Further Preemptive Rate Hikes
Despite reports of economic moderation and minimal price acceleration, the
economy's broad-based fundamental strength and resilient equity market make
additional Fed rate increases likely this year. Goldman Sachs' economists
believe that the speed and extent of Fed tightening will depend in large part on
the emergence of conclusive signs that the economy is nearing maximum capacity,
rather than immediate evidence of increased inflationary pressures.
In conclusion, we thank you for your support of the Goldman Sachs Fixed
Income Funds and we look forward to continuing our relationship.
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
May 30, 1997
- -------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs 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.
Special Events
As of March 27, 1997, the fund opened a new share class (Service). In
addition, effective May 1, 1997, the name of the GS Adjustable Rate Government
Fund was changed to the Goldman Sachs Adjustable Rate Government Fund. The
fund's objective and investment focus remain the same.
ARM Market Performed Well, Buoyed by Low Volatility and Strong Investor Demand
The ARM market performed well during the period under review, supported by
low volatility and stable prepayments. In addition, investor interest in the
sector increased as opportunities in short-duration alternatives diminished. In
combination, these factors drove ARM spreads approximately 15 basis points
tighter over the period.
Performance Review
During the six-month period ended April 30, the fund's Institutional,
Administration and Class A shares all outperformed the six-month U.S. Treasury
bill and the one-year U.S. Treasury bill. (The fund's duration as of April 30
was 0.7 years, in between that of the six-month and the one-year U.S. Treasury
bill.) The fund's positive performance was due to the tightening of yield
spreads between ARMs and Treasuries, as well as the incremental yield of ARMs
over similar-duration Treasuries.
The fund also performed well compared with its peers. For the 12 months
ended April 30, 1997, the fund's Institutional shares ranked 11th out of 47
adjustable rate mortgage funds based on total return, as tracked by Lipper
Analytical Services, Inc. (Lipper does not rank the fund's Administration,
Service 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.)
We are pleased to announce that for the three- and five-year periods ended
April 30, 1997, the fund's Institutional shares were rated "five stars" (out of
1,193 taxable bond funds) and "four stars" (out of 641 taxable bond funds),
respectively, according to Morningstar, Inc., an independent rating agency. In
addition, as of April 30, Morningstar rated the fund's Administration shares
"five stars" for the one-year period (out of 1,709 taxable bond funds) and "four
stars" (out of 1,193 taxable bond funds) for the three-year period./1/
- ------------------------------------------------
/1/Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-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" for the one-year period and were rated among 1,709 taxable bond funds.
The Morningstar ratings apply only to the fund's Institutional and
Administration shares; the fund's Class A and Service shares have not been
rated. Class A and Service shares are subject to additional fees and expenses
which may have the effect of lowering performance and may affect any future
Morningstar rating. Morningstar rates each fund against its peers in the same
category. In all, there are four Morningstar categories (domestic equity,
international equity, taxable bond and municipal). 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.
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
6-Month 1-Year
Institu- Adminis- Treasury Treasury
tional tration Class A Service* Bill Bill
------ ------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Return 3.28% 3.16% 3.16% 0.74% 2.65% 2.56%
(based on net
asset value)
- --------------------------------------------------------------------------------
Return From 2.97% 2.85% 2.85% 0.20% NA NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From 0.31% 0.31% 0.31% 0.54% NA NA
Price
Appreciation
- --------------------------------------------------------------------------------
NAV (4/30/97) $9.86 $9.86 $9.86 $9.86 NA NA
- --------------------------------------------------------------------------------
NAV Change +$0.03 +$0.03 $0.03 $0.02 NA NA
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period. Performance and net asset value
(NAV) change are from its inception date on 3/27/97.
Portfolio Composition and Investment Strategies
Portfolio composition remained similar compared with six months ago, with
the exception of a slight reduction in collateralized mortgage obligations
(CMOs) and an increase in repurchase agreements/cash equivalents.
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
ARMs 85.8%
SBA Floaters 7.4%
Repos/Cash Equivalents 4.8%
CMOs 2.0%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
.. ARMs. As of April 30, 1997, the fund's primary investment continued to be
in ARMs, which accounted for 85.8% of the portfolio. We emphasized seasoned,
fully indexed one-year Constant Maturity Treasury (CMT) securities that were
issued prior to 1990, which are attractive because of their lower prepayment
risk. (Seasoned issues are less likely to be impacted by prepayments than newly
issued mortgages because homeowners who did not refinance in earlier periods of
lower rates are generally less likely to refinance in the future.)
.. SBA Floaters. The portfolio's position in securities backed by Small
Business Administration (SBA) loans was 7.4%, approximately the same as six
months ago. The sector offered incremental yield over similar-duration
Treasuries and increased fund diversification.
.. CMOs. We reduced the portfolio's CMO allocation to 2.0%, down from 3.5%
last October. Within the sector, the fund's largest holding was a 1.1% position
in super floaters. Because super floaters are generally considered to be higher
risk than conventional floaters, we use them selectively in seeking to enhance
fund performance. The remainder of the CMO position (0.9%) was invested in a
variety of other structures.
.. Duration. We seek excess return over similar-duration U.S. Treasuries
through our sector weightings and specific security selection rather than
attempting to make interest rate predictions. Therefore, we manage the fund's
duration to approximate that of the Index, partly through the use of futures. As
of April 30, the fund's duration was 0.7 years, unchanged from six months ago.
Credit Quality. The fund invests exclusively in securities issued by the U.S.
government, its agencies or instrumentalities, which are considered to be of the
highest credit quality.
Market Outlook
Despite some suggestion of economic moderation, we continue to believe that
interest rates are likely to move higher during the balance of the year. This
expectation is
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
- --------------------------------------------------------------------------------
predicated on the economy's broad-based fundamental strength, as well as the
Fed's well-publicized commitment to monetary discipline.
As of the end of the period, we have a neutral outlook for the ARM sector.
ARMs are currently trading at fair value, reflecting a stable prepayment
outlook. Seasoned one-year CMT ARMs remain attractive as a core holding due to
their prepayment stability in a falling rate environment and reduced cap risk in
a rising rate environment.
Distribution Policy
During the six-month period ended April 30, 1997, the fund's
Institutional, Administration and Class A shares distributed $0.29, $0.28 and
$0.28 per share, respectively. From their inception on March 27 through April
30, the fund's Service shares paid out $0.05 per share.
The fund distributes substantially all of its investment company taxable
income. The dividend is set at the start of each month, based on the income the
fund is expected to generate. However, because the fund invests primarily in
mortgage securities that are subject to prepayments, we cannot precisely predict
the amount of principal and interest that a portfolio will receive. Therefore,
at times a portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy has not affected the management of
the fund or significantly affected its NAV per share.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
Goldman Sachs Adjustable Rate Government Fund
May 30, 1997
- --------------------------------------------------------------------------------
5
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--94.4%
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a)--25.6%
$ 2,499,665 7.41% 07/01/18 $ 2,603,551
1,337,640 7.57 12/01/18 1,390,932
10,052,878 7.45 05/01/19 10,420,411
19,024,919 7.65 11/01/19/(b)/ 19,952,383
4,828,320 7.75 05/01/20 5,061,431
17,560,720 7.50 06/01/20/(b)/ 18,260,339
36,305,075 7.77 02/01/22/(b)/ 38,097,820
6,736,255 7.27 06/01/22 6,940,632
3,743,219 7.48 08/01/22 3,889,430
6,343,944 7.55 09/01/22 6,616,543
5,798,265 7.29 09/01/22 5,961,312
16,426,906 7.65 11/01/22 17,181,558
9,544,724 7.68 06/01/24 10,002,584
3,422,929 7.32 02/01/28 3,543,279
1,677,210 7.68 07/01/30 1,756,089
- -------------------------------------------------------------------------------
$ 151,678,294
- -------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association (FNMA)(a)--53.9%
$ 1,626,928 7.45% 04/01/03 $ 1,648,729
1,063,451 7.81 11/01/14 1,116,453
671,988 7.60 12/01/15 696,771
5,800,505 6.72 03/01/17 5,911,063
3,475,919 7.56 03/01/17 3,625,279
11,078,486 7.04 04/01/17 11,476,093
734,378 7.51 11/01/17 764,216
4,070,446 6.49 03/01/18 4,114,976
755,256 7.67 05/01/18 781,101
1,196,229 7.88 05/01/18 1,250,167
1,291,177 7.32 06/01/18/(c)/ 1,326,271
7,811,611 7.50 06/01/18 8,172,898
4,895,608 7.48 07/01/18 5,117,428
6,964,915 7.61 07/01/18 7,297,907
5,963,754 7.27 08/01/18 6,190,198
3,775,708 7.75 08/01/18 3,964,493
3,424,816 7.60 10/01/18 3,584,275
6,244,935 7.49 11/01/18 6,486,927
1,919,120 7.39 12/01/18 1,992,296
12,663,766 7.67 12/01/18/(b)/ 13,296,954
3,245,589 7.37 06/01/19 3,366,779
4,222,057 7.31 07/01/19 4,376,415
1,572,328 7.40 07/01/19 1,632,768
1,466,614 7.35 08/01/19 1,513,589
4,212,924 7.63 09/01/19 4,404,485
2,660,817 7.31 01/01/20 2,761,848
2,845,244 7.79 03/01/20 2,987,506
8,236,162 7.39 07/01/20 8,548,889
4,385,557 7.67 02/01/21 4,600,713
4,953,699 7.40 04/01/21 5,140,998
69,652,900 7.65 09/01/21/(b)/ 72,928,676
5,721,530 7.10 01/01/22 5,920,639
20,957,781 7.66 02/01/22/(b)/ 21,972,976
13,609,253 7.80 06/01/22 14,266,989
645,000 7.56 08/01/22 661,628
2,036,342 7.73 08/01/22 2,137,202
29,003,668 7.67 09/01/22/(b)/ 30,449,210
1,821,772 7.57 02/01/23 1,868,464
272,046 6.23 12/01/23 268,986
15,812,397 7.56 04/01/25 16,501,660
16,515,667 7.59 09/01/25 17,302,804
3,390,319 7.41 08/01/27 3,523,830
2,373,397 7.43 10/01/27 2,466,102
1,077,506 7.09 07/01/29 1,111,350
- -------------------------------------------------------------------------------
$ 319,529,001
- -------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association (GNMA)(a)--3.9%
$ 1,430,321 7.00% 03/20/16 $ 1,462,732
1,877,843 7.13 08/20/17 1,929,784
975,525 7.13 08/20/18 1,004,186
6,329,270 7.00 02/20/21 6,492,439
3,551,234 6.50 01/20/22 3,624,282
4,539,525 7.13 04/20/22 4,679,978
3,724,927 7.00 03/20/23 3,816,299
- -------------------------------------------------------------------------------
$ 23,009,700
- -------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(a)--7.3%
$ 1,395,750 7.00% 10/25/14 $ 1,435,878
2,310,178 7.00 02/25/15 2,370,450
2,799,672 7.00 04/25/15 2,871,428
1,880,379 7.00 05/25/15 1,928,573
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Adjustable Rate Small Business Administration
(SBA)(continued)
$ 1,022,753 7.00% 08/25/15 $ 1,055,992
1,661,578 7.00 09/25/15 1,709,348
2,041,631 7.00 10/25/15 2,094,591
1,059,044 6.62 09/25/16 1,070,302
4,076,904 6.62 07/25/17 4,121,505
4,036,805 6.62 08/25/17 4,080,967
2,744,035 6.62 08/25/17 2,774,055
1,756,376 6.62 08/25/17 1,775,590
3,752,990 6.62 09/25/17 3,794,048
1,761,608 6.62 10/25/17 1,781,144
1,774,313 6.62 10/25/17 1,793,990
8,582,508 6.62 02/25/18 8,677,688
- -------------------------------------------------------------------------------
$ 43,335,549
- -------------------------------------------------------------------------------
Collateralized Mortgage Obligations--3.7%
Adjustable Rate CMOs/(a)/ --1.8%
FNMA Remic Trust 1990-145, Class A
$ 10,348,000 6.58% 12/25/20 $ 10,437,510
- -------------------------------------------------------------------------------
$ 10,437,510
- -------------------------------------------------------------------------------
Inverse Floater/(a)/--0.0%
FNMA Remic Trust 1991-91, Class S
$ 138,928 8.55% 07/25/98 $ 149,631
- -------------------------------------------------------------------------------
$ 149,631
- -------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only/(a)/--0.0%
FNMA Remic Trust 1992-157, Class SA
$ 1,384,066/(d)/ 55.35% 03/25/04 $ 86,712
- -------------------------------------------------------------------------------
$ 86,712
- -------------------------------------------------------------------------------
Inverse IOette--0.1%
FHLMC Series 1164, Class O
$ 33,045/(d)/ 19.07% 11/15/06 $ 431,596
- -------------------------------------------------------------------------------
$ 431,596
- -------------------------------------------------------------------------------
IOette--0.1%
FNMA Remic Trust 1990-145, Class B
$ 25,428/(d)/ 10.00% 12/25/20 $ 850,208
- -------------------------------------------------------------------------------
$ 850,208
- -------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--0.6%
FHLMC Series 1645, Class B
$ 2,956,606 5.50% 01/15/08 $ 2,730,573
FNMA Remic Trust 1990-65, Class U
185,451 9.50 11/25/06 185,160
FNMA Remic Trust 1991-37, Class E
838,752 8.50 04/25/05 839,801
- -------------------------------------------------------------------------------
$ 3,755,534
- -------------------------------------------------------------------------------
Super Floater CMOs/(a)/ --1.1%
FNMA Remic Trust 1992-157, Class FA
$ 6,813,861 2.16% 03/25/04 $ 6,632,817
- -------------------------------------------------------------------------------
$ 6,632,817
- -------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 22,344,009
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $557,420,929) $ 559,896,552
- -------------------------------------------------------------------------------
Repurchase Agreement--6.2%
Joint Repurchase Agreement Account
$ 36,700,000 5.49% 05/01/97/(b)/ $ 36,700,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $36,700,000) $ 36,700,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $594,120,929)/(e)/ $ 596,596,552
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long (Short)(f) Month Gain (Loss)
- ---------------------------- ---------------- ----------------- -------------
<S> <C> <C> <C>
1-Month Libor 110 May 1997 $(20,500)
1-Month Libor 115 June 1997 21,563
Euro Dollars 325 June 1997 (210,188)
Euro Dollars 285 September 1997 (104,813)
Euro Dollars 145 December 1997 (50,000)
Euro Dollars 10 March 1998 (14,500)
Euro Dollars (20) December 1998 (14,000)
Euro Dollars 10 June 1999 (18,000)
Euro Dollars 20 September 1999 (33,000)
5 Year U.S. Treasury Notes 64 June 1997 (5,781)
10 Year U.S. Treasury Notes (281) June 1997 70,063
------------
$(379,156)
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 3,264,098
Gross unrealized loss for investments in which cost
exceeds value (925,961)
- -------------------------------------------------------------------------------
Net unrealized gain $ 2,338,137
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(b)/ Portions of these securities are being segregated for futures margin
requirements and when-issued securities.
/(c)/ When-issued security.
/(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 $594,258,415.
/(f)/ Each Euro dollar contract represents $1,000,000 in notional par value.
Each 1-month Libor contract represents $3,000,000 in notional par value.
Each 5-Year and 10-year U.S. Treasury Note contract represents $100,000
in notional par value. The total notional amount and market value are
$1,524,500,000 and $281,048,344 respectively. The determination of
notional amounts and market value and 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
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs 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. Secondarily, the fund may, in
seeking current income, also consider the potential for capital appreciation.
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.
Special Events
Effective May 1, 1997, the name of the GS Short Duration Government Fund
was changed to the Goldman Sachs Short Duration Government Fund. In addition, to
accommodate different clients' needs and preferences, the fund added two new
share classes as of May 1: Class A shares, which have a front-end load but no
contingent deferred sales charge (on amounts less than $1 million), and Class B
shares, which are subject to a contingent deferred sales charge but no up-front
sales charge. The fund's investment focus remains the same.
Performance Review
During the six-month period ended April 30, the fund's Institutional,
Administration and Service shares all outperformed their benchmark, the two-year
U.S. Treasury security. Despite a slight decline in net asset value (NAV) due to
the backup in interest rates, the fund's positions in collateralized mortgage
obligations (CMOs) and adjustable rate mortgage (ARM) securities significantly
contributed to performance.
The fund performed very well relative to its peers. For the 12-month period
ended April 30, 1997, the fund's Institutional and Administration shares ranked
third and fifth, respectively, out of 97 short-intermediate U.S. government
funds based on total return, according to Lipper Analytical Services, Inc. In
addition, the fund's Service shares ranked within the top 20% (14th out of 97)
for the same time period. (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, the fund's Institutional shares were rated "four stars"
(out of 641 taxable bond funds) by Morningstar, Inc., an independent rating
agency, for the five years ended April 30./1/
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on net 2.67% 2.55% 2.42%
asset value)
- -------------------------------------------------------------------------------
Return From Monthly 3.39% 3.27% 3.14%
Distributions
- -------------------------------------------------------------------------------
Return From Price -0.72% -0.72% -0.72%
Depreciation
- -------------------------------------------------------------------------------
Total Return of Two-Year 2.09% 2.09% 2.09%
U.S. Treasury
- -------------------------------------------------------------------------------
NAV (4/30/97) $9.76 $9.78 $9.75
- -------------------------------------------------------------------------------
NAV Change -$0.07 -$0.07 -$0.07
- -------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-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 "four
stars" for both the three- and one-year periods and were rated among 1,193 and
1,709 taxable bond funds for the three- and one-year periods, respectively. The
Morningstar ratings apply only to the funds' Institutional shares; the fund's
Administration and Service shares have not been rated. The Administration and
Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates each fund against its peers in the same category. In all,
there are four Morningstar categories (domestic equity, international equity,
taxable bond and municipal). 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.
- -------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
Portfolio Composition and Investment Strategies
The most significant changes in the portfolio's sector composition
during the period were a reduction in U.S. Treasuries in favor of CMOs and a new
position in agency debentures.
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
CMOs 61.8%
ARMS 19.0%
Fixed Rate Mortgage Pass-Throughs 9.7%
Agency Debentures 4.8%
U.S. Treasuries 3.6%
Repos/Cash Equivalents 1.1%
</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.
.. CMOs. CMOs accounted for 61.8% of the portfolio, up from 56.9% six
months ago. The CMO sector performed very well during the period, bolstered by
low volatility and strong investor demand. CMOs were particularly attractive to
investors because they offered substantial yield over similar-duration Treasury
and non-Treasury alternatives. Within the sector, the portfolio's positions
included sequential-pay/support CMOs (24.5%) and planned amortization class
(PAC) CMOs (21.2%). These securities were short duration issues that offered
relatively predictable cash flows.
.. ARMs. As of April 30, the fund's allocation to ARMs was 19.0%, unchanged
from last October. We emphasized seasoned, fully indexed one-year Constant
Maturity Treasury (CMT) securities that were issued prior to 1990, which are
attractive because of their lower prepayment risk. (Seasoned issues are less
likely to be impacted by prepayments than newly issued mortgages because
homeowners who did not refinance in earlier periods of lower rates are generally
less likely to refinance in the future.)
.. Fixed Rate Mortgage Pass-Throughs. The fixed rate mortgage pass-through
sector accounted for 9.7% of the portfolio, up from 7.2% six months ago. We
continued to favor the sector because of its attractive yield enhancement
potential.
.. Agency Debentures. We established a new 4.8% position in agency debentures,
which are bonds issued by agencies of the U.S. government. This sector offered
incremental yield over Treasuries and added to portfolio diversification.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. During the
period, we sold more than three-quarters of the fund's Treasury allocation in
favor of other sectors that offered better relative value. By April 30, the
fund's position in the sector was down to 3.6%, while repurchase agreements/cash
equivalents were 1.1%, unchanged from six months ago.
.. Issuer Composition. The portfolio's mortgage-backed security composition by
issuer was 47.6% in Federal National Mortgage Association (FNMA) issues, 37.0%
in Federal Home Loan Mortgage Corporation (FHLMC) issues and 5.8% in Government
National Mortgage Association (GNMA) issues.
.. Credit Quality. The fund invests exclusively in securities issued by the
U.S. government and its agencies or instrumentalities.
.. Prudent Use of Derivatives. The fund's CMO position included several
securities typically considered to be
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
lower risk derivatives. These included sequential-pay/support CMOs and PAC CMOs
(24.5% and 21.2% of the portfolio, respectively), as noted previously, and a
9.0% allocation in CMO floaters (whose coupons reset upward when interest rates
rise). The fund also held a 2.8% position in super floaters (whose coupons reset
higher than conventional floaters when rates rise), a 2.1% position in inverse
floaters (whose coupons reset in the opposite direction of interest rates), and
small positions in PAC interest-only (IO) and inverse IO securities. We invest
in these higher risk derivatives only when we believe such securities will
enhance returns without incurring undue risk. These positions contributed to the
fund's positive performance along with the other CMO securities. In addition, we
used futures as a tool to help manage the portfolio's duration.
Market Outlook
Our outlook is cautious for CMOs: the sector is now trading at fair spreads
relative to equal-duration Treasuries and does not appear to offer significant
tightening potential. Despite the lack of general value, we continue to look for
issues within the CMO market that offer favorable investment characteristics
that are not fully valued by the market. In the ARM market, seasoned one-year
CMT ARMs remain attractive as a core holding relative to other ARM sectors.
Distribution Policy
During the six-month period under review, the fund's Institutional,
Administration and Service shares paid out distributions of $0.33, $0.32 and
$0.30 per share, respectively. The fund distributes substantially all of its
investment company taxable income, as required by tax law.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Short Duration Government Fund
May 30, 1997
- -------------------------------------------------------------------------------
11
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--90.0%
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a)--13.8%
$ 1,862,421 7.38% 08/01/17/(b)/ $ 1,928,183
1,799,630 7.58 12/01/18/(b)/ 1,871,327
7,952,048 7.77 02/01/22/(b)/ 8,344,720
2,036,342 7.73 08/01/22/(b)/ 2,137,202
- -------------------------------------------------------------------------------
$ 14,281,432
- -------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association (FNMA)(a)--11.6%
$ 306,024 9.00% 12/01/97 $ 307,489
2,894,069 6.50 04/01/03/(b)/ 2,853,696
812,321 6.00 01/01/14 762,436
2,961,367 6.00 03/01/14/(b)/ 2,771,662
2,552,281 7.81 11/01/14/(b)/ 2,679,487
2,569,866 7.58 08/01/22 2,636,117
- -------------------------------------------------------------------------------
$ 12,010,887
- -------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (FNMA)--3.2%
$ 504,862 6.00% 10/01/08 $ 484,981
1,032,431 6.00 06/01/09 991,774
1,949,537 6.00 10/01/09/(b)/ 1,878,671
- -------------------------------------------------------------------------------
$ 3,355,426
- -------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--61.4%
Inverse Floater(a)--3.0%
FHLMC Series 1296, Class J
$ 890,613 12.15% 07/15/99 $ 954,683
FHLMC Series 1325, Class C
944,285 6.83 07/15/97 943,086
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 9.27 05/25/99 1,217,824
- -------------------------------------------------------------------------------
$ 3,115,593
- -------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.2%
FHLMC Series 1684, Class JD
$ 2,524,793/(c)/ 3.72% 08/15/20 $ 170,222
FNMA Remic Trust 1993-110, Class SC
2,010,905/(c)/ 3.52 04/25/19 74,564
- -------------------------------------------------------------------------------
$ 244,786
- -------------------------------------------------------------------------------
Planned Amortization - Accrual Bond--1.2%
FHLMC Series 1560, Class X
$ 1,245,394 6.00% 11/15/16 $ 1,234,885
- -------------------------------------------------------------------------------
Planned Amortization Class (PAC) CMOs--21.9%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,937,180
FHLMC Series 1684, Class F
5,000,000 5.75 08/15/20/(b)/ 4,756,650
FNMA Remic Trust 1992-138, Class C
2,375,000 6.00 12/25/18/(b)/ 2,351,986
FNMA Remic Trust, Series 1997-9, Class B
4,000,000 6.50 10/25/22/(b)/ 3,850,040
FNMA Series 1991-31, Class PJ
3,000,000 6.55 10/25/20 2,920,290
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09/(b)/ 5,982,420
- -------------------------------------------------------------------------------
$ 22,798,566
- -------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--1.3%
FHLMC Series 1552, Class JE
$ 7,308,380/(c)/ 7.00% 02/15/14 $ 313,822
FHLMC Series 1587, Class HA
9,090,222/(c)/ 6.50 10/15/08 1,032,104
- -------------------------------------------------------------------------------
$ 1,345,926
- -------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.4%
FNMA Remic Trust 1992-198, Class K
$ 34,647/(c)/ 12.81% 12/25/15 $ 370,318
- -------------------------------------------------------------------------------
Regular Floater CMOs(a)--8.8%
FHLMC Series 1296, Class I
$ 2,493,715 5.16% 07/15/97/(b)/ $ 2,462,544
FHLMC Series 1325, Class B
2,219,071 6.38 07/15/97/(b)/ 2,219,759
FHLMC Series 1684, Class JC
2,524,793 5.28 08/15/20/(b)/ 2,472,706
FNMA Remic Trust 1993-110, Class FC
2,010,905 5.48 04/25/19/(b)/ 1,987,639
- -------------------------------------------------------------------------------
$ 9,142,648
- -------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--24.6%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,046,860
FHLMC Series 1645, Class B
4,927,677 5.50 01/15/08/(b)/ 4,550,956
FNMA Remic Trust 1988-12, Class A
3,743,398 10.00 02/25/18/(b)/ 3,973,692
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
FNMA Remic Trust 1988-12, Class B
$ 2,955,314 4.74% 02/25/18/(b)/ $ 2,840,796
FNMA Remic Trust 1989-12, Class X
1,588,415 10.00 12/25/14 1,642,024
FNMA Remic Trust 1989-18, Class B
1,051,388 9.50 01/25/04 1,081,279
FNMA Remic Trust 1989-59, Class H
3,840,291 7.75 10/25/18/(b)/ 3,882,265
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,351,960
FNMA Series 1989-34, Class E
2,113,584 9.85 08/25/14/(b)/ 2,176,992
- -------------------------------------------------------------------------------
$ 25,546,824
- -------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 63,799,546
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $93,441,725) $ 93,447,292
- -------------------------------------------------------------------------------
Agency Debentures--4.7%
Sri Lanka Aid/(a)/
$ 5,000,000 6.06% 02/21/16/(b)/ $ 4,928,150
- -------------------------------------------------------------------------------
Total Agency Debentures
(Cost $4,925,000) $ 4,928,150
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--3.6%
United States Treasury Notes
$ 3,800,000 5.63% 11/30/00/(b)/ $ 3,696,678
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $3,672,738) $ 3,696,678
- -------------------------------------------------------------------------------
Repurchase Agreement--0.6%
Joint Repurchase Agreement Account
$ 600,000 5.49% 05/01/97/(b)/ $ 600,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $600,000) $ 600,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $102,639,463)/(d)/ $ 102,672,119
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts
Long Unrealized
Type (Short)/(e)/ Settlement Month Gain (Loss)
- ----------------------------- --------------- ----------------- ---------------
<S> <C> <C> <C>
1-Month Libor 14 June 1997 $2,625
1-Month Libor 15 May 1997 (4,125)
Euro Dollars 56 June 1997 (12,525)
Euro Dollars 53 September 1997 30,525
Euro Dollars 55 December 1997 21,750
Euro Dollars 45 March 1998 (23,125)
Euro Dollars 40 June 1998 (35,500)
Euro Dollars 35 September 1998 (15,250)
5 Year U.S. Treasury Notes (71) June 1997 (1,109)
2 Year U.S. Treasury Notes 71 June 1997 (53,250)
10 Year U.S. Treasury Notes (131) June 1997 101,500
U.S. Long Term Bond (4) June 1997 11,843
---------------
$23,359
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value exceeds
cost $ 554,824
Gross unrealized loss for investments in which cost exceeds
value (522,168)
- -------------------------------------------------------------------------------
Net unrealized gain $ 32,656
- -------------------------------------------------------------------------------
</TABLE>
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(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 amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/ Each Euro Dollar contract represents $1,000,000 in notional par value.
Each 1-Month Libor contract represents $3,000,000 in notional par value.
Each 2-Year U.S. Treasury Note contract represents $200,000 in notional
par value. Each 5-Year and 10-Year U.S. Treasury Note and each U.S. Long
Term Bond contract represents $100,000 in notional par value. The total
notional amount and market value are $405,800,000 and $109,850,675,
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.
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs 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 investment-grade
municipal securities. 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.
Special Event
The fund's name was changed to Goldman Sachs Short Duration Tax-Free Fund
from GS Short Duration Tax-Free Fund on May 1, 1997. In addition, Class A and
Class B shares have been added to the existing Institutional, Administration and
Service shares. The fund's focus and investment objective remain the same.
A Strong, Stable Municipal Bond Market
The municipal market has remained at relatively rich levels compared with
the taxable market since the end of 1996, as light primary and secondary supply
has been consumed easily by stable demand. The average price of a three-year
municipal bond (as calculated from data provided by Municipal Market Data, an
independent municipal market information provider) declined approximately 1.25%,
while yields rose from 4.15% on October 31, 1996 to 4.60% on April 30, 1997.
Supply increased throughout most of the period, though it remained light
compared with historical averages. In November, municipal bond issuance was up
30% versus the prior three-month average. As is typical, increased supply
continued in early December due to the approaching year-end. The 1997 new issue
supply has followed historical early-month patterns, with January and February
supply well below annual averages (slightly more than $10 billion each month)
and March and April supply closer to normal levels ($13 to $14 billion).
Demand from individual investors (who control approximately two-thirds of
municipal bond ownership either through mutual funds or direct investment)
remained stable, but not strong, as long-term municipal yields were below the
psychologically significant 6% level. While yields have not yet cracked that
barrier, President Clinton's reelection and the loss of Republican momentum have
put talk of tax reform and talk of significant changes in the tax-exempt status
of municipal bonds on the back burner, comforting some of the investors
concerned about the market. In addition, the emergence of "nontraditional"
buyers during April has helped support the long end of the market.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
4/30/97 10/31/96
<S> <C> <C>
1998 3.85% 3.90%
1999 4.40% 4.15%
2000 4.60% 4.30%
2001 4.70% 4.40%
2002 4.80% 4.50%
2003 4.85% 4.60%
2004 4.90% 4.70%
2005 4.95% 4.80%
2006 5.00% 4.90%
2007 5.05% 5.00%
2008 5.10% 5.10%
2009 5.20% 5.20%
2010 5.30% 5.25%
2011 5.35% 5.30%
2012 5.40% 5.35%
2013 5.45% 5.40%
2014 5.50% 5.40%
2015 5.50% 5.45%
2016 5.55% 5.45%
2017 5.55% 5.45%
2018 5.55% 5.50%
2019 5.55% 5.50%
2020 5.60% 5.50%
2021 5.60% 5.50%
2022 5.60% 5.50%
2023 5.60% 5.50%
2024 5.60% 5.50%
2025 5.60% 5.50%
2026 5.60% 5.50%
2027 5.60% 5.50%
</TABLE>
The yield curve steepened and shifted upward at the short end, remained nearly
the same in the mid-range, and shifted marginally upward at the longer end, in
contrast to six months ago.
Performance Review
The performance of the fund's Institutional shares exceeded the benchmark,
the Lehman Brothers Three-Year Municipal Bond Index (the "Index"), for the
six-month period ended April 30, 1997. The Administration and Service shares
also performed well, but lagged the benchmark.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on 1.91% 1.79% 1.56%
net asset value)
- -------------------------------------------------------------------------------
Return From 2.11% 1.99% 1.86%
Monthly Distributions
- -------------------------------------------------------------------------------
Return From Price -0.20% -0.20% - 0.30%
Depreciation
- -------------------------------------------------------------------------------
Lehman Brothers 3-Year 1.83% 1.83% 1.83%
Municipal Bond Index
- -------------------------------------------------------------------------------
NAV (as of 4/30/97) $9.94 $9.94 $9.94
- -------------------------------------------------------------------------------
NAV Change -$0.02 -$0.02 -$0.03
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
14
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
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. One
example of this is our purchase of an A-rated hospital bond that our credit
analysis indicated would likely be defeased with the purchase of Treasury
securities placed in an escrow account, thereby significantly enhancing the
credit quality of the security. Our analysis proved correct and the fund
benefited from the appreciation associated with the higher quality.
We are pleased to report that the fund's Institutional shares ranked third
out of 28 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the one-year period ended April 30, 1997 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 April
30, 1997, the fund's Institutional and Administration shares were awarded a
"four-star" rating for the three-year period (out of 1,257 municipal bond funds)
by Morningstar, Inc. For the one-year period, the Institutional shares received
a "five-star" rating (out of 1,746 municipal bond funds)./1/
Portfolio Composition and Investment Strategies:
Emphasis on Revenue Bonds
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Revenue Bonds 56.1%
Insured Revenue Bonds 28.1%
Pre-Refunded Bonds 7.8%
Insured General Obligations 6.8%
Variable Rate Demand Notes 1.3%
</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) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. For the one-year period, the Administration
shares received four stars and were rated among 1,746 municipal bond funds. Ten
percent of the funds receive the five-star rating. The Morningstar rating
applies only to the fund's Institutional and Administration shares; the fund's
Service shares have not been rated. 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 four Morningstar categories (domestic equity,
international equity, taxable bond and municipal bond). 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.
- -------------------------------------------------------------------------------
15
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- -------------------------------------------------------------------------------
.. Revenue Bonds. As of April 30, the portfolio's combined position in insured
and uninsured revenue bonds was significantly overweighted compared with the
Index, 84.2% versus 31.7%. We increased the portfolio's total revenue bond
allocation from 79.7% six months 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.)
.. Pre-refunded Bonds. Over the course of the year, we re-established the
fund's holdings in pre-refunded bonds to 7.8% from zero. The Index weighting of
pre-refunded bonds was 18.0%.
.. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 6.8% of the
portfolio, down from 15.6% six months ago. The allocation as of April 30 was
significantly underweighted versus the Index's 50.2%. 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 use to manage the portfolio's excess liquidity. VRDNs represented 1.3%
of the fund, down from 4.7% six months ago.
.. Duration. As of April 30, the fund's duration was effectively in line with
that of the Index at 2.7 years.
.. Credit Quality. During the year, the fund's credit quality allocations
shifted. We continued the trend from the last reporting period by reducing the
portfolio's allocation in triple-A-rated GOs, shifting in favor of
double-A-rated revenue bonds. This 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 quality securities in the one- to three-year
maturity range. As of April 30, 42.7% of the portfolio was invested in
triple-A-rated bonds, while double-A- and single-A-rated securities accounted
for 30.2% and 27.1%, respectively.
Market Outlook
Our long-term outlook for municipal bond supply is essentially neutral, as
rates are at high levels compared with one year ago. As a result, the current
rate environment encourages neither supply (low rates bring refinancing) nor
demand (high rates attract buyers). At this point, the municipal market does not
perceive any real threats from the federal budget accord. Without any
fundamental problems in view for tax-exempts, we are left with technical forces
as the key driver in relative market performance.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
six-month period ended April 30, 1997, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.21,
$0.20 and $0.19 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- -------------------------------------------------------------------------------
16
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- -------------------------------------------------------------------------------
We value your continued confidence in the Goldman Sachs 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
Goldman Sachs Short Duration Tax-Free Fund
May 30, 1997
- -------------------------------------------------------------------------------
17
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--99.7%
Alabama--2.6%
Selma, AL IDB for International Paper Co. PCRB (A-/A3)
$ 1,000,000 4.15% 07/15/08 $ 1,000,000
- -------------------------------------------------------------------------------
Arizona--2.8%
Mesa, Arizona IDA Health Care Facilities (AAA/Aaa)
$ 1,000,000 7.50% 01/01/04 $ 1,055,940
- -------------------------------------------------------------------------------
Arkansas--3.5%
West Memphis, AK Public Utility System RB (MBIA) (AAA/Aaa)
$ 1,310,000 5.25% 12/01/00 $ 1,333,816
- -------------------------------------------------------------------------------
Connecticut--6.6%
Connecticut State Housing Mortgage Revenue Town Colony Project (NR/Aa3)
$ 1,000,000 5.00% 04/01/08 $ 1,000,260
Connecticut State Residential Recovery Authority, Series A RB (AA-/NR)
1,500,000 5.60 11/15/99 1,542,945
- -------------------------------------------------------------------------------
$ 2,543,205
- -------------------------------------------------------------------------------
District of Columbia--2.7%
DC Ref Series A (Big 1) Tcc (AAA/Aaa)
$ 1,000,000 7.70% 06/01/98 $ 1,032,600
- -------------------------------------------------------------------------------
Georgia--5.1%
Burke County, GA Development Authority Oglethorpe Power Corp. (A/A3)/(a)/
$ 2,000,000 4.35% 01/01/01 $ 1,961,500
- -------------------------------------------------------------------------------
Illinois--9.4%
Chicago, IL GO (MBIA) (AAA/Aaa)
$ 1,500,000 5.40% 10/31/00 $ 1,533,405
Illinois Health Facilities Authority Highland Park Hospital, Series A
(AAA/Aaa)
1,000,000 5.20 10/01/01 1,003,770
Illinois Housing Development Authority, Series 1991 A (A+/A1)
1,000,000 7.90 07/01/99 1,057,620
- -------------------------------------------------------------------------------
$ 3,594,795
- -------------------------------------------------------------------------------
Louisiana--2.7%
Louisiana Offshore Deepwater Port Authority Term B RB (A/Baa1)
$ 1,000,000 5.85% 09/01/00 $ 1,030,880
- -------------------------------------------------------------------------------
Maryland--4.2%
Maryland State Health and Higher Educational Facilities Authority
GO(A-/NR)/(c)/
$ 1,600,000 5.50% 01/01/02 $ 1,600,000
- -------------------------------------------------------------------------------
Michigan--3.6%
Wayne Charter County, MI Airport (AAA/Aaa)
$ 1,250,000 6.75% 12/01/19 $ 1,371,775
- -------------------------------------------------------------------------------
Missouri--7.1%
Kansas City Municipal Assistance Corp. (AAA/Aaa)
$ 1,000,000 5.88% 10/15/00 $ 1,036,930
St. Louis, MO Municipal Finance Corp., Series A (A/Aa3)
1,655,000 5.30 07/15/02 1,677,740
- -------------------------------------------------------------------------------
$ 2,714,670
- -------------------------------------------------------------------------------
New York--11.8%
Clifton Park, NY Water Authority System, Series A (AAA/Aaa)
$ 1,500,000 6.38% 10/01/11 $ 1,630,695
New York City Municipal Assistance Corp., Series 62 (AA-/Aa2)
1,500,000 5.50 07/01/08 1,503,885
Syracuse, NY IDA RB (AA/NR)
1,365,000 4.60 10/15/98 1,371,020
- -------------------------------------------------------------------------------
$ 4,505,600
- -------------------------------------------------------------------------------
Oklahoma--5.3%
Southern Oklahoma Memorial Hospital RB (A/A)/(a)/
$ 2,000,000 5.60% 02/01/00 $ 2,048,159
- -------------------------------------------------------------------------------
Pennsylvania--8.9%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB (FGIC)
(AAA/Aaa)
$ 1,500,000 5.75% 06/15/00 $ 1,545,870
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,859,850
- -------------------------------------------------------------------------------
$ 3,405,720
- -------------------------------------------------------------------------------
Tennessee--3.9%
Clarksville, TN Public Building Authority (AA/NR)
$ 1,500,000 4.75% 12/01/00 $ 1,499,940
- -------------------------------------------------------------------------------
Texas--3.9%
Memorial Villages, TX Water Authority (NR/Aa)
$ 1,435,000 7.00% 09/01/00 $ 1,497,968
- -------------------------------------------------------------------------------
Virginia--4.7%
Petersburg, VA Hospital Authority RB GO (NR/A)
$ 1,760,000 5.50% 07/01/99 $ 1,795,658
- -------------------------------------------------------------------------------
Washington--4.2%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$ 1,500,000 7.20% 07/01/02 $ 1,608,840
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Wisconsin--2.6%
Oshkosh, WI Water Rev., Series C (NR/MIG1)/(b)/
$ 1,000,000 4.88% 01/01/00 $ 998,090
- --------------------------------------------------------------------------------
Wyoming--4.1%
Uinta County, WY School District Series A (FSA) (AAA/Aaa)
$ 1,500,000 6.88% 06/01/00 $ 1,593,570
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $38,115,334) $ 38,192,726
- --------------------------------------------------------------------------------
Short-Term Obligations--3.9%
New York City Municipal Water Finance Authority, Series A (A-1+/VMIG1)
$ 1,300,000 4.25% 05/01/97 $ 1,300,000
- --------------------------------------------------------------------------------
Wisconsin State Health Facilities Authority (A-1+/VMIG1)
200,000 4.50 05/01/97 200,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,500,000) $ 1,500,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $39,615,334)/(d)/ $ 39,692,726
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 140,632
Gross unrealized loss for investments in which cost
exceeds value (63,240)
- --------------------------------------------------------------------------------
Net unrealized gain $ 77,392
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Investment Abbreviations:
<S> <C>
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 Board
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
/(a)/ Portions of these securities are being segregated for when-issued
securities.
/(b)/ 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.
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.
19
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs 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.
Special Events
Effective May 1, 1997, the name of the GS Core Fixed Income Fund was
changed to the Goldman Sachs Core Fixed Income Fund. In addition, to accommodate
different clients' needs and preferences, the fund added two new share classes
as of May 1: Class A shares, which have a front-end load but no contingent
deferred sales charge (on amounts less than $1 million), and Class B shares,
which are subject to a contingent deferred sales charge but no up-front sales
charge. The fund's objective and investment focus remain the same.
Performance Review
We are pleased to report that the fund's Institutional and Administration
shares outperformed the Index during the period under review. The fund's
positive performance was primarily due to its overweighting in non-Treasury
sectors compared with the Index. Specifically, mortgage-backed securities and
corporate bonds were the most significant contributors to performance, and
asset-backed securities and emerging market debt also performed very well. The
fund's Service shares achieved positive results, but slightly lagged the
benchmark.
The fund performed well compared with its peers. For the three-year period
ended April 30, 1997, the fund's Institutional shares were rated "four stars"
(out of 1,193 taxable bond funds) by Morningstar, Inc., an independent rating
agency./1/
During the period, the net asset value (NAV) of the fund's Institutional,
Administration and Service shares each fell $0.14 due to rising interest rates.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on 1.87% 1.75% 1.63%
net asset value)
- --------------------------------------------------------------------------------
Return From Monthly 3.30% 3.18% 3.06%
Distributions
- --------------------------------------------------------------------------------
Return From Price -1.43% -1.43% -1.43%
Depreciation
- --------------------------------------------------------------------------------
Total Return of Lehman 1.70% 1.70% 1.70%
Brothers Aggregate
Bond Index
- --------------------------------------------------------------------------------
NAV (as of 4/30/97) $9.71 $9.70 $9.72
- --------------------------------------------------------------------------------
NAV Change -$0.14 -$0.14 -$0.14
- --------------------------------------------------------------------------------
</TABLE>
- -----------------------------------------
/1/Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-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 "four
stars" for the one-year period and were rated among 1,709 taxable bond funds.
The Morningstar ratings apply only to the fund's Institutional shares; the
fund's Administration and Service shares have not been rated. The Administration
and Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates each fund against its peers in the same category. In all,
there are four Morningstar categories (domestic equity, international equity,
taxable bond and municipal). 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.
- -------------------------------------------------------------------------------
20
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
Portfolio Composition and Investment Strategies
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Corporate Bonds 26.7%
Fixed Rate Mortgage Pass-Throughs 20.5%
U.S. Treasuries 17.1%
ABSs 13.2%
CMOs 13.2%
Emerging Market Debt 4.7%
Repos/Cash Equivalents 2.3%
Other Foreign Debt 2.3%
</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.
.. Corporate Bonds. Corporate bonds were the largest allocation at 26.7% of the
portfolio, overweighted compared with the Index (18.0%). The sector performed
well during the period as the healthy economy caused spreads to tighten across
subsectors. The fund's best performers were industrials, which included selected
cable issues that benefited from positive earnings trends (e.g., Time Warner,
Inc. and Tele-Communications, Inc.), as well as specific finance issues that
fared well due to continuing industry consolidation. We underweighted utilities
due to the regulatory and competitive pressures affecting that industry.
Fixed Rate Mortgage Pass-Throughs. The fund was underweighted in fixed rate
mortgage pass-throughs relative to the Index, 20.5% versus 29.9%. During the
period, the sector was supported by a combination of favorable trends, including
low volatility, range-bound interest rates, tight yield spreads on alternative
sectors, and light issuance of corporate and asset-backed securities (ABS).
After the sector rallied and became more fully priced, we trimmed the fund's
allocation in favor of securities that offered greater relative value.
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 liquid assets equal to the dollar amount of the forward
commitment in a segregated account with the fund's custodian.
.. U.S. Treasuries. We significantly underweighted U.S. Treasuries relative to
the Index, 17.1% compared with 44.5%, to emphasize sectors that offered greater
return potential.
.. Asset-Backed Securities. As of April 30, the fund's ABS position was 13.2%,
approximately the same weighting as six months ago. Though negative credit
events among selected credit card and sub-prime auto lenders raised investor
uncertainty during the period, investor interest remained broad-based, ratings
held firm and, relative to similarly rated spread products, ABSs continued to
offer attractive yield enhancement opportunities.
.. CMOs. The fund's collateralized mortgage obligation (CMO) holdings performed
very well and significantly contributed to the fund's performance. During the
period, CMOs enjoyed strong demand from yield-seeking investors who found the
sector particularly compelling relative to other high-quality alternatives. As
of the end of the period, CMOs were a 13.2% allocation, up from 9.8% last
October. This increase was primarily in sequential-pay/support CMOs, which
accounted for 8.8% of the portfolio, while the balance was invested in planned
- -------------------------------------------------------------------------------
21
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
amortization class (PAC) CMOs (3.3%) and floaters (1.1%). Sequential-pay/support
CMOs, PAC CMOs and floaters are typically considered to be lower risk derivative
securities.
.. Emerging Market Debt. As of April 30, 4.7% of the portfolio was invested in
emerging market debt. Our strategy in the sector is to control exposure by
stressing high-credit-quality, short-duration bonds. We continued to emphasize
Latin American issuers because structural and economic reforms in this region
are helping improve credit fundamentals. During the period, the fund held bonds
from Chile, Colombia, Mexico and the Andean region development bank, as well as
Indonesia. The sector also benefited from substantial global liquidity, which
has helped support the credit-sensitive areas of the lower grade bond markets.
.. Other Foreign Debt. During the period, we initiated a 2.3% position in a
10-year, fully hedged Australian government bond that offered attractive
incremental yield over U.S. Treasuries, as well as potential price appreciation
should Australian interest rates decline as we expect.
.. Agency Debentures. We sold the fund's allocation to agency debentures (1.5%
as of October 31, 1996) because their risk/reward profile indicated that we were
not being adequately compensated for holding the position.
.. Duration. As always, we seek to add incremental return over the Index
through sector weighting and individual security selection rather than
attempting to predict the direction of interest rates. Therefore, we manage the
fund's duration to approximate that of the Index, partly through the use of
financial futures. As of April 30, the fund's duration was in line with the
Index at 4.6 years.
.. Credit Quality. As of April 30, 39.7% of the portfolio was invested in
government and agency securities, 21.3% was invested in triple-A-rated
securities, 3.4% was invested in double-A-rated securities and 12.6% was
invested in single-A-rated securities. Triple-B-rated securities (20.7%) and
repurchase agreements/cash equivalents (2.3%) make up the remainder of the
portfolio.
Market Outlook
Though indications of economic moderation emerged in April, the economy's
fundamental strength remains intact, which leads us to believe that interest
rates will move higher during the balance of the year.
In terms of specific fixed income sectors, we have a neutral view of the
corporate market. While we anticipate no near-term deterioration in the
fundamental state of the economy, we are concerned that a series of Fed
tightenings may cause spreads to widen slightly in the near term. In the
mortgage-backed security market, spreads relative to Treasuries have remained
impressively resilient. Nonetheless, mortgage technicals may come under pressure
due to a potential increase in supply as the housing market accelerates during
the summer. We expect the portfolio's allocation to the ABS market to remain
stable in the near future, as it has become more challenging to identify
unrecognized value within the sector, particularly among the higher quality
issues that we tend to emphasize. Finally, we are optimistic regarding the
performance prospects of the emerging market debt sector, as credit trends
continue to improve and global liquidity remains plentiful. In the near future,
Latin America is likely to remain the fund's geographic focus; however, we will
actively seek attractive investment opportunities in other regions to increase
fund diversification.
- -------------------------------------------------------------------------------
22
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
Distribution Policy
During the six-month period under review, the fund's Institutional,
Administration and Service shares distributed $0.32, $0.31 and $0.30 per share,
respectively. Dividends are declared daily and paid on a monthly basis. As
required by tax law, the fund distributes substantially all of its investment
company taxable income.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Mark A. Van Wyk
Mark A. Van Wyk
Portfolio Managers
Goldman Sachs Core Fixed Income Fund
May 30, 1997
- -------------------------------------------------------------------------------
23
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds--25.4%
Finance Bonds--9.8%
BankAmerica Corp.
$ 200,000 6.03% 05/17/99 /(a)/ $ 205,042
300,000 7.75 07/15/02 305,466
Capital One Bank
600,000 6.66 02/03/00 593,580
400,000 6.88 04/24/00 399,284
800,000 6.58 04/17/01 780,976
500,000 6.60 08/20/01 487,010
Conseco Finance
170,000 8.70 11/15/26 169,252
Conseco Inc.
340,000 10.50 12/15/04 394,101
Continental Bank N.A.
525,000 11.25 07/01/01 551,565
Countrywide Funding Corp.
125,000 6.08 07/14/99 123,531
250,000 8.43 11/16/99 259,772
250,000 7.75 08/10/01 257,025
375,000 8.00 12/15/26 354,994
First U.S.A. Bank
160,000 6.13 10/30/97 159,872
Meditrust, Inc.
390,000 7.82 09/10/26 400,082
Mic Finance Trust
360,000 8.38 02/01/27 353,495
Phoenix RE Capital Trust
165,000 8.85 02/01/27 164,594
Security Pacific Corp.
995,000 11.50 11/15/00 /(a)/ 1,133,693
Signet Banking Corp.
240,000 9.63 06/01/99 252,629
Taubman Realty Group
480,000 8.00 07/30/01 489,811
Washington Real Estate Investment Trust
120,000 7.13 08/13/03 118,458
- -------------------------------------------------------------------------------
$ 7,954,232
- -------------------------------------------------------------------------------
Industrial Bonds--14.4%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 515,949
Continental Airlines, Inc.
339,989 7.75% 07/02/14 348,451
553,994 8.56 07/02/14 590,857
Edison Mission Energy Funding Corp.
170,564 6.77 09/15/03 168,785
Ford Capital Corp.
300,000 9.50 07/01/01 326,253
Ford Motor Corp.
300,000 7.00 09/25/01 300,474
General Motors Acceptance Corp.
275,000 7.63 03/09/98 277,989
200,000 7.13 05/10/00 201,840
375,000 9.63 12/15/01 412,492
H + T Master Trust
550,000 8.18 08/15/02 550,000
Harrahs Operations, Inc.
300,000 8.75 03/15/00 301,500
Hertz Corp.
400,000 7.00 07/15/03 391,260
Mitchell Energy and Dev. Corp.
310,000 9.25 01/15/02 328,758
Northwest Airlines Corp.
163,540 8.26 03/10/06 170,804
567,358 8.97 01/02/15 588,117
NWCG Holding Crp
680,000 7.05 06/15/99 586,786
Panamerican Beverage Co.
130,000 8.13 04/01/03 133,416
RJR Nabisco Inc.
175,000 8.00 07/15/01 172,440
550,000 8.63 12/01/02 548,218
Tele-Communications, Inc.
100,000 7.13 02/02/98 100,396
300,000 8.25 01/15/03 304,011
1,135,000 6.27 09/15/03 1,132,912
50,000 6.82 09/15/10 49,846
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,690,128
350,000 9.63 05/01/02 384,776
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds(continued)
Industrial Bonds(continued)
Time Warner, Inc. (continued)
$ 400,000 7.98% 08/15/04 $ 406,440
U.S. Air Inc.
553,242 6.76 04/15/08 528,761
USI American Holdings Corp.
150,000 7.25 12/01/06 145,070
- -------------------------------------------------------------------------------
$ 11,656,729
- -------------------------------------------------------------------------------
Utility Bonds--1.1%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 326,215
Salton Sea Funding
580,000 7.02 05/30/00 580,922
- -------------------------------------------------------------------------------
$ 907,137
- -------------------------------------------------------------------------------
Total Corporate Bonds
(Cost $20,576,762) $ 20,518,098
- -------------------------------------------------------------------------------
Asset-Backed Securities--14.1%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 /(a)/ $ 157,232
Asset Securitization Corp., Series 1996, Class A1
600,000 6.88 11/13/26 /(a)/ 591,398
Asset Securitization Corp., Series 4, Class A
900,000 7.49 04/14/27 914,800
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
177,654 5.80 06/15/02 176,876
Discover Card Master Trust 1996-4, Class A
1,910,000 6.06 10/16/13 /(a)/ 1,942,222
Discover Card Master Trust 1996-4, Class B
1,100,000 6.24 10/16/13 1,108,250
DVI Equipment Lease Trust Series 1996-1, Class A
1,011,139 6.55 07/10/04 1,006,286
General Motors Acceptance Corp. Series 1995, Class A
69,659 7.15 03/15/00 70,203
Navistar Financial Trust, Series 1995-A, Class A2
214,878 6.55 11/20/01 215,549
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
245,032 6.85 06/15/01 247,048
Premier Auto Trust Series 1995-1, Class A4
123,449 7.85 09/04/98 123,680
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 80,625
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20% 02/16/06 667,250
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 565,983
Sears Credit Account Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 302,718
Standard Credit Card Master Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 714,422
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,120,694
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 910,683
World Financial Tower B Series 1996, Class B
498,093 6.91 09/01/13 483,679
- -------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $11,543,903) $ 11,399,598
- -------------------------------------------------------------------------------
Emerging Market Debt--4.4%
Bancoldex
$ 60,000 8.63% 06/02/00 $ 61,372
BCO De Colombia
110,000 8.63 06/02/00 112,516
Bridas Corp.
110,000 12.50 11/15/99 118,581
Empresa Col Petroleos
900,000 7.25 07/08/98 903,438
Financiera Energy Nacional
50,000 9.38 06/15/06 50,504
90,000 9.38 06/15/06 94,271
Instituto de Fomento Industrial
140,000 8.38 07/29/01 141,558
130,000 8.38 07/29/01 131,447
Republic of Colombia
30,000 7.13 05/11/98 30,139
Republic of Croatia
210,000 7.00 02/27/02 204,091
Sampoerna International
120,000 8.38 06/15/06 120,164
United Mexican States
180,000 7.56 08/06/01 181,940
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Emerging Market Debt(continued)
United Mexican States (continued)
$ 650,000 7.62% 08/06/01 $ 657,007
YPF Sociedad Anonima
633,003 7.50 10/26/02 637,687
118,531 7.00 10/26/02 118,835
- -------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $3,558,558) $ 3,563,550
- -------------------------------------------------------------------------------
Government Bonds--3.0%
Australia Commonwealth
AUD 2,400,000 7.50% 07/15/05 $ 1,845,509
Province of Quebec
$ 520,000 13.25 09/15/14 611,666
- -------------------------------------------------------------------------------
Total Government Bonds
(Cost $2,524,905) $ 2,457,175
- -------------------------------------------------------------------------------
Mortgage Backed Obligations--31.9%
Bear Stearns Mortgage Securities, Inc.
$ 2,045,784 6.50% 03/28/09/(a)/ $ 1,883,062
Federal Home Loan Mortgage Corp. (FHLMC)
1,000,000 7.00 TBA-15 Yr./(b)/ 990,938
1,245,394 6.00 11/15/16 1,234,885
1,000,000 6.35 03/25/18 976,870
Federal National Mortgage Association (FNMA)
1,000,000 6.50 TBA-7 Yr./(b)/ 981,560
1,000,000 7.00 TBA-30 Yr./(b)/ 968,750
4,500,000 7.50 TBA-30 Yr./(b)/ 4,466,250
500,000 6.25 07/25/18 486,875
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24/(a)/ 1,771,240
Government National Mortgage Association (GNMA)
3,000,000 7.50 TBA-30 Yr./(b)/ 2,973,750
3,000,000 8.00 TBA-30 Yr./(b)/ 3,040,290
335,213 8.00 02/15/17 344,240
30,057 7.00 11/15/22 29,296
362,778 7.00 12/15/22 353,592
596,838 7.00 12/15/22 581,726
184,742 7.00 01/15/23 179,892
787,526 7.50 03/15/23 785,313
779,931 7.00 05/15/23 759,457
120,766 7.50 08/15/23 120,427
39,068 7.00 11/15/23 38,042
JP Morgan Commercial Mortgage Finance Corp., Series 1997-C4
1,000,000 7.32% 12/26/28 997,227
Morgan Stanley Capital Commercial Mortgage, Inc. Series 1997-C1
900,000 7.46 05/15/06 912,375
Prudential Home Mortgage Securities Corp. 1992-39 A8
1,000,000 7.11 12/25/07 860,550
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $25,637,886) $ 25,736,607
- -------------------------------------------------------------------------------
Sovereign Credit--0.4%
State of Israel
$ 370,000 6.38% 12/15/05 $ 343,748
- -------------------------------------------------------------------------------
Total Sovereign Credit
(Cost $346,061) $ 343,748
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--17.0%
United States Treasury Bonds
$ 330,000 8.75% 05/15/17 $ 390,070
550,000 8.88 08/15/17/(a)/ 657,938
2,230,000 8.75 05/15/20 2,656,488
120,000 7.88 02/15/21/(a)/ 131,174
2,240,000 7.63 02/15/25 2,402,400
United States Treasury Interest-Only Stripped Securities/(c)/
2,250,000 6.99 08/15/09 966,893
350,000 7.04 11/15/10 136,808
United States Treasury Notes
4,000,000 6.88 08/31/99 4,044,360
280,000 5.63 11/30/00 272,387
590,000 7.88 11/15/04/(a)/ 630,380
United States Treasury Principal-Only Stripped Securities/(d)/
40,000 5.78 11/15/97 38,781
410,000 6.81 11/15/04/(a)/ 247,566
5,730,000 7.22 05/15/20 1,119,356
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,742,043) $ 13,694,601
- -------------------------------------------------------------------------------
Yankee Bonds--0.3%
Korea Electric Power
$ 263,790 7.40% 04/01/16 $ 265,088
- -------------------------------------------------------------------------------
Total Yankee Bonds
(Cost $255,077) $ 265,088
- -------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase Agreement--20.1%
Joint Repurchase Agreement Account/(a)/
$ 16,200,000 5.49% 05/01/97 $ 16,200,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $16,200,000) $ 16,200,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $94,385,195)/(e)/ $ 94,178,465
- -------------------------------------------------------------------------------
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(f) Month Gain (Loss)
- ---------------------------- -------------- ----------------- -------------
Euro Dollars 5 June 1997 $4,250
Euro Dollars 8 September 1997 (2,338)
Euro Dollars 5 December 1997 (1,000)
Euro Dollars 5 June 1998 (2,250)
5 Year U.S. Treasury Notes 10 June 1997 (2,828)
10 Year U.S. Treasury Notes 17 June 1997 (12,750)
U.S. Long Term Bond (14) June 1997 42,682
-------------
$25,766
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $382,996
Gross unrealized loss for investments in which cost
exceeds value (704,905)
- ------------------------------------------------------------------------------
Net unrealized loss $(321,909)
- --------------------------------------------------------------------------------
</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)/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 interest rate disclosed for these securitites represents effective
yields to maturity.
/(e)/The aggregate cost for federal income tax purposes is $94,500,374.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and each U.S. Long Term Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $27,100,000 and $9,088,344, 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.
27
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Adjustable
Rate Short Duration
Government Government
Fund Fund
--------------------------------------
<S> <C> <C>
Assets:
Investments in securities, at value (cost $594,120,929, $102,639,463, $39,615,334
and $94,385,195, respectively) $ 596,596,552 $ 102,672,119
Cash 57,183 89,184
Receivables:
Investment securities sold 295,632 --
Interest 6,240,961 1,042,023
Forward foreign currency exchange contracts -- --
Fund shares sold 2,978,910 203,746
Variation margin -- --
Deferred organization expenses, net -- --
Other assets 64,048 50,879
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 606,233,286 104,057,951
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,032,523 109,251
Investment securities purchased 1,331,393 --
Fund shares repurchased 10,604,905 1,707
Investment adviser fees 191,592 34,620
Transfer agent fees 42,054 --
Authorized dealer service fees 6,616 --
Variation margin 87,000 46,971
Accrued expenses and other liabilities 59,487 15,162
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 13,355,570 207,711
- ------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 643,684,171 117,737,007
Accumulated undistributed (distributions in excess of) net investment income (2,943,415) 599,277
Accumulated net realized loss on investment and futures transactions (49,959,507) (14,542,059)
Accumulated net realized foreign currency loss -- --
Net unrealized gain (loss) on investments and futures 2,096,467 56,015
Net unrealized gain on translation of assets and liabilities denominated in
foreign currencies -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net assets $ 592,877,716 $ 103,850,240
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:
Institutional shares $9.86 $9.76
Administration shares $9.86 $9.78
Service shares $9.86 $9.75
Class A shares (a) $9.86 --
- ------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Institutional shares 55,732,381 10,231,208
Administration shares 424,079 153,792
Service shares 2,171 258,644
Class A shares 3,960,437 --
- ------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value (unlimited
number of shares authorized) 60,119,068 10,643,644
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
---------------------------------
<S> <C> <C>
Assets:
Investments in securities, at value (cost $594,120,929, $102,639,463, $39,615,334
and $94,385,195, respectively) $ 39,692,726 $ 94,178,465
Cash 91,511 94,989
Receivables:
Investment securities sold 145,393 1,331,207
Interest 554,155 1,045,248
Forward foreign currency exchange contracts -- 34,692
Fund shares sold -- 60,750
Variation margin -- 6,750
Deferred organization expenses, net 10,458 41,206
Other assets 51,608 29,277
- -------------------------------------------------------------------------------------------------------------------------
Total assets 40,545,851 96,822,584
- -------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 18,312 43,289
Investment securities purchased 2,144,574 15,935,315
Fund shares repurchased 10,296 --
Investment adviser fees 11,244 26,250
Transfer agent fees 12,983 2,771
Authorized dealer service fees -- --
Variation margin -- --
Accrued expenses and other liabilities 31,430 30,169
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,228,839 16,037,794
- -------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 42,243,143 81,193,439
Accumulated undistributed (distributions in excess of) net investment income 90,133 36,949
Accumulated net realized loss on investment and futures transactions (4,093,656) (267,089)
Accumulated net realized foreign currency loss -- (32,353)
Net unrealized gain (loss) on investments and futures 77,392 (175,768)
Net unrealized gain on translation of assets and liabilities denominated in
foreign currencies -- 29,612
- -------------------------------------------------------------------------------------------------------------------------
Net assets $ 38,317,012 $ 80,784,790
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:
Institutional shares $9.94 $9.71
Administration shares $9.94 $9.70
Service shares $9.94 $9.72
Class A shares (a) -- --
- -------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Institutional shares 3,738,166 7,565,340
Administration shares 11,363 638,323
Service shares 105,100 114,034
Class A shares -- --
- -------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value (unlimited
number of shares authorized) 3,854,629 8,317,697
- -------------------------------------------------------------------------------------------------------------------------
</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 $10.01.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Operations
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Adjustable Short
Rate Duration
Government Government
Fund Fund
-----------------------------------
<S> <C> <C>
Investment income:
Interest/(a)/ $ 19,521,515 $ 3,571,901
- -----------------------------------------------------------------------------------------------------------------------------------
Total income 19,521,515 3,571,901
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 1,196,772 259,279
Distribution fees 24,001 --
Authorized dealer service fees 24,001 --
Administration share fees 5,231 1,118
Service share fees 10 5,244
Transfer agent fees 143,729 --
Custodian fees 65,396 32,437
Professional fees 30,592 30,169
Registration fees 31,419 29,736
Amortization of deferred organization expenses -- --
Trustees' fees 5,754 990
Other 64,428 26,459
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,591,333 385,432
Less--Expenses reimbursable and fees waived by Goldman Sachs (215,722) (145,719)
- -----------------------------------------------------------------------------------------------------------------------------------
Net expenses 1,375,611 239,713
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 18,145,904 3,332,188
- -----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (301,736) 77,934
Futures transactions (575,601) (78,182)
Foreign currency related transactions -- --
Net change in unrealized gain (loss) on:
Investments 3,237,459 (594,540)
Futures (523,110) (9,522)
Translation of assets and liabilities denominated in foreign currencies -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 1,837,012 (604,310)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 19,982,916 $ 2,727,878
- -----------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
-----------------------------
<S> <C> <C>
Investment income:
Interest/(a)/ $ 846,820 $ 2,713,928
- --------------------------------------------------------------------------------------------------------------------------
Total income 846,820 2,713,928
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 72,141 152,651
Distribution fees -- --
Authorized dealer service fees -- --
Administration share fees 79 4,929
Service share fees 2,452 1,908
Transfer agent fees 7,214 15,265
Custodian fees 24,930 43,131
Professional fees 30,238 29,501
Registration fees 29,353 29,627
Amortization of deferred organization expenses 10,290 12,146
Trustees' fees 332 775
Other 15,581 8,570
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 192,610 298,503
Less--Expenses reimbursable and fees waived by Goldman Sachs (108,922) (119,934)
- --------------------------------------------------------------------------------------------------------------------------
Net expenses 83,688 178,569
- --------------------------------------------------------------------------------------------------------------------------
Net investment income 763,132 2,535,359
- --------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions 46,213 (11,091)
Futures transactions -- (15,366)
Foreign currency related transactions -- (32,353)
Net change in unrealized gain (loss) on:
Investments (125,032) (1,032,929)
Futures -- (72,450)
Translation of assets and liabilities denominated in foreign currencies -- 29,612
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions (78,819) (1,134,577)
- --------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 684,313 $ 1,400,782
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Net of $4,391 in foreign withholding tax for the Core Fixed Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Adjustable Short
Rate Duration
Government Government
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 18,145,904 $ 3,332,188
Net realized gain (loss) from investment and futures transactions (877,337) (248)
Net realized loss from foreign currency related transactions -- --
Net change in unrealized gain (loss) on investments and futures 2,714,349 (604,062)
Net change in unrealized gain on translation of assets and liabilities
denominated in foreign currencies -- --
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 19,982,916 2,727,878
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (16,997,708) (3,409,055)
Administration shares (118,601) (29,022)
Service shares (107) (65,458)
Class A shares (531,120) --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (17,647,536) (3,503,535)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 224,637,176 17,764,086
Reinvestment of dividends and distributions 10,493,073 2,378,322
Cost of shares repurchased (272,256,791) (17,534,072)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from shares transactions (37,126,542) 2,608,336
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (34,791,162) 1,832,679
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of period $ 627,668,878 $ 102,017,561
- ----------------------------------------------------------------------------------------------------------------
End of period $ 592,877,716 $ 103,850,240
- ----------------------------------------------------------------------------------------------------------------
Accumulated undistributed (distributions in excess of) net investment income $ (2,943,415) $ 599,277
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 22,833,196 1,813,884
Reinvestment of dividends and distributions 1,066,128 243,233
Shares repurchased (27,664,736) (1,793,383)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,765,412) 263,734
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 763,132 $ 2,535,359
Net realized gain (loss) from investment and futures transactions 46,213 (26,457)
Net realized loss from foreign currency related transactions -- (32,353)
Net change in unrealized gain (loss) on investments and futures (125,032) (1,105,379)
Net change in unrealized gain on translation of assets and liabilities
denominated in foreign currencies -- 29,612
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 684,313 1,400,782
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (743,379) (2,380,508)
Administration shares (1,285) (127,789)
Service shares (18,468) (23,664)
Class A shares -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (763,132) (2,531,961)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 15,143,248 8,630,772
Reinvestment of dividends and distributions 633,411 2,308,481
Cost of shares repurchased (12,937,480) (2,167,703)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from shares transactions 2,839,179 8,771,550
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase 2,760,360 7,640,371
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of period $ 35,556,652 $ 73,144,419
- ----------------------------------------------------------------------------------------------------------------
End of period $ 38,317,012 $ 80,784,790
- ----------------------------------------------------------------------------------------------------------------
Accumulated undistributed (distributions in excess of) net investment income $ 90,133 $ 36,949
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 1,519,494 880,108
Reinvestment of dividends and distributions 63,471 235,763
Shares repurchased (1,297,285) (220,518)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding 285,680 895,353
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Adjustable Short
Rate Duration
Government Government
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 37,031,818 $ 6,604,446
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519)
Administration shares (220,450) (2,548)
Service shares -- (14,792)
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 -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441
Reinvestment of dividends and distributions 18,181,648 4,153,816
Cost of shares repurchased (477,107,914) (47,993,112)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from shares transactions (52,339,892) (1,819,855)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469)
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of year $ 676,133,018 $ 103,760,030
- ----------------------------------------------------------------------------------------------------------------
End of year $ 627,668,878 $ 102,017,561
- ----------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed net investment income $ (3,441,783) $ 770,624
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467
Reinvestment of dividends and distributions 1,856,783 424,274
Shares repurchased (48,741,470) (4,905,357)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616)
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 1,786,304 $ 4,013,477
Net realized gain (loss) from investment and futures transactions 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures (396,071) (75,350)
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,721,871 3,684,707
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (1,766,892) (4,019,797)
Administration shares (2,032) (19,144)
Service shares (17,380) (5,349)
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- (450,016)
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,786,304) (4,494,306)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 22,248,684 21,976,567
Reinvestment of dividends and distributions 1,401,492 4,315,748
Cost of shares repurchased (46,918,400) (7,840,575)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from shares transactions (23,268,224) 18,451,740
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (23,332,657) 17,642,141
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of year $ 58,889,309 55,502,278
- ----------------------------------------------------------------------------------------------------------------
End of year $ 35,556,652 $ 73,144,419
- ----------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed net investment income $ 90,133 $ 33,551
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 2,233,482 2,244,430
Reinvestment of dividends and distributions 140,950 439,299
Shares repurchased (4,727,959) (811,075)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (2,353,527) 1,872,654
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
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 Adjustable Rate Government Fund (Adjustable Rate Government),
Goldman Sachs Short Duration Government Fund (Short Duration Government),
Goldman Sachs Short Duration Tax-Free Fund (Short Duration Tax-Free) and Goldman
Sachs Core Fixed Income Fund (Core Fixed Income), collectively, ("the Funds") or
individually a ("Fund"). The Funds are diversified portfolios of the Trust
offering three classes of shares - Institutional shares, Administration shares
and Service shares. In addition, the Adjustable Rate Government Fund offers
Class A shares. Effective May 1, 1997, the Trust was reorganized from a
Massachusetts business trust to a Delaware business trust and various
operational changes were approved, including updating certain investment
restrictions and amending the management contracts. In addition, Short Duration
Government, Short Duration Tax-Free, and Core Fixed Income added two new share
classes, Class A and Class B, as of May 1.
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
- -----------------------
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. 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 Short Duration Tax-Free. 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 Core Fixed
Income Fund.
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.
- --------------------------------------------------------------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
- ----------------------------------------------
Core Fixed 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. Core Fixed 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
- ------------------------
The Funds, with the exception of Short Duration Tax-Free, may enter into
mortgage "dollar rolls" in which the Fund sells securities in the current month
for delivery and simultaneously contracts with the same counterparty to
repurchase similar (same type, coupon and maturity) but not identical securities
on a specified future date. The Fund loses the right to receive principal and
interest paid on the securities sold. However, the Fund benefits to the extent
of any price received for the securities sold and the lower forward price for
the future purchase (often referred to as the "drop") or fee income plus the
interest earned on the cash proceeds of the securities sold until the settlement
date of the forward purchase. The Fund will hold and maintain in a segregated
account, until the settlement date, cash or liquid, high-grade debt securities
in an amount equal to the forward purchase price. For financial reporting and
tax reporting purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale.
F. Futures Contracts
- --------------------
The Funds may enter into futures transactions to hedge against changes in
interest rates, securities prices, currency exchange rates (in the case of Core
Fixed Income) or to seek to increase total return.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Payments for futures contracts ("variation margin") are paid or received by the
Funds daily, dependent on the daily fluctuations in the value of the contracts,
and are recorded for financial reporting purposes as unrealized gains or losses.
When contracts are closed, the Funds realize a gain or loss equal to the
difference between the value of the futures contract to sell and the value of
futures contract to buy. Gains and losses are reported in the Statement of
Operations.
The use of futures contracts involve, to varying degrees, elements of
market and counterparty risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities. 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 potentially result in a loss.
G. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
H. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are generally allocated to the portfolios based on
each portfolio's relative average net assets for the period.
- --------------------------------------------------------------------------------
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
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 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.
I. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of its investment company taxable and tax-exempt income to its
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial
statement purposes as either from or in excess of net investment income or net
realized gain on investment transactions, or from capital, depends on the type
of book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
The Funds, at their most recent tax year-ends (October 31, 1996 for Core
Fixed Income and December 31, 1996 for Adjustable Rate Government, Short
Duration Government and Short Duration Tax-Free) 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>
Adjustable Rate Government $49,069,000 2000-2004
Short Duration Government $14,141,000 2002-2004
Short Duration Tax-Free $4,058,000 2002-2003
Core Fixed Income $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 Adjustable Rate
Government and 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 Short
Duration Tax-Free and 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 Adjustable Rate Government, Short Duration Tax-Free
and Core Fixed Income and .50% of average daily net assets of Short Duration
Government. Until further notice, GSFM has voluntarily agreed not to impose .10%
of its investment advisory fee for Short Duration Government.
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 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.
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 Adjustable Rate Government Class A shares. During the period ended
April 30, 1997, Goldman Sachs retained approximately $110,300 of sales load
related to Class A shares. Goldman Sachs also serves as Transfer Agent of the
Funds for a fee.
The Trust, on behalf of Adjustable Rate Government, has adopted a
Distribution Plan (the "Plan") pursuant to Rule 12b-1 for the Class A shares.
Under the Plan, Goldman Sachs
- --------------------------------------------------------------------------------
34
<PAGE>
- --------------------------------------------------------------------------------
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.
The Trust, on behalf of Adjustable Rate Government, 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. Adjustable Rate Government pays a fee under the
Service Plan equal, on an annual basis, to .25% of its average daily net assets
attributable to Class A shares.
For the period ended April 30, 1997, the advisors and distributor have
voluntarily agreed to waive certain fees and reimburse other expenses as
follows(in thousands):
<TABLE>
<CAPTION>
Waivers
---------------
Reimburse-
Class A Reimburse- ment
Fund Advisor 12b-1 ment Outstanding
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustable Rate
Government -- $24 $192 $22
Short Duration
Government $52 -- 94 14
Short Duration
Tax-Free -- -- 109 28
Core Fixed
Income -- -- 120 28
</TABLE>
For the period ended April 30, 1997, Adjustable Rate Government, Short
Duration Government, and Core Fixed Income incurred commission expenses of
approximately $35,000, $8,500, and $900, respectively, in connection with
futures contracts entered into with Goldman Sachs. At April 30, 1997, Adjustable
Rate Government and Short Duration Government had approximately $87,000 and
$47,000, respectively, payable to Goldman Sachs related to variation margin on
futures contracts. Approximately $7,000 relating to variation margin was due to
Core Fixed Income from Goldman Sachs.
As of May 1, 1997, the Funds advisory agreements were changed to management
agreements encompassing the same services and fee structure.
4. 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 six months ended April
30, 1997, 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
six months ended April 30, 1997, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Short
Adjustable Rate Short Duration Duration Core Fixed
Government Government Tax-Free Income
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases of U.S.
Government and agency
obligations $ 150,343,674 $46,763,342 -- $115,895,051
- -----------------------------------------------------------------------------------------------
Purchases (excluding U.S.
Government and agency
obligations) -- -- $39,438,868 22,633,489
- -----------------------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 198,396,859 44,501,257 -- 118,193,576
- -----------------------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and agency
obligations) -- -- 35,970,076 12,305,124
- -----------------------------------------------------------------------------------------------
</TABLE>
At April 30, 1997, Core Fixed Income had an outstanding forward foreign
currency exchange contract, to sell foreign currency as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Value on
Foreign Currency Settlement Current Unrealized
Sell Contract Date Value Gain
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
Expiring 6/16/97 $ 1,897,856 $ 1,863,164 $ 34,692
- -----------------------------------------------------------------------------------------------
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered.
6. 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.
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 at the Funds' custodian.
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 April 30, 1997, Adjustable Rate Government, Short Duration Government and
Core Fixed Income had undivided interests in the repurchase agreements in the
following joint account which equaled $36,700,000, $600,000 and $16,200,000,
respectively, in principal amount.
As of April 30, 1997, the repurchase agreement in the joint account along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity data) were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns & Co., dated 4/30/97, repurchase price $680,103,889 (GNMA:
$59,497,211, 7.50%-9.00%, 12/15/21-12/15/26; FNMA: $267,568,394, 5.50%-8.00%,
02/01/09-04/01/27; FHLMC: $373,405,594, 5.50%-7.50%, 2/01/98-4/01/27)
$680,000,000 5.50% 5/01/97 $680,000,000
Nomura Securities International, Inc. dated 4/30/97, repurchase price $300,045,833
(FNMA: $182,812,268, 5.94%-8.01%, 7/22/97-5/11/05; FHLMC: $38,631,543, 6.02%-
6.75%, 1/28/00-12/04/01, FCSB: $49,581,430, 6.05%-6.25%, 5/10/99-12/03/99,
SLMA: $29,222,430, 6.00%, 1/16/01)
300,000,000 5.50 5/01/97 300,000,000
Credit Suisse First Boston, dated 4/30/97, repurchase price $52,307,845 (U.S.
Treasury Bill: $53,475,803, 2/05/98)
52,300,000 5.40 5/01/97 52,300,000
- ---------------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $1,032,300,000
- ---------------------------------------------------------------------------------------
</TABLE>
9. Other Matters
As of April 30, 1997, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 33% of the
outstanding shares of the Short Duration Government Fund.
- --------------------------------------------------------------------------------
36
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10. Summary of Share Transactions
Share activity for the six months ended April 30, 1997 is as follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Short Duration Government
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 18,594,775 $182,930,563 1,584,839 $15,518,375
Reinvestment of dividends
and distributions 1,001,545 9,856,991 234,064 2,288,677
Shares repurchased (26,271,346) (258,542,996) (1,756,576) (17,174,153)
-------------------------------------------------------------
(6,675,026) (65,755,442) 62,327 632,899
-------------------------------------------------------------
Administration shares
Shares sold 105,099 1,034,098 136,265 1,337,724
Reinvestment of dividends
and distributions 5,632 55,427 2,467 24,158
Shares repurchased (72,390) (712,347) (10,477) (102,683)
-------------------------------------------------------------
38,341 377,178 128,255 1,259,199
-------------------------------------------------------------
Service shares
Shares sold 2,161 21,270 92,780 907,987
Reinvestment of dividends
and distributions 11 107 6,702 65,487
Shares repurchased (1) (10) (26,330) (257,236)
-------------------------------------------------------------
2,171 21,367 73,152 716,238
-------------------------------------------------------------
Class A shares
Shares sold 4,131,161 40,651,245 -- --
Reinvestment of dividends
and distributions 58,940 580,548 -- --
Shares repurchased (1,320,999) (13,001,438) -- --
-------------------------------------------------------------
2,869,102 28,230,355 -- --
-------------------------------------------------------------
Net increase (decrease) (3,765,412) $(37,126,542) 263,734 $2,608,336
==============================================================
<CAPTION>
Short Duration Tax-Free Core Fixed Income
-------------------------------------------------------------
Shares Dollars Shares Dollars
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 1,341,295 $13,363,572 212,032 $2,070,524
Reinvestment of dividends
and distributions 61,868 617,418 227,665 2,229,551
Shares repurchased (1,159,405) (11,559,759) (186,679) (1,835,467)
-------------------------------------------------------------
243,758 2,421,231 253,018 2,464,608
-------------------------------------------------------------
Administration shares
Shares sold 6,402 63,690 579,102 5,684,739
Reinvestment of dividends
and distributions 116 1,153 5,675 55,281
Shares repurchased -- -- (17,694) (174,314)
-------------------------------------------------------------
6,518 64,843 567,083 5,565,706
-------------------------------------------------------------
Service shares
Shares sold 171,797 1,715,986 88,974 875,509
Reinvestment of dividends
and distributions 1,487 14,840 2,423 23,649
Shares repurchased (137,880) (1,377,721) (16,145) (157,922)
-------------------------------------------------------------
35,404 353,105 75,252 741,236
-------------------------------------------------------------
Class A shares
Shares sold -- -- -- --
Reinvestment of dividends
and distributions -- -- -- --
Shares repurchased -- -- -- --
-------------------------------------------------------------
-- -- -- --
-------------------------------------------------------------
Net increase (decrease) 285,680 $2,839,179 895,353 $8,771,550
============================================================
</TABLE>
37
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(unaudited)
- -------------------------------------------------------------------------------
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Short Duration Government
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 39,981,299 $391,363,204 4,072,082 $39,855,638
Reinvestment of dividends
and distributions 1,780,288 17,432,484 422,559 4,137,041
Shares repurchased (46,666,343) (456,776,795) (4,893,286) (47,875,174)
- ---------------------------------------------------------------------------------------------
(4,904,756) (47,981,107) (398,645) (3,882,495)
- ---------------------------------------------------------------------------------------------
Administration shares
Shares sold 148,981 1,457,872 33,251 326,101
Reinvestment of dividends
and distributions 9,641 94,420 207 2,032
Shares repurchased (138,609) (1,356,764) (7,921) (77,312)
- ---------------------------------------------------------------------------------------------
20,013 195,528 25,537 250,821
- ---------------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 188,134 1,837,702
Reinvestment of dividends
and distributions -- -- 1,508 14,743
Shares repurchased -- -- (4,150) (40,626)
- ---------------------------------------------------------------------------------------------
-- -- 185,492 1,811,819
- ---------------------------------------------------------------------------------------------
Class A shares
Shares sold 1,404,698 13,765,298 -- --
Reinvestment of dividends
and distributions 66,854 654,744 -- --
Shares repurchased (1,936,518) (18,974,355) -- --
- ---------------------------------------------------------------------------------------------
(464,966) (4,554,313) -- --
- ---------------------------------------------------------------------------------------------
Net increase (decrease) (5,349,709) $(52,339,892) (187,616) $(1,819,855)
=============================================================================================
<CAPTION>
Short Duration Tax-Free Core Fixed Income
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 2,085,253 $20,777,050 2,094,833 $20,524,422
Reinvestment of dividends
and distributions 139,126 1,383,351 436,903 4,292,533
Shares repurchased (4,601,865) (45,664,878) (769,104) (7,431,360)
- ---------------------------------------------------------------------------------------------
(2,377,486) (23,504,477) 1,762,632 17,385,595
- ---------------------------------------------------------------------------------------------
Administration shares
Shares sold 10,672 105,302 106,074 1,029,912
Reinvestment of dividends
and distributions 203 2,017 1,847 17,883
Shares repurchased (10,644) (105,478) (36,681) (358,284)
- ---------------------------------------------------------------------------------------------
231 1,841 71,240 689,511
- ---------------------------------------------------------------------------------------------
Service shares
Shares sold 137,557 1,366,332 43,525 422,233
Reinvestment of dividends
and distributions 1,621 16,124 549 5,332
Shares repurchased (115,450) (1,148,044) (5,292) (50,931)
- ---------------------------------------------------------------------------------------------
23,728 234,412 38,782 376,634
- ---------------------------------------------------------------------------------------------
Class A shares
Shares sold -- -- -- --
Reinvestment of dividends
and distributions -- -- -- --
Shares repurchased -- -- -- --
- ---------------------------------------------------------------------------------------------
-- -- -- --
- ---------------------------------------------------------------------------------------------
Net increase (decrease) (2,353,527) $(23,268,224) 1,872,654 $18,451,740
=============================================================================================
</TABLE>
- -------------------------------------------------------------------------------
38
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ 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
--------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. $9.83 $0.2971/(a)/ $0.0216/(a)/ -- $0.3187 $(0.2887) --
1997-Administration
Shares .............. 9.83 0.2844/(a)/ 0.0221/(a)/ -- 0.3065 (0.2765) --
1997-Service
Shares/(m)/ ......... 9.84 0.0527/(a)/ 0.0200/(a)/ -- 0.0727 (0.0527) --
1997-Class A Shares ...... 9.83 0.2766/(a)/ 0.0300/(a)/ -- 0.3066 (0.2766) --
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 9.77 0.5759/(a)/ 0.0772/(a)/ -- 0.6531 (0.5725) --
1996-Administration
Shares .............. 9.77 0.5489/(a)/ 0.0797/(a)/ -- 0.6286 (0.5489) --
1996-Class A Shares ...... 9.77 0.5481/(a)/ 0.0806/(a)/ -- 0.6287 (0.5489) --
1995-Institutional
Shares .............. 9.74 0.5630/(a)/ 0.0717/(a)/ -- 0.6347 (0.5759) --
1995-Administration
Shares .............. 9.74 0.5366/(a)/ 0.0737/(a)/ -- 0.6103 (0.5528) --
1995-Class A
Shares/(c)/.......... 9.79 0.2721/(a)/ (0.0090)/(a) / -- 0.2631 (0.2697) --
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) --
1993-Administration
Shares/(e)/.......... 10.02 0.2146 (0.0173)/(d) / -- 0.1973 (0.2146) --
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) --
<CAPTION>
Distributions to shareholders
----------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. -- -- -- $(0.2887) $0.0300 $9.86 3.28%/(f)/
1997-Administration
Shares .............. -- -- -- (0.2765) 0.0300 9.86 3.16/(f)/
1997-Service
Shares/(m)/ ......... -- -- -- (0.0527) 0.0200 9.86 0.74/(f)/
1997-Class A Shares ...... -- -- -- (0.2766) 0.0300 9.86 3.16/(f)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. (0.0206) -- -- (0.5931) 0.0600 9.83 6.86
1996-Administration
Shares .............. (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1996-Class A Shares ...... (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1995-Institutional
Shares .............. (0.0287) -- -- (0.6046) 0.0301 9.77 6.75
1995-Administration
Shares .............. (0.0275) -- -- (0.5803) 0.0300 9.77 6.48
1995-Class A
Shares/(c)/.......... (0.0134) -- -- (0.2831) (0.0200) 9.77 2.74/(f)/
1994-Institutional
Shares .............. -- -- -- (0.4486) (0.2600) 9.74 1.88
1994-Administration
Shares .............. -- -- -- (0.4239) (0.2600) 9.74 1.63
1993-Institutional
Shares .............. (0.0024) -- -- (0.4421) (0.0400) 10.00 4.13
1993-Administration
Shares/(e)/.......... (0.0027) -- -- (0.2173) (0.0200) 10.00 2.01/(f)/
1992-Institutional
Shares .............. -- -- -- (0.5470) 0.0100 10.04 6.12
For the Period July 17, 1991/(g)/through October 31
- ------------------------------------------------------
1991-Institutional Shares. -- -- -- (0.1553) 0.0300 10.03 2.14/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
---------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. 0.45%/(b)/ 6.08%/(b)/ 25.64% $549,611 0.51%/(b)/ 6.02%/(b)/
1997-Administration
Shares .............. 0.70/(b)/ 5.83/(b)/ 25.64 4,182 0.76/(b)/ 5.77/(b)/
1997-Service
Shares/(m)/ ......... 0.95/(b)/ 5.64/(b)/ 25.64 22 1.01/(b)/ 5.58/(b)/
1997-Class A Shares ...... 0.70/(b)/ 5.61/(b)/ 25.64 39,063 1.01/(b)/ 5.30/(b)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 0.45 5.85 52.36 613,149 0.51 5.79
1996-Administration
Shares .............. 0.70 5.59 52.36 3,792 0.76 5.53
1996-Class A Shares ...... 0.70 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares .............. 0.46 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares .............. 0.71 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares/(c)/.......... 0.69/(b)/ 5.87/(b)/ 24.12 15,203 1.01/(b)/ 5.55/(b)/
1994-Institutional
Shares .............. 0.46 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares .............. 0.71 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares .............. 0.45 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares/(e)/.......... 0.70/(b)/ 3.81/(b)/ 103.74 5,326 0.73/(b)/ 3.78/(b)/
1992-Institutional
Shares .............. 0.42 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g)through October 31,
- ------------------------------------------------------
1991-Institutional
Shares .............. 0.20/(b)/ 7.31/(b)/ 145.67/(b)/ 239,642 1.02/(b)/ 6.49/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ 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
-------------------------------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. $9.83 $0.3287/(a)/ $(0.0700)/(a)/ -- $0.2587 $(0.3287) --
1997-Administration
Shares .............. 9.85 0.3175/(a)/ (0.0700)/(a)/ -- 0.2475 (0.3175) --
1997-Service Shares ...... 9.82 0.3043/(a)/ (0.0700)/(a)/ -- 0.2343 (0.3043) --
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>
Distributions to shareholders
-----------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. -- -- -- $(0.3287) $(0.0700) $9.76 2.67%/(f)/
1997-Administration
Shares .............. -- -- -- (0.3175) (0.0700) 9.78 2.55/(f)/
1997-Service Shares ...... -- -- -- (0.3043) (0.0700) 9.75 2.42/(f)/
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. -- -- -- (0.6326) 0.0100 9.83 6.75
1996-Administration
Shares/(h)/.......... -- -- -- (0.3940) (0.0100) 9.85 4.00/(f)/
1996-Service
Shares/(i)/.......... -- -- -- (0.3152) 0.1000 9.82 4.35/(f)/
1995-Institutional Shares. -- -- -- (0.6518) 0.1800 9.82 8.97
1995-Administration
Shares .............. -- -- -- (0.2051) (0.0100) 9.63/(h)/ 2.10
1994-Institutional Shares. -- -- -- (0.6036) (0.5000) 9.64 0.99
1994-Administration
Shares .............. -- -- -- (0.5790) (0.5000) 9.64 0.73
1993-Institutional Shares. (0.0065) -- -- (0.5692) (0.0200) 10.14 5.55
1993-Administration
Shares/(e)/.......... -- -- -- (0.2725) (0.0900) 10.14 1.74
1992-Institutional Shares. -- -- -- (0.6703) (0.0600) 10.16 6.24
1991-Institutional Shares. -- -- -- (0.8020) 0.2200 10.22 10.93
1990-Institutional Shares. -- -- -- (0.8300) (0.0700) 10.00 8.23
1989-Institutional Shares. -- -- (0.0300) (0.9100) (0.0300) 10.07 9.08
For the Period August 15, 1988/(g)/through October 31
- ---------------------------------------------------------------
1988-Institutional Shares. -- -- -- (0.1800) 0.1000 10.10 3.30/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
-----------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. 0.45%/(b)/ 6.44%/(b)/ 43.72% $99,824 0.73%/(b)/ 6.16%/(b)/
1997-Administration
Shares .............. 0.70/(b)/ 6.22/(b)/ 43.72 1,504 0.98/(b)/ 5.94/(b)/
1997-Service Shares ...... 0.95/(b)/ 5.94/(b)/ 43.72 2,522 1.23/(b)/ 5.66/(b)/
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. 0.45 6.44 115.45 99,944 0.71 6.18
1996-Administration
Shares/(h)/.......... 0.70/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/.......... 0.95/(b)/ 6.05/(b)/ 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional Shares. 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares .............. 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional Shares. 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares .............. 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional Shares. 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/.......... 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional Shares. 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional Shares. 0.45 8.25 155.44 158,848 0.79 7.91
1990-Institutional Shares. 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional Shares. 0.46 8.71 137.37 31,015 1.39 7.78+
For the Period August 15, 1988/(g)/through October 31
- ---------------------------------------------------------------
1988-Institutional Shares. 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ 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
-------------------------------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. $9.96 $0.2097/(a)/ $(0.0200)/(a)/ -- $0.1897 $(0.2097) --
1997-Administration
Shares ................ 9.96 0.1976/(a)/ (0.0200)/(a)/ -- 0.1776 (0.1976) --
1997-Service Shares....... 9.97 0.1852/(a)/ (0.0300)/(a)/ -- 0.1552 (0.1852) --
For the Year Ended October 31,
- ---------------------------------------------------------------
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) --
<CAPTION>
Distributions to shareholders
---------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------------------
1997-Institutional Shares. -- -- -- $(0.2097) $(0.0200) $9.94 1.91%/(f)/
1997-Administration
Shares ................ -- -- -- (0.1976) (0.0200) 9.94 1.79/(f)/
1997-Service Shares....... -- -- -- (0.1852) (0.0300) 9.94 1.56/(f)/
For the Year Ended October 31,
- -------------------------------------------------------------------
1996-Institutional Shares. -- -- -- (0.4192) 0.0300 9.96 4.50
1996-Administration
Shares ................ -- -- -- (0.3944) 0.0300 9.96 4.24
1996-Service Shares....... -- -- -- (0.3697) 0.0200 9.97 3.98
1995-Institutional Shares. -- -- -- (0.4235) 0.1500 9.94 5.98
1995-Administration
Shares ................ -- -- -- (0.3989) 0.1500 9.94 5.76
1995-Service Shares ...... -- -- -- (0.3744) 0.1600 9.95 5.59
1994-Institutional Shares. -- -- -- (0.4612) (0.4400) 9.79 0.17
1994-Administration
Shares ................ -- -- -- (0.4362) (0.4400) 9.79 (0.11)
1994-Service Shares/(j)/.. -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/
1993-Institutional Shares. -- -- -- (0.3834) 0.3000 10.23 7.03
1993-Administration
Shares/(j)/............ -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
-----------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------------------
1997-Institutional Shares. 0.45%/(b)/ 4.24%/(b)/ 99.59% $37,159 1.05%/(b)/ 3.64%/(b)/
1997-Administration
Shares ................ 0.70/(b)/ 4.03/(b)/ 99.59 113 1.30/(b)/ 3.43/(b)/
1997-Service Shares....... 0.95/(b)/ 3.77/(b)/ 99.59 1,045 1.55/(b)/ 3.17/(b)/
For the Year Ended October 31,
- -------------------------------------------------------------------
1996-Institutional Shares. 0.45 4.21 231.65 34,814 1.01 3.65
1996-Administration
Shares ................ 0.70 3.96 231.65 48 1.26 3.40
1996-Service Shares....... 0.95 3.74 231.65 695 1.51 3.18
1995-Institutional Shares. 0.45 4.31 259.52 58,389 0.77 3.99
1995-Administration
Shares ................ 0.70 4.14 259.52 46 1.02 3.82
1995-Service Shares ...... 0.95 3.87 259.52 454 1.27 3.55
1994-Institutional Shares. 0.45 3.74 354.00 83,704 0.61 3.58
1994-Administration
Shares ................ 0.70 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/.. 0.95/(b)/ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares. 0.41 3.70 404.60 115,803 1.06 3.05
1993-Administration
Shares/(j)/............ 0.70/(b)/ 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. 0.05/(b)/ 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ 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
-------------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. $9.85 $0.3236 $(0.1403) $(0.0003) $0.1830 $(0.3230) --
1997-Administrative
Shares .............. 9.84 0.3108 (0.1398) (0.0003) 0.1707 (0.3107) --
1997-Service Shares ..... 9.86 0.2991 (0.1399) (0.0003) 0.1589 (0.2989) --
For the Year Ended October 31,
- ------------------------------------------------------
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) --
<CAPTION>
Distributions to shareholders
-----------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(k)/
------------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------
1997-Institutional
Shares .............. -- -- -- $(0.3230) $(0.1400) $9.71 1.87%/(f)/
1997-Administrative
Shares .............. -- -- -- (0.3107) (0.1400) 9.70 1.75/(f)/
1997-Service Shares ..... -- -- -- (0.2989) (0.1400) 9.72 1.63/(f)/
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares .............. -- -- -- (0.7244) (0.1500) 9.85 5.98
1996-Administrative
Shares/(l)/ ......... -- -- -- (0.4080) (0.0700) 9.84 3.56/(f)/
1996-Service
Shares/(l)/ ......... -- -- -- (0.3754) 0.0900 9.86 4.90/(f)/
1995-Institutional
Shares .............. -- -- -- (0.6433) 0.7600 10.00 15.72
For the Period January 5, 1994/(g)/through October 31,
- -------------------------------------------------------
1994-Institutional Shares. -- -- -- (0.4648) (0.7617) 9.24 (3.00)
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. 0.45%/(b)/ 6.66%/(b)/ 174.52% $73,483 0.76%/(b)/ 6.35%/(b)/
1997-Administrative
Shares .............. 0.70/(b)/ 6.49/(b)/ 174.52 6,194 1.01/(b)/ 6.18/(b)/
1997-Service Shares ..... 0.95/(b)/ 6.22/(b)/ 174.52 1,108 1.26/(b)/ 5.91/(b)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 0.45 6.51 414.20 72,061 0.83 6.13
1996-Administrative
Shares/(l)/ ......... 0.70/(b)/ 6.41/(b)/ 414.20 702 1.08/(b)/ 6.03/(b)/
1996-Service
Shares/(l)/ ......... 0.95/(b)/ 6.37/(b)/ 414.20 381 1.33/(b)/ 5.99/(b)/
1995-Institutional
Shares .............. 0.45 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994/(g)/through October 31,
- ------------------------------------------------------
1994-Institutional
Shares .............. 0.45/(b)/ 6.48/(b)/ 288.25 24,508 1.46/(b)/ 5.47/(b)/
</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)/ 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 no
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.
/(m)/ Service share activity commenced on March 27, 1997.
/(n)/ Includes the balancing effect of calculating per share amounts.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
- -------------------------------------------------------------------------------
This Semiannual 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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
John P. McNulty
Mary P. McPherson
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
FISARINST
- ------------------------------------------------------------------------------
The Goldman Sachs
Fixed Income Funds
- ------------------------------------------------------------------------------
Semiannual Report
April 30, 1997
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
[LOGO OF GOLDMAN SACHS APPEARS HERE]
- ------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders
- -------------------------------------------------------------------------------
Dear Shareholders:
A return of robust economic growth during the period under review fueled
fears of higher inflation, which pushed Treasury yields higher across the
maturity spectrum. In this semiannual report, we will review the performance of
the Goldman Sachs Fixed Income Funds for the six-month period ended April 30,
1997, as well as provide a brief overview of the U.S. economy and the bond
market. We are pleased to note that during the period, the Goldman Sachs Fixed
Income Funds performed well compared with their peers.
Economic Activity Rebounded, Led by Consumer Spending
After a sluggish third quarter, the pace of economic growth strengthened
during the period. During November and December, consumer spending rebounded,
the trade deficit narrowed and industrial production climbed significantly. As a
result, fourth-quarter real Gross Domestic Product (GDP) growth was 3.8%
(annualized), up from 2.1% in the prior quarter.
Economic activity continued to gain momentum during the first quarter of
1997, with real GDP surging 5.8%, the largest jump in a decade. Signs of
strength were led by a sharp increase in consumer spending, which resulted in
solid sales gains for automobile manufacturers and retailers. In addition,
upbeat reports on factory orders and inventories, construction outlays and labor
market conditions all pointed towards economic acceleration. Despite the growth
spurt, reported inflation remained surprisingly mild during the period.
Furthermore, several economic reports for April came in at the low end of
consensus expectations, which suggested that the economy could moderate during
the second quarter.
The Bond Market Rallied, Then Fell as Inflation Fears Reemerged
The U.S. fixed income market came under pressure during the period under
review. In November, bonds performed well in anticipation of a continued
slowdown in U.S. economic growth. However, the market experienced a reversal in
December when better-than-expected economic data, in particular, robust
employment figures, triggered a sell-off and drove interest rates higher. In
early February, bond prices briefly rebounded, but later faltered as it became
increasingly likely that the U.S. Federal Reserve would raise short term
interest rates in March. By the end of March, the yield on the benchmark 30-year
Treasury bond rose above the psychologically important 7% threshold. Despite the
lackluster performance of the U.S. bond market for the period as a whole, a
sharp rebound at the end of April helped bonds recoup part of their earlier
losses.
The Fed Raised the Federal Funds Rate in March
In March 1997, the Fed raised the federal funds rate by 25 basis points to
5.50%. Though there were few signs of actual inflation, the Fed tightening was
prompted by the economy's pervasive strength. The Fed's action was its first
since a quarter-point cut in January 1996.
During the period under review, the yield curve shifted higher across all
maturities. The yield on six-month Treasury bills rose from 5.26% on October 31,
1996 to approximately 5.52% on April 30, 1997. For the same period, the yield on
the 30-year U.S. Treasury bond rose more dramatically, climbing from 6.64% to
6.95%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 18
Goldman Sachs Government Income Fund 3 Notes to Financial Statements 22
Goldman Sachs Global Income Fund 8 Financial Highlights 29
Goldman Sachs Municipal Income Fund 13
----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
1
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders (continued)
- -------------------------------------------------------------------------------
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
10/31/96 4/30/97
<S> <C> <C>
3-Month 5.14% 5.23%
6-Month 5.26% 5.52%
1 5.40% 5.89%
2 5.73% 6.27%
3 5.86% 6.40%
5 6.07% 6.57%
10 6.34% 6.71%
30 6.64% 6.95%
</TABLE>
Source: Bloomberg, L.P.
The yield curve shifted upward across all maturities and steepened sharply at
the short end.
Outlook: Strengthening Economic Growth May Trigger Further Preemptive Rate Hikes
Despite reports of economic moderation and minimal price acceleration, the
economy's broad-based fundamental strength and resilient equity market make
additional Fed rate increases likely this year. Goldman Sachs' economists
believe that the speed and extent of Fed tightening will depend in large part on
the emergence of conclusive signs that the economy is nearing maximum capacity,
rather than immediate evidence of increased inflationary pressures.
In conclusion, we thank you for your support of the Goldman Sachs Fixed
Income Funds and we look forward to continuing our relationship.
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
May 30, 1997
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Government Income Fund seeks to provide shareholders with
a high level of current income consistent with safety of principal. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
U.S. government securities and in repurchase agreements collateralized by 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 Continued to Perform Well
During the period under review, mortgage-backed securities (MBS) performed
very well, buoyed by a surge in investor demand and stable prepayment activity.
Investor interest in the MBS market was triggered primarily by the favorable
interest rate environment. Throughout the period, rates remained in a fairly
tight range, allowing prepayment anxieties to subside. In addition, with other
highly rated fixed income instruments yielding approximately the same as
similar-duration Treasuries, investors turned to the mortgage-backed sector for
yield enhancement. Finally, an increase in collateralized mortgage obligation
(CMO) creation led to steady demand for underlying pass-through securities. As a
result of all of these positive factors, mortgage-backed securities became
increasingly expensive during the period as their yield spreads relative to
Treasuries tightened.
Performance Review
For the six-month period ended April 30, 1997, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to strong results from its investments in mortgage-backed
securities, particularly CMOs. The fund's Class B shares, which have higher
expenses, also achieved positive returns. The net asset value (NAV) of both
classes declined due to rising interest rates during the period.
We are pleased to report that the fund's Class A shares ranked within the
top 10% of intermediate U.S. government income funds (seventh out of 122) based
on total return for the 12 months ended April 30, 1997, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they have been
in existence less than 12 months.)
- -----------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
Total Return (based on net asset value) 1.83% 1.43%
- --------------------------------------------------------------------
Return From Monthly Distributions 3.67% 3.28%
- --------------------------------------------------------------------
Return From Price Depreciation -1.84% -1.85%
- --------------------------------------------------------------------
Total Return of Lehman Brothers 1.81% 1.81%
Government/Mortgage Index
- --------------------------------------------------------------------
NAV (as of 4/30/97) $14.10 $14.11
- --------------------------------------------------------------------
NAV Change -$0.26 -$0.26
- --------------------------------------------------------------------
</TABLE>
Portfolio Composition and Investment Strategies
The primary changes to the portfolio's sector allocations during the period
were a reduction of fixed rate mortgage pass-through and asset-backed securities
in favor of U.S. Treasuries and agency debentures.
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
U.S. Treasuries 36.7%
Fixed Rate Mortgage Pass-Throughs 26.1%
CMO's 13.0%
Asset-Backed Securities 11.0%
Agency Debentures 10.2%
Repos/Cash Equivalents 3.0%
</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.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio
held a 36.7% position in U.S. Treasuries, its single largest allocation as of
April 30. The fund's holdings in Treasuries more than doubled as we scaled back
exposure to the mortgage-backed and asset-backed sectors, both of which were
nearing full value.
.. Fixed Rate Mortgage Pass-Throughs. As of April 30, the fund's investment in
fixed rate mortgage pass-throughs accounted for 26.1% of the portfolio, down
from 40.4% six months earlier. The sector performed well during the period, as
many of the factors which supported MBS through 1996 remained in place: low
volatility, range-bound interest rates, tight yield spreads on alternative
sectors, and light issuance of corporate and asset-backed securities (ABS).
However, as the MBS market repriced to reflect the favorable environment, we
reduced the position.
We also used mortgage dollar rolls during the period, 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 liquid assets equal to the dollar
amount of the forward commitment in a segregated account with the fund's
custodian.
.. CMOs. The CMO market enjoyed strong demand from yield-seeking investors,
while the supply of CMOs, though rising, remained relatively low from a
historical perspective. As the sector became more expensive, we reduced the
fund's allocation to 13.0% from 22.0% last October. Specifically, we cut
sequential-pay/support CMOs to 7.2%, approximately half their weighting six
months ago, and planned amortization class (PAC) CMOs to 4.2% from 5.5%.
.. Asset-Backed Securities. As of April 30, the fund's ABS position was 11.0%,
down from 19.9% last October. During the period, the ABS sector experienced some
selling pressure, in part due to negative credit events among selected credit
card and sub-prime auto lenders. Overall, however, the sector performed well:
investor interest remained broad-based, ratings held firm and, relative to
similarly rated spread products, ABSs continued to offer attractive yield
enhancement opportunities.
.. Agency Debentures. Agency debentures represented 10.2% of the portfolio as
of the end of the period, constituting an overweighted position compared with
the benchmark's 8.0%. We added to the allocation during the period as
alternative sectors richened.
.. Issuer Composition. The portfolio composition of the fund's mortgage-backed
security holdings by issuer was 13.6% in Federal National Mortgage Association
(FNMA) issues and 13.2% in Government National Mortgage Association (GNMA)
issues.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
.. Credit Quality. As of April 30, 75.5% of the portfolio was invested in U.S.
government and agency securities, 21.5% of the portfolio was invested in triple-
A-rated securities and 3.0% of the portfolio was invested in cash equivalents.
.. Prudent Use of Derivatives. As discussed earlier, the fund held a 7.2%
position in sequential-pay/support CMOs and a 4.2% position in PAC CMOs,
securities that are generally considered to be lower risk derivative
instruments. In addition, the portfolio held small positions in inverse
floaters, interest-only (IO) CMOs and principal-only (PO) CMOs for their
potential to add incremental yield. The portfolio's combined position in these
higher risk derivatives was 1.6% as of the end of the period.
.. Duration. We seek excess return over the Index through sector weightings
and specific security selection rather than attempting to make interest rate
predictions. Therefore, we manage the fund's duration to approximate that of the
Index, partly through the use of futures. As of April 30, the fund's duration
was 4.4 years, in line with that of the Index.
Market Outlook
Despite some suggestion of economic moderation, we continue to believe that
interest rates are likely to move higher during the balance of the year. This
expectation is predicated on the economy's broad-based fundamental strength, as
well as the Fed's well-publicized commitment to monetary discipline.
Regarding specific fixed income sectors, investor demand for mortgage-
backed securities remains robust, but lower rates and rising volatility increase
the risk of refinancings and lead us to maintain a cautious outlook for mortgage
pass-throughs over the next few months. Similarly, while CMOs do not generally
offer significant value over mortgage pass-throughs, specific structures within
the CMO market present attractive investment opportunities. In the ABS sector,
anxiety regarding negative credit events during the first quarter appears to be
subsiding. However, we believe the market is now more alert to credit
distinctions among issuers, servicers and collateral types, and has begun
pricing securities accordingly. Consequently, it may become more challenging to
identify unrecognized value within the ABS sector, particularly among the higher
quality issues that we tend to emphasize.
Distribution Policy
The fund's Class A and Class B shares paid out monthly distributions of
approximately $0.52 and $0.47 per share, respectively, during the six-month
period ended April 30, 1997. 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.
/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
May 30, 1997
- --------------------------------------------------------------------------------
5
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--37.7%
Federal Home Loan Mortgage Corp. (FHLMC)--1.8%
$ 1,000,000 7.00% TBA 15-Yr /(a)/ $ 990,930
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--8.7%
$ 1,000,000/(h)/ 6.50% TBA 7-Yr /(a)/ $ 981,560
1,000,000 7.00 TBA 30-Yr /(a)/ 968,750
1,000,000 7.50 TBA 30-Yr /(a)/ 942,500
2,000,000/(h)/ 7.50 TBA 30-Yr /(a)/ 1,985,000
- --------------------------------------------------------------------------------
$ 4,877,810
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA) --13.0%
$ 238,209 9.00% 10/15/19 $ 253,098
97,383 9.00 12/15/19 103,470
315,821 7.50 04/15/23 314,933
610,646 7.50 07/15/23 608,930
368,845 7.00 08/15/23 359,162
695,669 7.00 10/15/23 677,408
61,762 7.00 11/15/23 60,141
877,541 7.00 12/15/23 854,506
1,005,084 8.00 12/15/26 1,018,690
2,000,000/(h)/ 7.50 TBA 30-Yr /(a)/ 1,982,500
1,000,000/(h)/ 8.00 TBA 30-Yr /(a)/ 1,013,430
- --------------------------------------------------------------------------------
$ 7,246,268
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--14.2%
Interest Only--0.4%
FNMA Interest-Only Stripped Security, Series 151, Class 2/(d)/
$ 643,343 11.30% 07/25/22 $ 213,024
- --------------------------------------------------------------------------------
$ 213,024
- --------------------------------------------------------------------------------
Inverse Floater--0.7%
FNMA Remic Trust, Series 1992-62, Class S
$ 404,038 9.27%/(c)/ 05/25/99 $ 405,941
- --------------------------------------------------------------------------------
$ 405,941
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC) CMOs--2.9%
FNMA Remic Trust, Series 1997-9, Class B
$ 1,000,000 6.50% 10/25/22 $ 962,510
GE Capital Mortgage Services, Inc., Series 1994-11, Class A1
644,342 6.50 03/25/24 644,941
- --------------------------------------------------------------------------------
$ 1,607,451
- --------------------------------------------------------------------------------
Principal Only--1.9%
FNMA Remic Trust, Series G-35, Class N/(d)/
$ 575,000 6.16% 10/25/21 $ 419,376
FNMA Remic Trust, Series 1993-205, Class C/(d)/
750,000 7.23% 09/25/23 625,545
- --------------------------------------------------------------------------------
$ 1,044,921
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--1.4%
Citicorp Mortgage Securities, Series 1993-11, Class A6
$ 818,108 6.25% 09/25/08 $ 788,362
- --------------------------------------------------------------------------------
$ 788,362
- --------------------------------------------------------------------------------
Support--7.0%
GE Capital Mortgage Services, Inc., Series 1994-10, Class A22
$ 996,703 6.50% 03/25/24 $ 865,497
Housing Securities, Inc., Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,329,852
Prudential Securities, Series 1995-2, Class A
797,338 5.77 11/15/15 799,578
Salomon Brothers Mortgage Securities VII, Series 1996-6H, Class A1
1,000,000 6.00 09/30/08 899,840
- --------------------------------------------------------------------------------
$ 3,894,767
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,954,466
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $21,101,884) $ 21,069,474
- --------------------------------------------------------------------------------
Asset-Backed Securities--11.6%
Asset Securitization Corp., Series 1996, Class A1
$ 300,000 6.88% 11/13/26 $ 295,699
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
720,000 6.23 06/15/03 710,546
CPS Auto Grantor Trust, Series 1993-3, Class A
855,634 6.30 08/15/02 850,107
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 589,263
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 622,980
JP Morgan Commercial Mortgage Finance Corp., Series 1997-C4
500,000 7.32 12/26/28 498,614
Morgan Stanley Capital Commercial Mortgage, Inc. Series 1997-C1
500,000 7.46 05/15/06 506,875
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
224,429 6.55 11/20/01 225,129
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset-Backed Securities(continued)
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
$ 420,638 6.85% 06/15/01 $ 424,099
Premier Auto Trust, Series 1993-6, Class A2
271,484 4.65 11/02/99 269,021
Premier Auto Trust, Series 1994-1, Class A3
176,500 4.75 02/02/00 175,672
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 473,368
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 860,533
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $6,623,680) $ 6,501,906
- --------------------------------------------------------------------------------
U.S. Government Agency Obligations--10.0%
Small Business Administration
$ 1,700,000 7.15% 03/01/17 $ 1,685,176
1,400,000 7.50 04/01/17 1,416,562
Sri Lanka Aid/(c)/
2,500,000 6.06 02/21/16 2,464,075
- --------------------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $5,562,500) $ 5,565,813
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--35.6%
United States Treasury Bonds
$ 140,000 8.75% 05/15/17 $ 165,484
270,000/(e)/ 8.88 08/15/17 322,988
3,450,000 8.75 05/15/20 4,109,813
180,000 8.75 08/15/20 214,565
690,000/(e)/ 7.63 02/15/25 740,025
United States Treasury Notes
1,460,000/(e)/ 7.38 11/15/97 1,471,636
700,000 5.88 04/30/98 699,342
5,650,000/(e)/ 6.88 08/31/99 5,712,659
3,700,000 6.13 07/31/00 3,664,739
1,100,000 5.63 11/30/00 1,070,091
1,200,000 7.50 02/15/05 1,256,436
United States Treasury Principal-Only Stripped Securities/(d)/
300,000 6.85 05/15/05 174,777
1,550,000 7.23 05/15/20 302,790
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $20,041,673) $ 19,905,345
- --------------------------------------------------------------------------------
Repurchase Agreement--19.9%
Joint Repurchase Agreement Account/(e)/
$ 11,100,000 5.49% 05/01/97 $ 11,100,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $11,100,000) $ 11,100,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $64,429,737/(f)/) $ 64,142,538
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long (Short)/(g)/ Month Gain (Loss)
- --------------------------- ------------------ -------------- -------------
<S> <C> <C> <C>
Euro Dollars 3 September 1997 $375
5 Year U.S. Treasury Notes 19 June 1997 4,312
U.S. Long Term Bond 3 June 1997 6,282
-------------
$10,969
- --------------------------------------------------------------------------------
</TABLE>
Federal Income Tax Information:
<TABLE>
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 118,460
Gross unrealized loss for investments in which cost
exceeds value (509,387)
- --------------------------------------------------------------------------------
Net unrealized loss $ (390,927)
- --------------------------------------------------------------------------------
</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
April 30, 1997.
/(d)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(e)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(f)/The aggregate cost for federal income tax purposes is $64,533,465.
/(g)/Each 5-Year U.S. Treasury Note and U.S. Long Term 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 at risk are $5,200,000 and $3,032,288, respectively. The
determination of notional amounts as presented here are indicative only of
volume of activity and not a measure of market risk.
/(h)/When-issued security.
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.
7
<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.
Special Event
To accommodate different clients' needs and preferences, on March 12, 1997,
the fund opened a new share class (Service).
Favorable Economic Factors Helped European Bonds While Rising Rates Impacted
Treasuries
Global bonds began the period under review on a strong note, but weakened
during the first quarter of 1997. European bonds were the best performers during
the period, while the United States lagged along with the dollar bloc markets.
The economic fundamentals that supported most European bonds throughout
1996 -- particularly weak economic growth and contained inflation -- remained
intact during the period. This favorable backdrop, plus yield convergence ahead
of European monetary union (EMU), helped the higher yielding bonds of Spain
achieve the best performance of all the major bond markets (hedged into U.S.
dollars). The "core" European markets such as Germany also fared well due to
increased expectations of tighter fiscal policies to help them meet EMU
criteria. In contrast, the U.K. gilt underperformed most European bonds as
sharply accelerating growth triggered fears of higher inflation. In Japan, the
performance of Japanese Government Bonds (JGBs) trailed nearly all of the major
European markets but still fared reasonably well (hedged into U.S. dollars). The
Japanese market strengthened following a sharp November sell-off when continued
weakness in the financial sector made near-term rate hikes by the Bank of Japan
unlikely.
In the United States, stronger than expected economic growth pushed yields
higher and prompted the Federal Reserve to raise the federal funds rate by a
quarter-percentage point in March. As a result, U.S. Treasuries posted the
poorest performance of all the major bond markets.
Performance Review: Country Allocations Contributed to Performance
During the period under review, the Goldman Sachs Global Income Fund's
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. The fund's
favorable results were primarily due to its overweighting in German bonds, one
of the strongest European markets during the period, and its underweighting in
the United States, the weakest market.
The fund's Class A and B shares, which have higher expenses than the
Institutional shares, lagged the benchmark. The fund's Service shares achieved
positive performance since their inception on March 12, 1997; however, a partial
period of approximately 1 1/2 months is obviously too brief a period to measure
performance meaningfully.
The fund's Institutional and Class A shares fared well compared with their
peers. For the 12-month period ended April 30, the Institutional and Class A
shares ranked 25th and 29th, respectively, out of 133 global income funds 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
- -------------------------------------------------------------------------------
8
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
performance is not a guarantee of future results. Class B and Service shares
were not ranked for this period because they were in existence less than 12
months.)
We are also pleased to announce that for the five-year period ended April
30, 1997, the fund's Class A shares were rated "four stars" (out of 641 taxable
bond funds) by Morningstar, Inc., an independent rating agency./1/
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
Institu-
Class A Class B tional Service*
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Total Return (based on net
asset value) 3.22% 2.94% 3.50% 0.21%
- ----------------------------------------------------------------------------------------------------------------------
Return From Monthly 2.80% 2.59% 3.08% 0.01%
Distributions
- ----------------------------------------------------------------------------------------------------------------------
Return From Price 0.42% 0.35% 0.42% 0.20%
Appreciation
- ----------------------------------------------------------------------------------------------------------------------
Total Return of J.P. 3.47% 3.47% 3.47% 0.50%
Morgan Global
Government Bond Index
- ----------------------------------------------------------------------------------------------------------------------
NAV (as of 4/30/97) $14.59 $14.58 $14.58 $14.59
- ----------------------------------------------------------------------------------------------------------------------
NAV Change +$0.06 +$0.05 +$0.06 -$0.10
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period. Performance and net asset value
(NAV) change are from its inception date on 3/12/97.
- ------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Class A shares received "four stars"
for both the three- and one-year periods and were rated among 1,193 and 1,709
taxable bond funds for the three- and one-year periods, respectively. The
Morningstar ratings apply only to the fund's Class A shares; the fund's Class B,
Institutional and Service shares have not been rated. Class B and Service shares
are subject to additional fees and expenses that may have the effect of lowering
performance and may affect any future Morningstar rating. Morningstar rates each
fund against its peers in the same category. In all, there are four Morningstar
categories (domestic equity, international equity, taxable bond and municipal).
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.
During the period, we successfully employed several currency strategies
relative to our neutral position, which is to be fully hedged into U.S. dollars.
The main contributors to the positive currency performance were the fund's long
U.S. dollar positions against the yen and long positions in the high-yielding
European currencies against the Deutschemark and Swiss franc. The U.S. dollar
was supported by strong growth and rising short-term rates while the high-
yielding European currencies benefited from the EMU process gaining momentum.
Portfolio Composition and Investment Strategies
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
U.S. 33.1%
Germany 11.0%
Cash 10.7%
Japan 10.4%
U.K. 10.1%
Australia 8.5%
Italy 6.3%
Sweden 4.3%
France 3.0%
Spain 2.6%
</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 April 30, 1997, the fund was slightly underweighted in
the dollar bloc countries (e.g., U.S., Canada and Australia) relative to the
Index, 41.6% versus 44.3%.
U.S. In the U.S., Treasury prices came under pressure when accelerating
economic growth drove bond yields
- -------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
higher and prompted a Fed rate hike. As noted, the fund was underweighted in
Treasuries, which significantly benefited its performance relative to the Index.
As of April 30, 33.1% of the portfolio was invested in U.S. Treasuries compared
with a 40.2% allocation for the benchmark.
Other Dollar Bloc. The fund was not invested in Australia when the period
began, but we took advantage of improving bond fundamentals and a widening of
the Australia/U.S. bond yield differential by reestablishing a position in
December 1996. As of April 30, Australian bonds accounted for 8.5% of the
portfolio, overweighted compared with the benchmark's 1.2%. The fund also
briefly held a position in Canada, which performed well and was sold at a
profit.
.. Europe. European bonds were the strongest performers and they contributed
to the fund's favorable results during the period. As of April 30, the region
accounted for 37.3% of the portfolio compared with a 41.4% weighting for the
Index.
Germany. Despite a pickup in growth in mid-1996, the period under review
was marked by a return of softening economic activity. The most dramatic
indication of Germany's continuing economic difficulties was a record increase
in unemployment in January to levels last seen in 1933. The belief that an end
of the Bundesbank's very easy monetary policy was not in sight continued to
support the bond market. The fund held an overweighted position in Germany
relative to the Index, 11.0% versus 8.9%.
Spain, Sweden and Italy. When the period began, increased optimism
regarding EMU particularly benefited the higher-yielding bonds of Spain and
Sweden. Though the prospects for EMU dimmed somewhat during the first quarter,
Spain, a 2.6% position as of April 30, continued to perform well due to
favorable economic fundamentals. Sweden's portfolio weighting was in line with
the Index for most of the period, then increased to 4.3% in April in
anticipation of further rate cuts on the back of favorable inflation reports.
Finally, as of April 30, the portfolio was overweighted in Italy, 6.3% versus
4.9% for the Index, because growth remains muted and we expect it to benefit
from further yield convergence.
U.K. The U.K.'s economy continued to grow at a pace well above that of the
rest of Europe. The prospect of higher rates, as well as concerns surrounding
the general election, raised investor uncertainty and impacted the performance
of the U.K. gilt. However, we increased the portfolio's U.K. position in January
in the belief that the forward interest rate curve reflected an overly
pessimistic view of potential monetary tightening. By April 30, the U.K. was
10.1% of the portfolio, overweighted compared with the benchmark (6.4%).
France. Though the fund was not invested in France during most of the
period, we established a 3.0% position in April, as we believed that the
underperformance of shorter term bonds in that market presented an attractive
investment opportunity relative to Germany.
Ireland, Denmark and the Netherlands. During the period, we sold the
portfolio's small positions in Ireland, Denmark and the Netherlands after they
performed well and fulfilled our return expectations.
.. Japan. The fund significantly underweighted Japan relative to the Index
(10.4% versus 14.3%) because economic growth, though muted, continued to point
towards economic recovery. To a significant extent, the Japanese bond market
shrugged off signs of strengthening growth as being "front loading" ahead of the
consumption tax hike on April 1. Instead, the market focused on the need for a
continuation of low rates to assist the troubled financial sector.
.. Cash Equivalents. We reduced the fund's cash equivalent position to 10.7%,
down from 15.5% six months ago, in favor of attractive investment opportunities.
.. Credit Quality. Throughout the period, the portfolio was 100% invested in
triple-A-rated securities.
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
.. Duration. As of the end of the period, the fund's duration was shorter
than that of the Index, 4.7 years compared with 5.1 years, primarily due to its
underweighting in Japan and its cash equivalent position. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's NAV should move in relation to interest rate
fluctuations.)
Distribution Policy
During the six-month period under review, the fund's Class A, B and
Institutional shares paid out distributions of $0.40, $0.37 and $0.44 per share,
respectively. From their inception on March 12 through April 30, the fund's
Service shares paid out $0.13 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.
Fund Outlook
The rapid pace of U.S. economic growth during the past two quarters leads
us to expect further Fed tightening. Despite early signs of a possible slowdown
in the second quarter, we continue to believe that bond yields will need to rise
from current levels to ensure that inflationary pressures remain in check.
European growth remains modest, but even more importantly, inflation
appears to be set for further declines (excluding the U.K.). Provided EMU
remains on track, short rates across Europe appear likely to stay at current
levels for a sustained period. Consequently, we expect European bonds to provide
reasonable returns, outperforming the weaker U.S. bond market. In the U.K., a
25-basis-point rate hike and greater independence for the Bank of England has
established the new Labor government's anti-inflation credentials. Any policy
that moves towards a closer relationship with continental Europe will further
highlight the fundamentally cheap levels for U.K. gilts relative to other
European bonds.
In Japan, a rate hike in the near future remains unlikely but JGBs are
vulnerable to the threat of a change in government policy or an asset allocation
shift. For example, the weakness of the life insurance companies may force the
authorities to consider the cost of maintaining historically low short-term
rates. Furthermore, the strong performance of the equity market at the end of
the period may prompt an asset allocation shift away from bonds into equities,
putting further upward pressure on Japanese yields.
/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, May 30, 1997
- -------------------------------------------------------------------------------
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount(a) Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--87.7%
Australian Dollar--8.4%
Commonwealth of Australia
AUD 21,700,000 10.00% 02/15/06 $ 19,262,621
- --------------------------------------------------------------------------------
British Pound Sterling--9.8%
United Kingdom Treasury
BPS 8,000,000 8.50% 12/07/05 $ 13,833,063
5,300,000 7.50 12/07/06 8,528,207
- --------------------------------------------------------------------------------
$ 22,361,270
- --------------------------------------------------------------------------------
Deutschemark--10.8%
Federal Republic of Germany
DEM 28,000,000 7.50% 11/11/04 $ 18,101,859
2,000,000 6.50 10/14/05 1,216,538
9,000,000 6.25 04/26/06 5,383,994
- --------------------------------------------------------------------------------
$ 24,702,391
- --------------------------------------------------------------------------------
French Franc--3.0%
Government of France
FRF 40,000,000 4.75% 03/12/02 $ 6,851,366
- --------------------------------------------------------------------------------
Italian Lira--6.1%
Republic of Italy
ITL 22,000,000,000 9.50% 05/01/01 $ 13,922,058
- --------------------------------------------------------------------------------
Japanese Yen--10.2%
International Bank for Reconstruction & Development
JPY 1,400,000,000 4.50% 06/20/00 $ 12,132,194
700,000,000 6.75 06/18/01 6,665,813
500,000,000 4.50 03/20/03 4,497,873
- --------------------------------------------------------------------------------
$ 23,295,880
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 700,000,000 10.15% 01/31/06 $ 5,841,114
- --------------------------------------------------------------------------------
Swedish Krona--4.2%
Kingdom of Sweden
SEK 50,000,000 5.50% 04/12/02 $ 6,157,023
30,000,000 6.00 02/09/05 3,586,638
- --------------------------------------------------------------------------------
$ 9,743,661
- --------------------------------------------------------------------------------
United States Dollar--32.7%
United States Treasury Notes
USD 15,000,000 5.25% 01/31/01 $ 14,392,950
17,000,000 6.38 03/31/01 16,909,730
8,200,000 6.25 02/15/03 8,059,042
10,000,000 7.88 11/15/04 10,684,400
4,000,000 6.50 08/15/05 3,940,640
14,700,000 7.00 07/15/06 14,947,989
6,200,000 6.50 10/15/06 6,098,258
- --------------------------------------------------------------------------------
$ 75,033,009
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $204,539,209) $ 201,013,370
- --------------------------------------------------------------------------------
Short-Term Obligations--13.6%
State Street Bank & Trust Euro-Time Deposit
USD 31,090,625 5.66% 05/01/97 31,090,625
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $31,090,625) $ 31,090,625
- --------------------------------------------------------------------------------
<CAPTION>
Contracts Description Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Options--0.0%
FRF 60,000,000 Government of France 4.75% Call, $ 71,961
exp 7/97, Strike yield 4.85%
FRF 40,000,000 Government of France 4.75% Put, $ 39,750
exp 7/97, Strike yield 4.85%
- --------------------------------------------------------------------------------
Total Options
(Cost $124,428) $ 111,711
- --------------------------------------------------------------------------------
Total Investments
(Cost $235,754,262(b)) $ 232,215,706
- --------------------------------------------------------------------------------
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value $ 1,972,384
exceeds cost
Gross unrealized loss for investments in which cost (5,579,488)
exceeds value
- --------------------------------------------------------------------------------
Net unrealized loss $ (3,607,104)
- --------------------------------------------------------------------------------
</TABLE>
(a)The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
AUD = Australian Dollar JPY = Japanese Yen
BPS = British Pound Sterling ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
FRF = French Franc USD = United States Dollar
ITL = Italian Lira
/(b)/The aggregate cost for federal income tax purposes is $235,822,810.
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.
12
<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, securities 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.
A Stable Municipal Bond Market
The municipal market has remained at relatively rich levels compared with
the taxable market since the end of 1996, as light primary and secondary supply
has been consumed easily by stable demand. The average price of a 15-year
municipal bond (as calculated from data provided by Municipal Market Data, an
independent municipal market information provider) declined approximately 1.07%,
while yields rose from 5.30% on October 31, 1996 to 5.40% on April 30, 1997.
Supply increased throughout most of the period, though it remained light
compared with historical averages. In November, municipal bond issuance was up
30% versus the prior three-month average. As is typical, increased supply
continued in early December due to the approaching year-end. The 1997 new issue
supply has followed historical early-month patterns, with January and February
supply well below annual averages (slightly more than $10 billion each month)
and March and April supply closer to normal levels ($13 to $14 billion).
Demand from individual investors (who control approximately two-thirds of
municipal bond ownership either through mutual funds or direct investment)
remained stable, but not strong, as long-term municipal yields were below the
psychologically significant 6% level. While yields have not yet cracked that
barrier, President Clinton's reelection and the loss of Republican momentum have
put talk of tax reform and talk of significant changes in the tax-exempt status
of municipal bonds on the back burner, comforting some of the investors
concerned about the market. In addition, the emergence of "nontraditional"
buyers during April has helped support the long end of the market.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Yield
Year of Maturity 4/30/97 10/31/96
<S> <C> <C>
1998 3.85% 3.90%
1999 4.40% 4.15%
2000 4.60% 4.30%
2001 4.70% 4.40%
2002 4.80% 4.50%
2003 4.85% 4.60%
2004 4.90% 4.70%
2005 4.95% 4.80%
2006 5.00% 4.90%
2007 5.05% 5.00%
2008 5.10% 5.10%
2009 5.20% 5.20%
2010 5.30% 5.25%
2011 5.35% 5.30%
2012 5.40% 5.35%
2013 5.45% 5.40%
2014 5.50% 5.40%
2015 5.50% 5.45%
2016 5.55% 5.45%
2017 5.55% 5.45%
2018 5.55% 5.50%
2019 5.55% 5.50%
2020 5.60% 5.50%
2021 5.60% 5.50%
2022 5.60% 5.50%
2023 5.60% 5.50%
2024 5.60% 5.50%
2025 5.60% 5.50%
2026 5.60% 5.50%
2027 5.60% 5.50%
</TABLE>
The yield curve steepened and shifted upward at the short end, remained nearly
the same in the mid-range, and shifted marginally upward at the longer end, in
contrast to six months ago.
Performance Review: The Fund's Positive Performance Reflects Active Management
of Term Structure, Sector Weightings and Security Selection
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 also performed well, although slightly below the
Index.
We are pleased to report that the fund's Class A shares outperformed most
of their peers. For the one-year period ended April 30, 1997, Class A shares
ranked in the top 10% of general municipal debt funds (20 out of 231) based on
total return, according to Lipper Analytical Services, Inc. The fund's Class B
shares were not in existence for the entire one-year period and were not
included in the ranking. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.)
- -------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
Class A Class B
------- -------
<S> <C> <C>
Total Return (based on net asset 2.57% 2.18%
value (NAV))
- --------------------------------------------------------------------------------
Return From Monthly Distributions 2.36% 1.97%
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.21% 0.21%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal 2.49% 2.49%
Bond Index
- --------------------------------------------------------------------------------
NAV (as of 4/30/97) $14.40 $14.40
- --------------------------------------------------------------------------------
NAV Change +$0.03 +$0.03
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
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
municipal and Treasury futures contracts to manage sector allocation and
duration.
.. The portfolio's 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 10-year maturities on the short end of the
curve. This strategy allows us to extract extra yield from the shorter end of
the market while maintaining higher quality on the more interest-rate-sensitive
long end of the market. However, during the period, we regularly adjusted the
credit and term structure to take advantage of changing market conditions.
.. During the period, we employed several strategies using municipal and/or
treasury futures contracts. These trades are designed to exploit relative
pricing discrepancies between different markets, and are not designed to incur
additional interest rate risk. The fund stood at a 100% municipal bond weighting
(no Treasury or municipal contracts) at the end of the reporting period,
indicating attractive opportunities across the length of the municipal yield
curve.
.. 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:
Emphasis on Revenue Bonds
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Revenue Bonds 44.1%
Insured Revenue Bonds 35.4%
Insured General Obligations 20.5%
</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.
.. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of April 30, the fund held a 79.5% 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 April 30, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 20.5% versus 45.6%. Though the fund's total
GO allocation of 20.5% was down from 29.8% six months ago, the GO category is
now exclusively
- -------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- -------------------------------------------------------------------------------
weighted in insured GOs. Security-specific investment opportunities and the
relative cheapness of bond insurance for issuers enable the fund to purchase
higher yielding insured GOs without sacrificing quality.
.. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. VRDNs fell
from 7.6% to 4.4% of the portfolio. The 4.4% VRDN allocation consists of 3.0%
GOs and 1.4% Revenue-Backed VRDNs.
.. Credit Quality. During the period, the fund's average credit quality has
remained double-A. The fund's credit quality maintained a "barbell" structure,
with higher quality securities at the long end of the yield curve and lower
quality securities (but still investment grade) at the short end, though there
have been slight increases in the double-A and single-A categories. As of April
30, 59.8% of the fund was invested in triple-A-rated securities, down from 70.5%
six months ago, while double-A- and single-A-rated securities were increased to
14.4% and 9.8% from 9.3% and 1.8%, respectively. We continued to maintain a
position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 16.0% of the portfolio, down
slightly from 18.4%. 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
Our long-term outlook for municipal bond supply is essentially neutral, as
rates are at high levels compared with one year ago. As a result, the current
rate environment encourages neither supply (low rates bring refinancing) nor
demand (high rates attract buyers). At this point, the municipal market does not
perceive any real threats from the federal budget accord. Without any
fundamental problems in view for tax-exempts, we are left with technical forces
as the key driver in relative market performance.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the period
under review, the fund's Class A and B shares paid out distributions of $0.34
and $0.32 per share, respectively. The fund intends to distribute substantially
all of its investment company tax-exempt and taxable income, as required by tax
law.
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
May 30, 1997
- -------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--95.6%
Arizona--7.6%
Maricopa County MFH IDA (A)
$1,795,000 5.85% 01/01/08 $1,824,546
Maricopa County Unified School District No. 41 GO (FSA)
(AAA/Aaa)
2,500,000 6.25 07/01/15 2,618,500
- --------------------------------------------------------------------
$4,443,046
- --------------------------------------------------------------------
California--3.4%
Contra Costa Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $2,014,700
- --------------------------------------------------------------------
Colorado--4.3%
Englewood MFH RB (BBB)/(d)/
$2,500,000 6.65% 12/01/26 $2,495,575
- --------------------------------------------------------------------
Connecticut--3.6%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $2,107,780
- --------------------------------------------------------------------
Florida--6.7%
Escambia County Housing Authority, Single Family
Multi-County (FNMA/GNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $1,460,070
Santa Rosa Bay Bridge Authority RB (BBB-)
2,500,000 6.25 07/01/28 2,472,900
- --------------------------------------------------------------------
$3,932,970
- --------------------------------------------------------------------
Illinois--14.6%
Chicago Midway Airport RB (MBIA)(AAA/Aaa)
$2,500,000 5.50% 01/01/10 $2,498,800
Lake County Unified School District No. 116 GO (FSA)
(AAA/Aaa)
2,000,000 7.60 02/01/14 2,423,180
1,525,000 6.10 02/01/16 1,555,988
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,104,080
- --------------------------------------------------------------------
$8,582,048
- --------------------------------------------------------------------
Indiana--7.0%
Indiana Bond Bank for Hendricks County RB (AA-)/(b)/
$1,420,000 6.00% 02/01/12 $1,472,540
Indiana Transportation Airport Series A RB (AAA/Aaa)
2,500,000 6.00 11/01/11 2,618,025
- --------------------------------------------------------------------
$4,090,565
- --------------------------------------------------------------------
Kentucky--1.8%
Nelson County Industrial Building RB for Mabex
Universal Corp. Project (A3)
$1,000,000 6.50% 04/01/05 $1,060,850
- --------------------------------------------------------------------
Louisiana--4.3%
South Louisiana Port RB for Cargill Corp. (Aa3)
$2,500,000 5.85% 04/01/17 $2,499,950
- --------------------------------------------------------------------
Maine--1.2%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 675,000 6.80% 12/01/07 $ 721,177
- --------------------------------------------------------------------
Missouri--3.6%
St. Louis Municipal Finance Leasehold RB (A/Aa3)
$2,100,000 5.30% 07/15/02 $2,128,854
- --------------------------------------------------------------------
Nevada--3.1%
Washoe County GO (MBIA)(AAA/Aaa)
$2,000,000 5.00% 06/01/17 $1,822,080
- --------------------------------------------------------------------
New York--3.4%
Syracuse IDA RB (AA)
$2,000,000 5.13% 10/15/02 $1,992,580
- --------------------------------------------------------------------
North Dakota--3.5%
Mercer County PCRB for Basin Electric & Power 2nd
Series (AMBAC) (AAA/Aaa)/(d)/
$2,000,000 6.05% 01/01/19 $2,051,720
- --------------------------------------------------------------------
Ohio--1.0%
Cuyahoga County for Rock & Roll Hall of Fame RB (BBB)
$ 600,000 5.45% 12/01/05 $ 594,018
- --------------------------------------------------------------------
Oklahoma--4.0%
Holdenville IDA RB (BBB/Baa)
$1,245,000 5.95% 07/01/02 $1,279,001
Tulsa County Public Facilities RB (A-)
1,000,000 6.60 11/01/08 1,070,250
- --------------------------------------------------------------------
$2,349,251
- --------------------------------------------------------------------
Pennsylvania--3.5%
Bethlehem School District GO Bond (MBIA)(AAA/Aaa)
$2,000,000 6.00% 03/01/16 $2,035,940
- --------------------------------------------------------------------
South Carolina--2.5%
Piedmont Municipal Power Agency RB (MBIA)(AAA/Aaa)
$1,465,000 5.50% 01/01/10 $1,461,718
- --------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations(continued)
Tennessee--2.6%
McMinnville Housing Authority RB (A2)
$1,550,000 6.00% 10/01/09 $ 1,551,240
- --------------------------------------------------------------------
Texas--5.2%
Denison Water & Sewer RB (AMBAC)(AAA/Aaa)
$1,000,000 5.50% 09/01/09 $ 1,014,700
East Texas Criminal Justice Facilities Financing Corp.
RB (AMBAC) (AAA/Aaa)
2,000,000 5.75 11/01/09 2,035,100
- --------------------------------------------------------------------
$ 3,049,800
- --------------------------------------------------------------------
Washington--8.7%
Chelan County Public Utility RB (MBIA)(AAA/Aaa)
$2,500,000 6.35% 07/01/28 $ 2,586,650
Washington State Public Power Supply System Series A RB
(AMBAC)(AAA/Aaa)
2,500,000 5.70 07/01/11 2,491,850
- --------------------------------------------------------------------
$ 5,078,500
- --------------------------------------------------------------------
Total Debt Obligations
(Cost $55,481,930) $ 56,064,362
- --------------------------------------------------------------------
Short-Term Obligations--5.0%
Alabama--0.7%
Phenix City IDA RB (Toronto Dominion LOC)(AA)/(a)/
$ 400,000 5.05% 05/01/97 $ 400,000
- --------------------------------------------------------------------
New York--3.4%
New York GO (Kredietbank LOC)(AA-)/(a)/
$2,000,000 4.45% 05/01/97 $ 2,000,000
- --------------------------------------------------------------------
Texas--0.9%
Sabine River PCRB (Union Bank of Switzerland
LOC)(AA+)/(a)/
$ 500,000 5.55% 05/01/97 $ 500,000
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $2,900,000) $ 2,900,000
- --------------------------------------------------------------------
Total Investments
(Cost $58,381,930/(c)/) $58,964,362
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value $739,962
exceeds cost
Gross unrealized loss for investments in which cost (157,530)
exceeds value
- --------------------------------------------------------------------
Net unrealized gain $582,432
- --------------------------------------------------------------------
</TABLE>
/(a)/ Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/(b)/ When-issued security.
/(c)/ The amount stated also represents aggregate cost for federal income
tax purposes.
/(d)/ 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.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Abbreviations:
<S> <C>
AMBAC --Insured by American Municipal
Bond Assurance Corp.
FNMA --Insured by Federal National
Mortgage Association
FSA --Financial Security Assurance Co.
GNMA --Insured by Government National
Mortgage Association
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $64,429,737, $235,754,262 and $58,381,930) $64,142,538 $232,215,706 $58,964,362
Cash, at value 94,169 324,863 90,406
Receivables:
Investment securities sold 1,004,854 -- --
Interest 587,522 3,982,620 1,009,894
Forward foreign currency exchange contracts -- 2,735,490 --
Fund shares sold 664,318 373,902 93,800
Variation margin 6,413 -- --
Foreign tax withheld -- 87,755 --
Deferred organization expenses, net 14,677 -- 21,390
Other assets 63,375 3,239 9,208
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 66,577,866 239,723,575 60,189,060
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 10,549,108 8,691,808 1,387,075
Forward foreign currency exchange contracts -- 1,125,990 --
Fund shares repurchased 23,074 332,497 10,350
Income distribution 81,478 7,496 92,940
Investment adviser fees 10,999 82,520 19,312
Administration fees -- 28,132 7,242
Authorized dealer service fees 10,285 38,021 9,984
Distribution fees 1,290 30,045 169
Accrued expenses and other liabilities 19,056 98,644 12,103
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,695,290 10,435,153 1,539,175
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 56,393,312 222,342,678 58,551,259
Accumulated undistributed net investment income 53,331 6,196,133 60,331
Accumulated net realized loss on investment transactions (287,837) (989,524) (544,137)
Accumulated net realized foreign currency gain -- 3,713,328 --
Net unrealized gain (loss) on investments and futures (276,230) 682,535 582,432
Net unrealized loss on translation of assets and liabilities denominated
in foreign currencies -- (2,656,728) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $55,882,576 $229,288,422 $58,649,885
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:/(a)/
Class A $14.10 $14.59 $14.40
Class B $14.11 $14.58 $14.40
Institutional -- $14.58 --
Service -- $14.59 --
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Class A 3,754,506 11,765,253 4,031,092
Class B 208,089 75,162 42,867
Institutional -- 3,870,161 --
Service -- 6,466 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 3,962,595 15,717,042 4,073,959
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $14.76, $15.28 and $15.08 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.
18
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Operations
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $ 1,346,191 $ 7,675,570 $1,514,540
- ----------------------------------------------------------------------------------------------------------------------------------
Total income 1,346,191 7,675,570 1,514,540
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 98,534 915,292 109,080
Administration fees 29,560 183,102 40,904
Authorized dealer service fees 49,266 235,877 68,174
Distribution fees 51,745 237,238 69,406
Custodian fees 31,954 76,892 20,721
Transfer agent fees 42,728 53,004 44,706
Professional fees 30,344 40,805 29,494
Registration fees 13,207 28,146 14,522
Amortization of deferred organization expenses 9,321 -- 8,700
Trustee fees 332 2,324 553
Other 6,659 23,235 6,641
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 363,650 1,795,915 412,901
Less--expenses reimbursable and fees waived by Goldman Sachs (261,399) (513,953) (179,441)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 102,251 1,281,962 233,460
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income 1,243,940 6,393,608 1,281,080
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions (102,548) 3,647,163 384,465
Futures transactions 19,662 -- 96,288
Foreign currency related transactions -- 3,669,694 --
Net change in unrealized gain (loss) on:
Investments (363,801) (4,182,327) (408,697)
Futures (63,631) -- --
Translation of assets and liabilities denominated in foreign currencies -- (1,445,970) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, futures and foreign
currency transactions (510,318) 1,688,560 72,056
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 733,622 $ 8,082,168 $1,353,136
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Net of $94,607 in foreign withholding tax for the Global Income Fund.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
-------------------------------------------
<S> <C> <C> <C>
From operations:
Net investment income $ 1,243,940 $ 6,393,608 $1,281,080
Net realized gain (loss) from investment transactions (82,886) 3,647,163 480,753
Net realized gain from foreign currency related transactions -- 3,669,694 --
Net change in unrealized gain (loss) on investments and futures (427,432) (4,182,327) (408,697)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- (1,445,970) --
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 733,622 8,082,168 1,353,136
- -------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,217,324) (5,196,561) (1,272,366)
Class B (26,616) (15,612) (8,714)
Institutional Class -- (1,688,968) --
Service Class -- (559) --
Net realized gain on investment transactions
Class A (157,412) -- --
Class B (1,780) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,403,132) (6,901,700) (1,281,080)
- -------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 32,392,263 19,707,735 10,342,628
Reinvestment of dividends and distributions 1,137,480 4,631,079 756,256
Cost of shares repurchased (7,815,079) (49,406,305) (5,043,455)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 25,714,664 (25,067,491) 6,055,429
- -------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 25,045,154 (23,887,023) 6,127,485
Net assets:
Beginning of period 30,837,422 253,175,445 52,522,400
- -------------------------------------------------------------------------------------------------------------------------------
End of period $ 55,882,576 $ 229,288,422 $58,649,885
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income $ 53,331 $ 6,196,133 $ 60,331
- -------------------------------------------------------------------------------------------------------------------------------
Summary of share transactions:
Shares sold 2,285,678 1,345,225 716,106
Reinvestment of dividends and distributions 80,099 316,808 52,251
Shares repurchased (550,966) (3,368,115) (349,613)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 1,814,811 (1,706,082) 418,744
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<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 and futures (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.
21
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
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 April 30, 1997, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. Effective May 1, 1997, the Trust was reorganized from a
Massachusetts business trust to a Delaware business trust and various
operational changes were approved, including updating certain investment
restrictions and amending the management contracts.
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. 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 the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account principal prepayment
experience and estimates of future principal prepayments. Certain mortgage
security paydown gains and losses are taxable as ordinary income. Such paydown
gains and losses increase or decrease taxable ordinary income available 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
- -------------------------------------------------------------------------------
22
<PAGE>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
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.
F. Option Accounting Principles
- -------------------------------
The Funds may purchase or write call and put options to hedge against changes in
security prices. When call or put options are written, an amount equal to the
premium received is recorded as a liability in the Statement of Assets and
Liabilities which is subsequently marked-to-market to reflect the current value
of the written option. 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 a closing
transaction has been entered into, a gain or loss may be realized on the written
or purchased option. When options expire, the premium received from a written
option is treated as a realized gain while the cost of a purchased option is
treated as a realized loss. If an option is exercised, the premium paid or
received will be offset against the proceeds on the sale or the purchase cost of
the underlying security to determine realized gains or losses. Gains and losses
are reported in the Statement of Operations.
Certain risks arise upon entering into options contracts. The risk in
writing a call option is that the Fund gives up the opportunity to profit if the
underlying security's market value increases beyond the exercise price and the
option is exercised. The risk in writing a put option is that the Fund may
realize a loss if the market price of an underlying security declines and the
option is exercised. A premium must be paid for purchased options regardless of
whether or not the option is exercised. The Fund also has the risk of not being
able to enter into a closing transaction if a liquid secondary market does not
exist.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices,
- -------------------------------------------------------------------------------
23
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
currency exchange rates (in the case of Global Income) or to seek to increase
total return.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Payments for futures contracts ("variation margin") are paid or received by the
Funds daily, dependent on the daily fluctuations in the value of the contracts,
and are recorded for financial reporting purposes, as unrealized gains or
losses. When contracts are closed, the Funds realize a gain or loss equal to the
difference between the value of the futures contract to sell and the value of
the futures contract to buy. Gains and losses are reported in the Statement of
Operations.
The use of futures contracts involve, to varying degrees, elements of
market and counterparty risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities. Changes in the value of the futures
contract may not directly correlate with changes in the value of the underlying
securities decreasing the effectiveness of the Funds' hedging strategies
potentially resulting in a loss.
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
substantially all investment company tax-exempt and taxable income to its
shareholders each year. 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.
The Funds, at their most recent tax year-ends (October 31, 1996 for Global
Income and December 31, 1996 for Government Income and Municipal Income) had
approximately the following amounts of capital loss carryforwards for U.S.
federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ---------------- --------------
<S> <C> <C>
Global Income $4,471,734 2004
Municipal Income $ 702,691 2004
</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 generally 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. Shareholders of
Service shares bear all expenses and fees paid to service organizations for
their services with respect to such shares as well as other expenses (subject to
expense limitations) which are directly attributable to such shares.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as 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
- -------------------------------------------------------------------------------
24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 period ended April 30, 1997,
Goldman Sachs retained approximately $134,700, $46,600 and $40,300 of sales
loads related to sales of 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. 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 six months ended April 30, 1997, 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 $49 $30 $48 $134 $24
Global
Income 378 -- 38 98 --
Municipal
Income --- -- 68 111 9
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such
waivers and limitations in the future at their discretion.
For the six months ended April 30, 1997, Government Income and Municipal
Income incurred commissions expense of approximately $877 and $500 respectively,
in connection with futures contracts entered into with Goldman Sachs. At April
30, 1997, Goldman Sachs owes approximately $6,400 to Government Income related
to variation margin on futures contracts.
As of May 1, 1997 each Fund's advisory and administration agreements were
combined into a single management agreement encompassing the same services and
fee structure. The investment adviser for Global Income changed from GSAM to
GSAM International.
4. Line of Credit Facility
The Funds participate in a $250,000,000 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
- -------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
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 period ended April 30, 1997, 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
six months ended April 30, 1997, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and agency
obligations $89,868,153 $31,460,469 $ --
- --------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 2,626,912 251,582,253 52,647,833
- --------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 66,314,796 46,245,813 --
- --------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and agency
obligations) 2,926,850 234,275,222 50,202,452
- --------------------------------------------------------------------
</TABLE>
At April 30, 1997, Global Income had outstanding forward foreign currency
exchange contracts, both to purchase and sell foreign currencies as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Value on
Foreign Currency Settlement Current Unrealized
Purchase Contracts Date Value (Loss)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Finnish Markka
Expiring 7/10/97 $ 5,769,651 $ 5,743,713 $ (25,938)
Norwegian Krone
Expiring 7/18/97 6,967,220 6,931,393 (35,827)
- ----------------------------------------------------------------------------
Total Foreign Currency
Purchase Contracts $12,736,871 $12,675,106 $ (61,765)
- ----------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
Expiring 6/16/97 $ 19,731,038 $ 19,370,358 $ 360,680
British Pound Sterling
Expiring 5/15/97 22,990,248 22,842,002 148,246
Deutschemark
Expiring 5/23/97 9,189,539 9,098,874 90,665
Expiring 7/10/97 5,769,651 5,746,603 23,048
French Franc
Expiring 7/22/97 19,223,491 18,986,663 236,828
Italian Lira
Expiring 5/23/97 14,576,014 14,452,635 123,379
Japanese Yen
Expiring 7/24/97 46,975,472 46,670,841 304,631
Spanish Peseta
Expiring 6/11/97 5,856,184 5,819,307 36,877
Swedish Krona
Expiring 6/12/97 10,186,641 9,919,416 267,225
Swiss Franc
Expiring 5/23/97 240,202 240,493 (291)
Expiring 5/23/97 11,211,600 11,103,780 107,820
- ----------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $165,950,080 $164,250,972 $1,699,108
- ----------------------------------------------------------------------------
</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 April 30, 1997, 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 $2,735,490 and $1,125,990 respectively, in the
accompanying Statement of Assets and Liabilities. Included in the "Receivable
and Payable for forward foreign currency exchange contracts" are $1,036,091 and
$1,063,934 respectively, related to forward contracts closed but not settled as
of April 30, 1997.
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the six months ended April 30, 1997 is as follows:
<TABLE>
<CAPTION>
Government Income Global Income Municipal Income
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 2,087,525 $29,588,339 1,091,068 $15,982,653 687,045 $9,922,452
Reinvestment of dividends and
distributions 78,520 1,115,153 240,916 3,522,418 51,831 750,177
Shares repurchased (543,006) (7,702,748) (3,237,001) (47,484,511) (345,221) (4,979,641)
--------------------------------------------------------------------------------------
1,623,039 23,000,744 (1,905,017) (27,979,440) 393,655 5,692,988
--------------------------------------------------------------------------------------
Class B shares
Shares sold 198,153 2,803,924 65,331 958,124 29,061 420,176
Reinvestment of dividends and
distributions 1,579 22,327 715 10,428 420 6,079
Shares repurchased (7,960) (112,331) (8,487) (124,059) (4,392) (63,814)
--------------------------------------------------------------------------------------
191,772 2,713,920 57,559 844,493 25,089 362,441
--------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 182,398 2,673,084 -- --
Reinvestment of dividends and
distributions -- -- 75,139 1,097,674 -- --
Shares repurchased -- -- (122,627) (1,797,735) -- --
--------------------------------------------------------------------------------------
-- -- 134,910 1,973,023 -- --
--------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 6,428 93,874 -- --
Reinvestment of dividends and
distributions -- -- 38 559 -- --
Shares repurchased -- -- -- -- -- --
--------------------------------------------------------------------------------------
-- -- 6,466 94,433 -- --
--------------------------------------------------------------------------------------
Net increase (decrease) 1,814,811 $25,714,664 (1,706,082)$(25,067,491) 418,744 $6,055,429
=====================================================================================-
</TABLE>
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Global Income Municipal Income
- --------------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 607,156 $8,675,868 1,089,521 $15,545,777 431,736 $6,139,212
Reinvestment of dividends and
distributions 112,752 1,611,387 947,846 13,419,614 104,074 1,482,976
Shares repurchased (626,797) (8,971,389) (5,376,065) (76,216,894) (694,685) (9,874,431)
--------------------------------------------------------------------------------------
93,111 1,315,866 (3,338,698) (47,251,503) (158,875) (2,252,243)
--------------------------------------------------------------------------------------
Class B shares
Shares sold 17,470 246,680 18,628 265,053 17,760 250,553
Reinvestment of dividends and
distributions 225 3,200 119 1,708 127 1,802
Shares repurchased (1,378) (19,531) (1,144) (16,373) (109) (1,551)
--------------------------------------------------------------------------------------
16,317 230,349 17,603 250,388 17,778 250,804
--------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 1,703,165 23,936,542 -- --
Reinvestment of dividends and
distributions -- -- 250,603 3,546,724 -- --
Shares repurchased -- -- (406,888) (5,786,481) -- --
--------------------------------------------------------------------------------------
-- -- 1,546,880 21,696,785 -- --
--------------------------------------------------------------------------------------
Net increase (decrease) 109,428 $1,546,215 (1,774,215)$(25,304,330) (141,097) $(2,001,439)
======================================================================================
</TABLE>
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
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 at the Funds' custodian.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSAM, transfer uninvested cash balances into joint accounts, the
daily aggregate balance of which is invested in one or more repurchase
agreements. The underlying securities for the repurchase agreements are U.S.
Treasury and agency obligations. At April 30, 1997, Government Income had an
undivided interest in the repurchase agreement in the following joint account
which equaled $11,100,000 in principal amount. At April 30, the repurchase
agreements held in this joint account, along with the corresponding underlying
securities (including the type of security, market value, interest rate and
maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns & Co., dated 4/30/97, repurchase price
$680,103,889 (GNMA: $59,497,211, 7.50%-9.00%,
12/15/21-12/15/26; FNMA: $267,568,394, 5.50%,
02/01/09-04/01/27; FHLMC: $373,405,594, 5.50%-7.50%,
2/01/98-4/01/27)
$680,000,000 5.50% 5/01/97 $680,000,000
Nomura Securities International, Inc. dated 4/30/97,
repurchase price $300,045,833 (FNMA: $182,812,268,
5.94%-8.01%, 7/22/97-5/11/05; FHLMC: $38,631,543,
6.02%-6.75%, 1/28/00-12/04/01, FCSB: $49,581,430,
6.05%-6.25%, 5/10/99-12/03/99, SLMA: $29,222,430,
6.00%, 1/16/01)
300,000,000 5.50 5/01/97 300,000,000
Credit Suisse First Boston, dated 4/30/97, repurchase
price $52,307,845 (U.S. Treasury Bill: $53,475,803,
2/05/98)
52,300,000 5.40 5/01/97 52,300,000
- --------------------------------------------------------------------
Total Joint Repurchase Agreement Account $1,032,300,000
- --------------------------------------------------------------------
</TABLE>
9. Other
As of April 30, 1997, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 16% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
28
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions/(a)/ transactions operations income transactions
--------------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997-Class A shares $14.36 $0.46 $(0.20) -- $0.26 $(0.45) $(0.07)
1997-Class B shares 14.37 0.40 (0.19) -- 0.21 (0.40) (0.07)
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)
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 Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares $14.53 $0.25 $(0.07) $0.28 $0.46 $(0.40) --
1997-Class B shares 14.53 0.36 (0.02) 0.08 0.42 (0.37) --
1997-Institutional shares 14.52 0.42 (0.02) 0.10 0.50 (0.44) --
1997-Service shares/(i)/ 14.69 0.10 0.02 (0.09) 0.03 (0.13) --
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>
Distributions to shareholders
-----------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(b)/
-----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997-Class A shares -- -- -- $(0.52) $(0.26) $14.10 1.83%/(g)/
1997-Class B shares -- -- -- (0.47) (0.26) 14.11 1.43/(g)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares -- -- -- (0.92) (0.11) 14.36 5.80
1996-Class B shares/(c)/ -- -- -- (0.41) 0.26 14.37 4.85/(g)/
1995-Class A shares -- -- -- (0.94) 1.00 14.47 14.90
1994-Class A shares (0.02) (0.01) -- (1.00) (1.43) 13.47 (2.98)
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares -- -- -- (0.56) 0.58 14.90 8.03/(g)/
GLOBAL INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares -- -- -- $(0.40) $0.06 $14.59 3.22%/(g)/
1997-Class B shares -- -- -- (0.37) 0.05 14.58 2.94/(g)/
1997-Institutional shares -- -- -- (0.44) 0.06 14.58 3.50/(g)/
1997-Service shares/(i)/ -- -- -- (0.13) (0.10) 14.59 0.21/(g)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares -- -- -- (1.43) 0.08 14.53 11.05
1996-Class B shares/(c)/ -- -- -- (0.36) 0.50 14.53 6.24/(g)/
1996-Institutional shares -- -- -- (1.50) 0.07 14.52 11.55
1995-Class A shares -- -- -- (0.94) 1.02 14.45 15.08
1995-Institutional shares/(f)/ -- -- -- (0.26) 0.36 14.45 4.42/(g)/
1994-Class A shares -- -- (0.61) (0.99) (1.64) 13.43 (4.49)
1993-Class A shares -- -- -- (1.12) 0.38 15.07 10.75
1992-Class A shares -- -- -- (1.14) 0.09 14.69 8.77
For the Period August 2, 1991/(d)/through October 31,
- ---------------------------------------------------------------------
1991-Class A shares -- -- -- (0.24) 0.05 14.60 2.00
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Net Ratio of
Ratio of net assets net
net investment at end Ratio of investment
expenses income Portfolio of expenses income
to average to average turnover period to average to average
net assets net assets rate/(h)/ (in 000s) net assets net assets
--------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997-Class A shares 0.50%/(e)/ 6.34%/(e)/ 182.25%/(g)/ $52,946 1.83%/(e)/ 5.01%/(e)/
1997-Class B shares 1.25/(e)/ 5.37/(e)/ 182.25/(g)/ 2,937 2.33/(e)/ 4.29/(e)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 0.50 6.42 485.09 30,603 1.89 5.03
1996-Class B shares/(c)/ 1.25/(e)/ 5.65/(e)/ 485.09 234 2.39/(e)/ 4.51/(e)/
1995-Class A shares 0.47 6.67 449.53 29,503 2.34 4.80
1994-Class A shares 0.11 6.06 654.90 14,452 2.86 3.31
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares 0.00/(e)/ 4.87/(e)/ 725.41/(g)/ 12,860 4.00/(e)/ 0.87/(e)/
GLOBAL INCOME FUND
- ---------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares 1.17%/(e)/ 5.12%/(e)/ 136.72%/(g)/ $171,668 1.60%/(e)/ 4.69%/(e)/
1997-Class B shares 1.71/(e)/ 4.73/(e)/ 136.72/(g)/ 1,095 2.10/(e)/ 4.34/(e)/
1997-Institutional shares 0.65/(e)/ 5.64/(e)/ 136.72/(g)/ 56,431 1.04/(e)/ 5.25/(e)/
1997-Service shares/(i)/ 1.15/(e)/ 5.85/(e)/ 136.72/(g)/ 94 1.54/(e)/ 5.46/(e)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 1.16 5.81 232.15 198,665 1.64 5.33
1996-Class B shares/(c)/ 1.70/(e)/ 5.16/(e)/ 232.15 256 2.14/(e)/ 4.72/(e)/
1996-Institutional shares 0.65 6.35 232.15 54,254 1.11 5.89
1995-Class A shares 1.29 6.23 265.86 245,835 1.58 5.94
1995-Institutional shares/(f)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.28 5.73 343.74 396,584 1.53 5.48
1993-Class A shares 1.30 5.78 313.88 675,662 1.55 5.53
1992-Class A shares 1.37 7.85 270.75 588,893 1.62 7.60
For the Period August 2, 1991/(d)/through October 31,
- -----------------------------------------------------------------
1991-Class A shares 0.38/(g)/ 1.72/(g)/ 34.22/(g)/ 388,744 0.44/(g)/ 1.66/(g)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
29
<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,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions/a/ transactions operations income transactions
---------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares $14.37 $0.34 $0.03 -- $0.37 $(0.34) --
1997-Class B shares 14.37 0.28 0.03 -- 0.31 (0.28) --
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
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 Total
income transactions capital shareholders value period return/(b)/
------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares -- -- -- $(0.34) $0.03 $14.40 2.57%/(g)/
1997-Class B shares -- -- -- (0.28) 0.03 14.40 2.18/(g)/
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares -- -- -- (0.65) 0.20 14.37 6.13
1996-Class B shares/(c)/ -- -- -- (0.27) 0.34 14.37 4.40/(g)/
1995-Class A shares -- -- -- (0.67) 1.09 14.17 13.79
1994-Class A shares -- -- -- (0.78) (1.56) 13.08 (5.51)
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares -- -- -- (0.22) 0.32 14.64 3.73/(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Net Ratio of
Ratio of net assets net
net investment at end Ratio of investment
expenses income Portfolio of expenses income
to average to average turnover period to average to average
net assets net assets rate/(h)/ (in 000s) net assets net assets
------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares 0.85%/(e)/ 4.70%/(e)/ 90.46%/(g)/ $58,033 1.51%/(e)/ 4.04%/(e)/
1997-Class B shares 1.60/(e)/ 3.92/(e)/ 90.46/(g)/ 617 2.01/(e)/ 3.51/(e)/
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares 0.85 4.58 344.13 52,267 1.55 3.88
1996-Class B shares/(c)/ 1.60/(e)/ 3.55/(e)/ 344.13 255 2.05/(e)/ 3.10/(e)/
1995-Class A shares 0.76 4.93 335.55 53,797 1.49 4.20
1994-Class A shares 0.45 5.28 357.54 47,373 1.55 4.18
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares 0.00/(e)/ 5.15/(e)/ 99.99/(g)/ 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.
/(i)/ Service Class shares commenced operations on March 12, 1997.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Semiannual 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
John P. McNulty
Mary P. McPherson
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
FISARRET
The Goldman Sachs
Fixed Income Funds
- --------------------------------------------------------------------------------
Semiannual Report
April 30, 1997
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
- -------------------------------------------------------------------------------
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/1/
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
- ----------
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings indicated do not
necessarily represent ratings which will be given to these securities on the
date of a Fund's fiscal year end.
1-A
<PAGE>
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-1
have a superior capacity for repayment. Notes bearing the designation P-2 have
a strong capacity for repayment.
2-A
<PAGE>
Description of Ratings of State and Municipal
Commercial Paper
---------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an original
maturity in excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
3-A
<PAGE>
AA: Bonds and debt rated AA have a very strong capacity to pay interest
and repay principal and differ from the higher rated issues only in small
degree.
A: Bonds and debt rated A have a very strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB: Bonds and debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB-rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
4-A
<PAGE>
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC-debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A plus sign (+) is added for those issues determined to possess
overwhelming safety characteristics. An SP-2 designation indicates a
satisfactory capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by Standard & Poor's is described as having a strong
degree of safety regarding timely payment.
5-A
<PAGE>
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issued carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable t the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity
for timely payment.
C: This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
FITCH INVESTORS SERVICE, L.P.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories
6-A
<PAGE>
are not significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated F-1+.
A: Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
PLUS (+) AND MINUS (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA, DDD, DD, or D Categories.
7-A
<PAGE>
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
8-A
<PAGE>
DUFF & PHELPS
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
BBB+, BBB, BBB-: Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
9-A
<PAGE>
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
DUFF 3: Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
DUFF 4: Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DUFF 5: Issuer failed to meet scheduled principal and/or interest
payments.
Notes: Bonds which are unrated may expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to
the risks of lower-rated bonds. The Fund is dependent on the
Investment Adviser's judgment, analysis and experience in the
evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
10-A
<PAGE>
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- - Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- - Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
11-A
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of
the interests of the firm and its clients.
INTEGRITY AND HONESTY ARE THE HEART OF OUR BUSINESS. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
.. Privately owned and ranked among Wall Street's best capitalized firms, with
partners' capital of approximately $5.3 billion as of November 29, 1996.
.. Thirty-four offices worldwide where professionals focus on identifying
financial opportunities.
.. The number one underwriter of all international equity issues for 1993,
1994 and 1995.*
.. Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
.. The number one lead manager of U.S. common stock offerings from (1989-
1995).*
* Source: Securities Data Corporation. Ranking excludes REITS, Trusts and
-----------------------------------
Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the
first talking film
1956 Goldman Sachs co-manages Ford's public offering, the
largest to date
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
3-B
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY STATE.
SUBJECT TO COMPLETION -- JUNE 13, 1997
PART B
STATEMENT OF ADDITIONAL INFORMATION
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
GOLDMAN SACHS MUNICIPAL INCOME FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS HIGH YIELD FUND
(EACH A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is
not a prospectus. This Additional Statement should be read in conjunction with
the prospectus for the Class A, Class B and Class C Shares of Goldman Sachs
Adjustable Rate Government Fund, Goldman Sachs Short Duration Government Fund,
Goldman Sachs Short Duration Tax-Free Fund, Goldman Sachs Government Income
Fund, Goldman Sachs Municipal Income Fund, Goldman Sachs Core Fixed Income Fund,
Goldman Sachs Global Income Fund and Goldman Sachs High Yield Fund dated ____,
1997, as amended and/or supplemented from time to time, which may be obtained
without charge from Goldman, Sachs & Co. by calling the telephone number, or
writing to one of the addresses, listed below. Goldman Sachs Adjustable Rate
Government Fund currently does not offer Class B or Class C Shares.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Introduction B-3
Other Investments and Practices B-10
Investment Restrictions B-53
Management B-70
Portfolio Transactions B-86
Shares of the Trust B-87
Net Asset Value B-91
Taxation B-92
Performance Information B-104
Other Information B-116
Financial Statements B-118
Other Information Regarding Purchases, Redemptions,
Exchanges and Dividends B-119
Distribution and Authorized Dealer Service Plans B-122
Appendix A 1-A
Appendix B 1-B
</TABLE>
The date of this Additional Statement is ____, 1997.
<PAGE>
GOLDMAN SACHS TRUST GOLDMAN, SACHS & CO.
4900 SEARS TOWER DISTRIBUTOR
CHICAGO, ILLINOIS 60606 85 BROAD STREET
NEW YORK, NY 10004
GOLDMAN SACHS ASSET MANAGEMENT
ADVISER TO GOLDMAN SACHS MUNICIPAL
INCOME FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
GOLDMAN SACHS SHORT DURATION TAX FREE
FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS HIGH YIELD FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN,SACHS & CO.
MANAGEMENT, L.P. TRANSFER AGENT
ADVISER TO GOLDMAN SACHS 4900 SEARS TOWER
ADJUSTABLE RATE GOVERNMENT FUND CHICAGO, ILLINOIS 60606
AND SHORT DURATION GOVERNMENT FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET MANAGEMENT
INTERNATIONAL
ADVISER TO GOLDMAN SACHS
GLOBAL INCOME FUND
133 PETERBOROUGH COURT
LONDON EC4A 2BB ENGLAND
TOLL FREE .......800-526-7384
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") was formed under the laws of the
state of Delaware on January 28, 1997. The Trust is a successor to a
Massachusetts business trust that was merged with the Trust on April 30, 1997.
The Trust assumed its current name on March 22, 1991. The Trustees of the Trust
have authority under the Declaration of Trust to create and classify shares into
separate series and to classify and reclassify any series of shares into one or
more classes without further action by shareholders. Pursuant thereto, the
Trustees have created the following series, among others: Goldman Sachs
Adjustable Rate Government Fund ("Adjustable Rate Fund"), Goldman Sachs Core
Fixed Income Fund ("Core Fund"), Goldman Sachs Global Income Fund ("Global
Income Fund"), Goldman Sachs Government Income Fund ("Government Income Fund"),
Goldman Sachs Municipal Income Fund ("Municipal Income Fund"), Goldman Sachs
Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund"), Goldman Sachs
Short Duration Government Fund ("Short Duration Government Fund") and Goldman
Sachs High Yield Fund ("High Yield Fund") and 27 other series of shares.
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund, Short Duration Government
Fund and High Yield Fund are each sometimes referred to herein as a "Fund" and
collectively as the "Funds." Short Duration Government Fund, Short Duration
Tax-Free Fund and Core Fund are each authorized to issue six classes of shares:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares. Adjustable Rate Fund is authorized to issue
four classes of shares: Institutional Shares, Administration Shares, Service
Shares and Class A Shares. Government Income Fund, Municipal Income Fund,
Global Income Fund and High Yield Fund are authorized to issue five classes of
shares: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. Additional series may be added in the future from time to time.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Government Income Fund, Municipal Income Fund, Short Duration Tax-
Free Fund and High Yield Fund. Goldman Sachs Asset Management International
("GSAMI"), an affiliate of Goldman Sachs, serves as investment adviser to the
Global Income Fund. Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate
of Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI and GSFM are each sometimes
referred to herein as the "Adviser" and collectively herein as the "Advisers."
In addition, Goldman Sachs serves as each Fund's distributor and transfer agent.
Each Fund's custodian is State Street Bank and Trust Company.
Because each Fund's shares may be redeemed upon request of a
shareholder on any business day at net asset value, the Funds offer greater
liquidity than many competing investments, such as certificates of deposit and
direct investments in certain securities in which the respective Fund may
invest. However,
B-3
<PAGE>
unlike certificates of deposits, shares of the Funds are not insured by the
Federal Deposit Insurance Corporation.
The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of each Fund's investment objective and policies.
Investing in the Funds entails certain risks and there is no assurance that a
Fund will achieve its objective.
EXPERIENCED MANAGEMENT. Successfully creating and managing a
----------------------
diversified portfolio of securities requires professionals with extensive
experience. Goldman Sachs' highly skilled portfolio management team brings
together many years of experience in the analysis, valuation and trading of U.S.
and foreign fixed-income securities.
ADJUSTABLE RATE FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Fund and Short Duration Government Fund are both
designed for investors who seek a high level of high current income, relative
stability of principal and the high credit quality of securities issued or
guaranteed by the U.S. government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and accounting
burdens involved in direct investment.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short Duration Government Fund differently than the investments
normally purchased by such investors. Relative to U.S. Treasury and non-
fluctuating money market instruments, the market value of adjustable rate
mortgage securities in which Adjustable Rate and Short Duration Government Funds
may invest may be adversely affected by increases in market interest rates.
Conversely, decreases in market interest rates may result in less capital
appreciation for adjustable rate mortgage securities in relation to U.S.
Treasury and money market investments.
HIGH CURRENT INCOME. Adjustable Rate and Short Duration Government
-------------------
Funds seek a higher current yield than a money market fund or than that offered
by bank certificates of deposit and money market accounts. However, the
Adjustable Rate and Short Duration Government Funds do not maintain a constant
net asset value per share and are subject to greater fluctuations in the value
of their shares than a money market fund. Unlike bank certificates of deposit
and money market accounts, investments in shares of the Funds are not insured or
guaranteed by any government agency. Each of the Adjustable Rate and Short
Duration Government Funds seeks to provide such high current income without
sacrificing credit quality.
RELATIVE LOW VOLATILITY OF PRINCIPAL. Adjustable Rate Fund seeks to
-------------------------------------
minimize net asset value fluctuations by investing primarily in adjustable rate
mortgage pass-through securities and
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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
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
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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
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
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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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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
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<PAGE>
liquidity in most foreign bond markets are less than in the United States
markets and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Commissions on foreign
securities exchanges are often fixed and generally are higher than negotiated
commissions or dealer mark-ups in the U.S. markets, although each Fund endeavors
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of securities markets
and exchanges, brokers, dealers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlement of portfolio transactions or loss of certificates for portfolio
securities.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of Core Fund, High Yield Fund or Global
Income Fund is uninvested and no return is earned thereon. The inability of
Core Fund, High Yield Fund or Global Income Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to Core Fund, High Yield Fund
or Global Income Fund due to subsequent declines in value of the portfolio
securities, or, if Core Fund, High Yield Fund or Global Income Fund has entered
into a contract to sell the securities, could result in possible liability to
the purchaser. In addition, with respect to certain foreign countries, there is
the possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could adversely affect Core, High
Yield or Global Income Funds' investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources self-sufficiency and balance of payments
position.
INVESTING IN EMERGING COUNTRIES
Market Characteristics. Debt securities of most emerging markets issuers
----------------------
may be less liquid and are generally subject to greater price volatility than
securities of issuers in the U.S. and other developed countries. The markets
for securities of emerging markets may have substantially less volume than the
market for similar securities in the U.S. and may not be able to absorb, without
price disruptions, a significant increase in trading volume or trade size.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The less liquid the market, the more
difficult it may be for the Fund to accurately price its portfolio securities or
to
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<PAGE>
dispose of such securities at the times determined to be appropriate. The risks
associated with reduced liquidity may be particularly acute to the extent that a
Fund needs cash to meet redemption requests, to pay dividends and other
distributions or to pay its expenses.
Securities markets of emerging markets may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and settlement
could result in temporary periods when a portion of the Fund's assets is
uninvested and no return is earned thereon. Inability to make intended security
purchases could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in
emerging markets may be higher than in the U.S. and other developed securities
markets. As legal systems in emerging markets develop, foreign investors may be
adversely affected by new or amended laws and regulations. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Economic, Political and Social Factors. Emerging markets may be subject to
--------------------------------------
a greater degree of economic, political and social instability than the U.S.,
Japan and most Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes or attempted changes
in government through extra-constitutional means; (ii) popular unrest associated
with demands for improved economic, political and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection and conflict. Many emerging
markets have experienced in the past, and continue to experience, high rates of
inflation. In certain countries inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate environment and
sharply eroding the value of outstanding financial assets in those countries.
The economies of many emerging markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging markets may differ unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
Restrictions on Investment and Repatriation. Certain emerging markets
-------------------------------------------
require governmental approval prior to investments by
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<PAGE>
foreign persons or limit investments by foreign persons to only a specified
percentage of an issuer's outstanding securities or a specific class of
securities which may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. Repatriation of
investment income and capital from certain emerging markets is subject to
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect the operation
of a Fund.
SOVEREIGN DEBT OBLIGATIONS
Investments in sovereign debt obligations involves special risks not
present in corporate debt obligations. The issuer of the sovereign debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and a Fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and a Fund's net asset value, may be more
volatile than prices of debt obligations of U.S. issuers. In the past, the
governments of certain emerging markets have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core, High Yield and Global
Income Funds may enter into forward foreign currency exchange contracts for
hedging purposes and to seek to increase total return. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
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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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INTEREST RATE SWAPS, MORTGAGE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS,
FLOORS AND COLLARS
Each Fund may enter into interest rate swaps, caps, floors and collars. In
addition, Core, Adjustable Rate, Government Income, Short Duration Government,
Global Income and High Yield Funds may enter into mortgage swaps and Core, High
Yield and Global Income Funds may also enter into currency swaps. Each Fund may
enter into swap transactions for hedging purposes or to seek to increase total
return. Interest rate swaps involve the exchange by a Fund with another party
of their respective commitments to pay or receive interest, such as an exchange
of fixed-rate payments for floating rate payments. Mortgage swaps are similar
to interest rate swaps in that they represent commitments to pay and receive
interest. The notional principal amount, however, is tied to a reference pool
or pools of mortgages. Currency swaps involve the exchange of the parties'
respective rights to make or receive payments in specified currencies. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar is the combination of
a cap and a floor that preserves a certain return within a predetermined range
of interest rates. Since interest rate, mortgage and currency swaps and
interest rate caps, floors and collars are individually negotiated, each Fund
expects to achieve an acceptable degree of correlation between its portfolio
investments and its swap, cap, floor and collar positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each interest rate or currency swap will
be accrued on a daily basis and an amount of cash or liquid assets, having an
aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by a Fund's custodian. Inasmuch as these
transactions are entered into
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for hedging purposes or are offset by cash or liquid assets, as permitted by
applicable law, maintained in a segregated account the Funds and the Advisers
believe that swaps do not constitute senior securities under the Act and,
accordingly, will not treat them as being subject to a Fund's borrowing
restriction.
The Funds will not enter into any swap transactions unless the unsecured
commercial paper, senior debt or claims-paying ability of the other party is
rated either AA or A-1 or better by Standard & Poor's or Aa or P-1 or better by
Moody's or their equivalent ratings. If there is a default by the other party
to such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
The staff of the Securities and Exchange Commission (the "SEC") currently takes
the position that swaps, caps, floors and collars are illiquid for purposes of
a Fund's limitation on illiquid investments.
The use of interest rate, mortgage and currency swaps, as well as interest
rate caps, floors and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a Fund would be less favorable than it would have been if this
investment technique were not used.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
-----------------------
options on any securities in which it may invest or on any securities index
based on securities in which it may invest. A Fund may purchase and write such
options on securities that are listed on national domestic securities exchanges
or foreign securities exchanges or traded in the over-the-counter market. A
call option written by a Fund obligates the Fund to sell specified securities to
the holder of the option at a specified price if the option is exercised at any
time before the expiration date. All call options written by a Fund are
covered, which means that the Fund will own the securities subject to the option
so long as the option is outstanding or use the other methods described below.
The purpose of a Fund in writing covered call options is to realize greater
income than would be realized in portfolio securities transactions alone.
However, in writing covered call options for additional income, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. The
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purpose of writing such options is to generate additional income. However, in
return for the option premium, the Fund accepts the risk that it will be
required to purchase the underlying securities at a price in excess of the
securities' market value at the time of purchase.
All call and put options written by a Fund are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid assets, as
permitted by applicable law, either of which, in the case of Global Income Fund,
Core Fund or High Yield Fund, may be quoted or denominated in any currency, in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position.
A Fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases
are referred to as "closing purchase transactions."
Each Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
The Funds may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by their respective custodian) upon conversion or exchange of
other securities in its portfolio. The Funds may also cover call and put
options on a securities index by maintaining cash or liquid assets, as permitted
by applicable law, with a value equal to the exercise price in a segregated
account with their custodian or by using the other methods described above.
PURCHASING OPTIONS. Each Fund may also purchase put and call options on
------------------
any securities in which it may invest or on any securities index composed of
securities in which it may invest. A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options it had purchased.
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A Fund would normally purchase call options in anticipation of an increase,
or put options in anticipation of a decrease ("protective puts") in the market
value of securities of the type in which it may invest. The purchase of a call
option would entitle a Fund, in return for the premium paid, to purchase
specified securities at a specified price during the option period. A Fund would
ordinarily realize a gain on the purchase of a call option if, during the option
period, the value of such securities exceeded the sum of the exercise price, the
premium paid and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the call option. The purchase of a put option
would entitle a Fund, in exchange for the premium paid, to sell specified
securities at a specified price during the option period. The purchase of
protective puts is designed to offset or hedge against a decline in the market
value of a Fund's securities. Put options may also be purchased by a Fund for
the purpose of affirmatively benefiting from a decline in the price of
securities which it does not own. A Fund would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased below
the exercise price sufficiently to cover the premium and transaction costs;
otherwise the Fund would realize either no gain or a loss on the purchase of the
put option. Gains and losses on the purchase of put options may be offset by
countervailing changes in the value of the underlying portfolio securities.
A Fund may purchase put and call options on securities indices for the same
purposes as it may purchase options on securities. Options on securities indices
are similar to options on securities, except that the exercise of securities
index options requires cash payments and does not involve the actual purchase or
sale of securities. In addition, securities index options are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security.
Transactions by a Fund in options on securities and securities indices will
be subject to limitations established by each of the exchanges, boards of trade
or other trading facilities on which such options are traded governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which a
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Advisers. An exchange, board of trade
or other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Core, Global Income
----------------------------------------------------
and High Yield Funds may write covered put and call options and purchase put and
call options on foreign currencies in
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an attempt to protect against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. Global Income, Core and High Yield Funds may use options on currency
to cross-hedge, which involves writing or purchasing options on one currency to
seek to hedge against changes in exchange rates for a different currency with a
pattern of correlation. In addition, Global Income, Core and High Yield Funds
may purchase call options on currency to seek to increase total return when the
Advisers anticipate that the currency will appreciate in value, but the
securities denominated or quoted in that currency do not present attractive
investment opportunities and are not included in the Fund's portfolios.
A call option written by Core, Global Income and High Yield Funds obligates
the Fund to sell specified currency to the holder of the option at a specified
price if the option is exercised at any time before the expiration date. A put
option written by a Fund obligates the Fund to purchase specified currency from
the option holder at a specified price if the option is exercised at any time
before the expiration date. The writing of currency options involves a risk
that a Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase currency subject to a put at a price that exceeds the
currency's market value.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one written. Such purchases are referred
to as "closing purchase transactions." A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
purchased options.
Core, Global Income and High Yield Funds would normally purchase call
options in anticipation of an increase in the U.S. dollar value of currency in
which securities to be acquired by the Fund are denominated or quoted. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified currency at a specified price during the option period. A
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
Core, Global Income and High Yield Funds would normally purchase put
options in anticipation of a decline in the U.S. dollar value of currency in
which securities in its portfolio are denominated or quoted ("protective puts").
The purchase of a put option would entitle Core, Global Income and High Yield
Funds, in exchange for the premium paid, to sell specified currency at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the U.S. dollar value of
a Fund's portfolio securities due to currency exchange rate fluctuations. A
Fund would ordinarily realize a gain if, during the option period, the value
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of the underlying currency decreased below the exercise price sufficiently to
more than cover the premium and transaction costs; otherwise the Fund would
realize either no gain or a loss on the purchase of the put option. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying currency.
In addition to using options for the hedging purposes described above,
Core, Global Income and High Yield Funds may use options on currency to seek to
increase total return. Global Income Fund, High Yield Fund and Core Fund may
write (sell) covered put and call options on any currency in an attempt to
realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Global Income, High Yield and Core Funds may forego the opportunity to
profit from an increase in the market value of the underlying currency. Also,
when writing put options, Global Income, High Yield and Core Funds accept, in
return for the option premium, the risk that it may be required to purchase the
underlying currency at a price in excess of the currency's market value at the
time of purchase.
Global Income, High Yield and Core Funds would normally purchase call
options to seek to increase total return in anticipation of an increase in the
market value of a currency. Global Income, High Yield and Core Funds would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the call option. Put
options may be purchased by the Global Income, High Yield and Core Funds for
the purpose of benefiting from a decline in the value of currencies which it
does not own. Global Income, High Yield and Core Funds would ordinarily realize
a gain if, during the option period, the value of the underlying currency
decreased below the exercise price sufficiently to more than cover the premium
and transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the put option.
YIELD CURVE OPTIONS. Each Fund may enter into options on the yield
-------------------
"spread," or yield differential between two securities. Such options are
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. For example, a Fund may purchase a call option on the yield spread
between two securities if it owns one of the securities and anticipates
purchasing the other security and
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wants to hedge against an adverse change in the yield spread between the two
securities. A Fund may also purchase or write yield curve options for other
than hedging purposes (i.e., in an attempt to increase its current income) if,
in the judgment of the Adviser, the Fund will be able to profit from movements
in the spread between the yields of the underlying securities. The trading of
yield curve options is subject to all of the risks associated with the trading
of other types of options. In addition, however, such options present a risk of
loss even if the yield of one of the underlying securities remains constant, or
if the spread moves in a direction or to an extent which was not anticipated.
Yield curve options written by a Fund must be "covered." A call (or put)
option is covered if the Fund holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or liquid assets, as permitted by applicable law, sufficient to
cover the Fund's net liability under the two options. Therefore, a Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter, and because they
have been only recently introduced, established trading markets for these
options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the
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secondary market on that exchange (or in that class or series of options) would
cease to exist although outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
A Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the SEC changes its position, the Funds will treat
purchased over-the counter options and all assets used to cover written over-the
counter options as illiquid securities, except that with respect to options
written with primary dealers in U.S. Government Securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to a formula
approved by the SEC.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options for
hedging purposes depends in part on the applicable Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
- --------------------------------------------------
To seek to increase total return or to hedge against changes in interest
rates or securities prices or, in the case of Core, High Yield and Global Income
Funds, currency exchange rates, each Fund may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. Each Fund may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), securities indices, foreign currencies in the case of Global
Income, Core and High Yield Funds and any other financial instruments and
indices. A Fund will engage in futures and related options transactions only
for bona fide hedging purposes as defined below or for purposes of seeking to
increase total return to the extent permitted by regulations of the CFTC. All
futures contracts entered into by a Fund are traded on U.S. exchanges or boards
of trade that are licensed and regulated by the CFTC or on foreign exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
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When interest rates are rising or securities prices are falling, a Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a Fund, through the purchase of futures contracts,
can attempt to secure better rates or prices than might later be available in
the market when it effects anticipated purchases. Core, Global Income and High
Yield Funds may each seek to offset anticipated changes in the value of a
currency in which its portfolio securities, or securities that it intends to
purchase, are quoted or denominated by purchasing and selling futures contracts
on such currencies.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currency are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
------------------
establish with more certainty than would otherwise be possible the effective
price or rate of return on portfolio securities or securities that a Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are quoted or denominated. A Fund may, for example, take a "short"
position in the futures market by selling futures contracts to seek to hedge
against an anticipated rise in interest rates or a decline in market prices or
foreign currency rates that would adversely affect the U.S. dollar value of the
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by a Fund or securities with
characteristics similar to those of a Fund's portfolio securities. Similarly,
Core Fund, High Yield Fund and Global Income Fund may each sell futures
contracts on any currencies in which its portfolio securities are quoted or
denominated or in one currency to seek to hedge against fluctuations in the
value of securities denominated in a different currency if there is an
established historical pattern of correlation between the two currencies. If,
in the opinion of the Advisers, there is a sufficient degree of correlation
between price trends for a Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Funds may also enter into such futures contracts as part of its hedging
strategy. Although under some circumstances prices of securities in a Fund's
portfolio may be more or less volatile than prices of such futures contracts,
the Advisers will attempt to estimate the extent of this volatility difference
based on historical patterns and compensate for any such differential by having
a Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting a
Fund's portfolio securities. When hedging of this character is successful, any
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depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position. On the other hand, any
unanticipated appreciation in the value of a Fund's portfolio securities would
be substantially offset by a decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium,
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that a Fund intends to
purchase. However, a Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Funds will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Each Fund will engage in futures and related options
--------------------
transactions only for bona fide hedging or to seek to increase total return as
permitted by CFTC regulations which permit principals of an investment company
registered under the Act to engage in such transactions without registering as
commodity pool operators. Each Fund will determine that the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price
B-51
<PAGE>
fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. Except as stated below, each Fund's futures
transactions will be entered into for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities (or the currency in which they are quoted or denominated) that a Fund
owns or futures contracts will be purchased to protect a Fund against an
increase in the price of securities (or the currency in which they are quoted or
denominated) it intends to purchase. As evidence of this hedging intent, each
Fund expects that on 75% or more of the occasions on which it takes a long
futures or option position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities (or assets denominated in the related currency) in
the cash market at the time when the futures or option position is closed out.
However, in particular cases, when it is economically advantageous for a Fund to
do so, a long futures position may be terminated or an option may expire without
the corresponding purchase of securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation permits the Funds to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish positions
to seek to increase total return in futures contracts and options on futures
will not exceed 5% of the net asset value of a Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Funds will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") for maintaining their
qualifications as regulated investment companies for federal income tax
purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
assets, as permitted by applicable law, in an amount equal to the underlying
value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of
B-52
<PAGE>
securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government Securities. The only
futures contracts available to hedge a Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies.
MORTGAGE DOLLAR ROLLS
- ---------------------
The Taxable Funds may enter into mortgage "dollar rolls" in which a Fund
sells securities for delivery in the current month and simultaneously contracts
with the same counterparty to repurchase similar (same type, coupon and
maturity), but not identical securities on a specified future date. During the
roll period, a Fund loses the right to receive principal and interest paid on
the securities sold. However, a Fund would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase (often referred to as the "drop") or fee
income plus the interest earned on the cash proceeds of the securities sold
until the settlement date of the forward purchase. Unless such benefits exceed
the income, capital appreciation and gain or loss due to mortgage prepayments
that would have been realized on the securities sold as part of the mortgage
dollar roll, the use of this technique will diminish the investment performance
of a Fund compared with what such performance would have been without the use of
mortgage dollar rolls. All cash proceeds will be invested in instruments that
are permissible investments for the applicable Fund. Each Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
assets, as permitted by applicable law, in an amount equal to its forward
purchase price.
For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions; one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if
the broker-dealer to whom a Fund sells the security becomes insolvent, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
CONVERTIBLE SECURITIES
B-53
<PAGE>
Convertible securities include corporate notes or preferred stock but are
ordinarily long-term debt obligation of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline. Convertible
securities generally offer lower interest or dividend yields than non-
convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion price,
the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities in which the Core Fund and High Yield Fund invest will be
subject to the same rating criteria as its other investments in fixed-income
securities.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions, such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents, letters of credit or U.S. Government Securities maintained on a
current basis in an amount at least equal to the market value of the securities
loaned. Cash collateral may be invested in cash equivalents. A Fund has the
right to call a loan and obtain the securities loaned at any time on five days'
notice. For the duration of a loan, a Fund continues to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned and
also receives compensation from investment of the collateral. A Fund would not
have the right to vote any securities having voting rights during the existence
of the loan, but a Fund would call the loan in anticipation of an important vote
to be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovering, or even loss of
rights in, the collateral should the borrower of the securities fail
financially. However, the loans are made only to firms deemed by the applicable
Adviser to be of good standing, and when, in the judgment of the applicable
Adviser, the consideration which can be earned currently from securities loans
of this type justifies the attendant risk. If an Adviser determines to make
securities loans, the value of the securities loaned will not exceed one-third
of the value of the total assets of each Fund.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
B-54
<PAGE>
However, a Fund will not invest more than 15% of its net assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate, currency and mortgage swaps, interest rate caps, floors and
collars, certain SMBS, municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted Securities, unless the
Board of Trustees determines, based upon a continuing review of the trading
markets for the specific Restricted Securities, that such Restricted Securities
are liquid. Certain commercial paper issued in reliance on Section 4(2) of the
1933 Act is treated like Rule 144A Securities. The Trustees have adopted
guidelines and delegated to the Advisers the daily function of determining and
monitoring the liquidity of the Funds' portfolio securities. The Board of
Trustees, however, will retain sufficient oversight and be ultimately
responsible for the determinations. Since it is not possible to predict with
assurance exactly how the market for Restricted Securities sold and offered
under Rule 144A or Section 4(2) will develop, the Trustees will carefully
monitor the Funds' investments in these securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
This investment practice could have the effect of increasing the level of
illiquidity in a Fund to the extent that qualified institutional buyers become
for a time uninterested in purchasing these Restricted Securities.
The purchase price and subsequent valuation of Restricted Securities
normally reflect a discount from the price at which such securities trade when
they are not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the Restricted Securities and prevailing
supply and demand conditions.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. The Funds will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, the Funds may dispose of or negotiate a
commitment after entering into it. A Fund also may sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Funds may realize a capital gain or loss in connection
with these transactions. For purposes of determining each Fund's duration,
B-55
<PAGE>
the maturity of when-issued or forward commitment securities will be calculated
from the commitment date. Each Fund is required to hold and maintain in a
segregated account with the Fund's custodian until three days prior to
settlement date, cash or liquid assets, in an amount sufficient to meet the
purchase price. Alternatively, each Fund may enter into offsetting contracts
for the forward sale of other securities that it owns. Securities purchased or
sold on a when-issued or forward commitment basis involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date or
if the value of the security to be sold increases prior to the settlement date.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets,
calculated at the time of purchase, in the securities of other investment
companies, but may not invest more than 5% of its total assets in the securities
of any one investment company or acquire more than 3% of the voting securities
of any other investment company. Pursuant to an exemptive order obtained from
the SEC, the Funds may invest in money market funds for which the Adviser or any
of its affiliates serves as investment adviser. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that a Fund invests in a money
market fund for which the Adviser acts as adviser, the management fees payable
by the Fund to the Adviser will be reduced by an amount equal to the Fund's
proportionate share of the management fees paid by such money market fund to the
Adviser or any of its affiliates.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected broker-
dealers, banks or other financial institutions. A repurchase agreement is an
arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities will be maintained by each Fund's custodian. The
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the security subject to the repurchase agreement.
For purposes of the Act and, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the
B-56
<PAGE>
security under a repurchase agreement, a Fund may encounter delay and incur
costs before being able to sell the security. Such a delay may involve loss of
interest or a decline in price of the security. If the court characterizes the
transaction as a loan and a Fund has not perfected a security interest in the
security, the Fund may be required to return the security to the seller's estate
and be treated as an unsecured creditor of the seller. As an unsecured
creditor, a Fund would be at risk of losing some or all of the principal and
interest involved in the transaction.
As with any unsecured debt instrument purchased for each Fund, the
applicable Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
security. Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the security subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), each Fund will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price. Certain repurchase agreements which provide for
settlement in more than seven days can be liquidated before the nominal fixed
term on seven days or less notice. Such repurchase agreements will be regarded
as liquid instruments.
In addition, the Funds, together with other registered investment companies
having management agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the affected Fund. The
investment objective of each Fund and all other investment policies or practices
of the Funds, except for Short Duration Tax-Free Fund's and Municipal Income
Fund's policy to invest under normal market conditions 80% of its net assets in
Municipal Securities, are considered by the Trust not to be fundamental and
accordingly may be changed without shareholder approval. See "INVESTMENT
OBJECTIVES AND POLICIES" in the Prospectuses. As defined in the Act, "a
majority of the outstanding voting securities" of a Fund means the vote (a) of
67% or more of the shares of the Fund present at a meeting, if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy or (b) more than 50% of the outstanding shares of the Fund, whichever
is less.
For the purposes of the limitations (except for the asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered
B-57
<PAGE>
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by, a Fund. With respect to the Tax Exempt Funds, the identification
of the issuer of a Municipal Security that is not a general obligation is made
by the Adviser based on the characteristics of the Municipal Security, the most
important of which is the source of funds for the payment of principal and
interest on such securities.
AS A MATTER OF FUNDAMENTAL POLICY, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in municipal securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other municipal securities. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations.
(3) borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% or its total assets (including the amount borrowed), (b)
the Fund may, to
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<PAGE>
the extent permitted by applicable law borrow up to an additional 5%
of its total assets for temporary purposes, (c) the Fund may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities, (d) the Fund may
purchase securities on margin to the extent permitted by applicable
law and (e) the Fund may engage in transactions in mortgage dollar
rolls which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted by
applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be an
underwriting.
(6)(a) for each Fund other than Core Fund, purchase, hold or deal in real
estate, although a Fund may purchase and sell securities that are
secured by real estate or interests therein, securities of real
estate investment trusts and mortgage-related securities and may
hold and sell real estate acquired by a Fund as a result of the
ownership of securities.
(6)(b) in the case of the Core Fund, purchase, hold or deal in real estate
(including real estate limited partnerships) or oil, gas or mineral
leases, although the Fund may purchase and sell securities that are
secured by real estate or interests therein, may purchase mortgage-
related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts that
are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same fundamental investment
objectives, restrictions and policies as the Fund.
In addition, as non-fundamental policies, a Fund may not:
B-59
<PAGE>
(1) Invest in companies for the purpose of exercising control or
management.
(2) Invest more than 15% of the Fund's net assets in illiquid
investments including repurchase agreements maturing in more than
seven days, securities which are not readily marketable and
restricted securities not eligible for resale pursuant to Rule 144A
under the 1933 Act.
(3) Purchase additional securities if the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
MANAGEMENT
TRUSTEES AND OFFICERS
- ---------------------
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees and Officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
Ashok N. Bakhru, Age 53, 1325 Avenue of the Americas, 34th Floor, New York, New
York 10019. Chairman and Trustee. Executive Vice President-Finance and
--------------------
Administration and Chief Financial Officer, Coty Inc. (since April 1996);
President, ABN Associates, Inc. (June 1994 through March 1996); Senior Vice
President, Scott Paper Company (until June 1994); Director, Arkwright Mutual
Insurance Company; Trustee, International House of Philadelphia; Member of
Cornell University Council; Trustee of Walnut Street Theater.
David B. Ford,* Age 51, One New York Plaza, New York, New York 10004. Trustee.
-------
Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs,
(1986-1996); Co-Head of GSAM since December 1994.
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Vice President, Goldman Sachs since May 1996; President,
- ---------------------
MFS Retirement Services Inc., of Massachusetts Financial Services prior thereto.
John P. McNulty,* Age 44, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
B-60
<PAGE>
Mary P. McPherson, Age 60, Taylor Hall, Bryn Mawr College, Bryn Mawr, PA 19010.
Trustee. President of Bryn Mawr College since 1978; Director of Josiah Macy,
- -------
Jr. Foundation since 1977; Director of the Philadelphia Contributionship since
1985; Director of Amherst College since 1986; Director of Dayton Hudson
Corporation since 1988; Director of the Spencer Foundation since 1993; and
member of PNC Advisory Board since 1993.
Alan A. Shuch,* Age 48, One New York Plaza, New York, New York 10004. Trustee.
-------
Limited Partner, Goldman Sachs (since 1994); Director and Vice President,
Goldman Sachs Funds Management, Inc. from April 1990 to November 1994; President
and Chief Operating Officer, GSAM from September 1988 to November 1994; Limited
Partner, Goldman Sachs since December 1994.
Jackson W. Smart, Jr., Age 66, One Northfield Plaza, #218, Northfield, Illinois
60093. Trustee. Chairman, Executive Committee, First Commonwealth, Inc. (a
-------
managed dental care company, since January 1996); Chairman and Chief Executive
Officer, MSP Communications Inc. (a company engaged in radio broadcasting) since
November 1988; Director, Federal Express Corporation since 1976; Evanston
Hospital Corporation (since 1980) and First Commonwealth,Inc. (since 1988) and
North American Private Equity Group (a venture capital fund).
William H. Springer, Age 67, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman and Chief Financial and Administrative Officer,
- -------
Ameritech (a telecommunications holding company) from February 1987 to
retirement in June 1992; Director, Walgreen Co. (a retail drugstore business);
and Baker, Fentress & Co. (a closed-end non-diversified management investment
company) April 1992 to present.
Richard P. Strubel, Age 57, 70 West Madison Street, Suite 1400, Chicago,
Illinois 60602. Trustee. Managing Director, Tandem Partners, Inc. (since
-------
1990); President and Chief Executive Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and connectors) from January 1984 to October
1994.
Pauline Taylor,* Age 50, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Director of
- ---------
Shareholder Servicing since June 1992.
Nancy L. Mucker,* Age 47, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
Scott M. Gilman,* Age 37, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds
B-61
<PAGE>
Management, Inc. since March 1993. Vice President, Goldman Sachs since March,
1990.
John M. Perlowski,* Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 36, 85 Broad Street, New York, New York 10004.
Secretary. Associate General Counsel of GSAM since February 1994; Vice
- ---------
President and Assistant General Counsel of Goldman Sachs; Counsel to the Funds
Group, GSAM since June 1992; Partner, Hale and Dorr from September 1991 to June
1992.
Howard B. Surloff,* Age 31, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General Counsel, Goldman Sachs since
- ---------
November 1993 and May 1994, respectively; Counsel to the Funds Group, GSAM since
November 1993; Associate of Shereff, Friedman, Hoffman & Goodman, LLP prior
thereto.
Valerie A. Zondorak,* Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Vice President, Goldman Sachs (since March 1997); Counsel
- --------------------
to the Funds Group, GSAM (since March 1997); Associate of Shereff, Friedman,
Hoffman & Goodman, LLP (prior thereto).
Steven E. Hartstein*, Age 33, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs since June 1993;
- -------------------
Funds Compliance Officer, Citibank Global Asset Management from August 1991 to
June 1993); Legal Assistant, Brown & Wood prior thereto.
Deborah A. Farrell*, Age 25, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman Sachs since January
- -------------------
1994. Formerly at Cleary, Gottlieb, Stein and Hamilton.
Kaysie Uniacke*, Age 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Senior Portfolio Manager, GSAM since
- -------------------
1988.
Elizabeth D. Anderson*, Age 27, One New York Plaza, New York, New York 10004.
Assistant Secretary. Portfolio Manager, GSAM since April 1996; Junior Portfolio
- -------------------
Manager, Goldman Sachs 1995-1996. Funds Trading Assistant, GSAM 1993-1995.
Compliance Analyst, Prudential Insurance, from 1991 to 1993.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or GSFM is the
investment adviser, administrator and/or distributor. As of _______, 1997, the
Trustees and officers as a
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<PAGE>
group owned less than 1% of the outstanding shares of beneficial interest of
each Fund.
B-63
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended October
31, 1996:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Funds
from the as of Part of (including
Funds/1/ Trust's Expenses the Funds)/2/
------------ ---------------- --------------
<S> <C> <C> <C>
Name of Trustees
Ashok N. Bakhru $4,109 $0 $77,375
Marcia L. Beck/3/ $0 $0 $0
David B. Ford $0 $0 $0
Douglas C. Grip $0 $0 $0
Paul C. Nagel, Jr./4/ $2,525 $0 $50,500
Alan A. Shuch $0 $0 $0
Jackson W. Smart $3,169 $0 $65,750
William H. Springer $3,169 $0 $65,750
Richard P. Strubel $3,169 $0 $65,750
</TABLE>
/1/ Reflects amount paid by Goldman Sachs Trust, a Massachusetts business
trust, during fiscal year ended October 31, 1996.
/2/ The Goldman Sachs Funds consisted of 29 mutual funds, including the seven
series of the Trust, on October 31, 1996.
/3/ Resigned as of May 1, 1996.
/4/ Retired as of June 30, 1996.
B-64
<PAGE>
INVESTMENT ADVISERS
- -------------------
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Municipal Income
Fund, Government Income Fund, Short Duration Tax-Free Fund, High Yield Fund and
Core Fund pursuant to a management agreement. GSFM, One New York Plaza, New
York, New York 10004, serves as the investment adviser to Adjustable Rate Fund
and Short Duration Government Fund pursuant to a management agreement. GSFM, a
Delaware limited partnership, is an affiliate of Goldman Sachs. GSAMI, 133
Peterborough Court, London EC4A 2BB, England, serves as investment adviser to
Global Income Fund pursuant to a management agreement. As a company with
unlimited liability under the laws of England, GSAMI is regulated by the
Investment Management Regulatory Organization Limited, a United Kingdom self-
regulatory organization, in the conduct of its investment advisory business.
See "MANAGEMENT" in the Funds' Prospectuses for a description of the applicable
Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24 hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico,
Milan, Montreal, Osaka, Paris, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs, whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching
$160 million, Goldman Sachs' Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers. The Advisers manage money for
some of the world's largest institutional investors.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry
B-65
<PAGE>
surveys conducted in the U.S. and abroad. Goldman Sachs is also among the
leading investment firms using quantitative analytics (now used by a growing
number of investors) to structure and evaluate portfolios. For example, Goldman
Sachs' options evaluation model analyzes each security's term, coupon and call
option, providing an overall analysis of the security's value relative to its
interest risk.
In planning the Tax Exempt Funds' strategies, the portfolio managers also
evaluate and monitor individual issues by using analytical techniques that have
traditionally been applied to corporate bonds and Mortgage-Backed Securities.
In particular, the Adviser's embedded option valuation model provides a picture
of an individual security's relative value and the portfolio's overall interest
rate risk. By constantly reviewing the positions of securities within the
portfolio, the Adviser looks for opportunities to enhance the Tax Exempt Funds'
yields by fine-tuning the portfolio, using quantitative tools designed for
municipal portfolio management. The Adviser, which managed approximately $3
billion in tax-free securities in 1996, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
In structuring Adjustable Rate Fund's and Short Duration Government Fund's
respective securities portfolio, the Adviser will review the existing overall
economic and mortgage market trends. The Adviser will then study yield spreads,
the implied volatility and the shape of the yield curve. The Adviser will then
apply this analysis to a list of eligible securities that meet the respective
Fund's investment guidelines. With respect to Adjustable Rate Fund, this
analysis is used to plan a two-part portfolio, which will consist of a "core"
portfolio of ARMs and a "relative value" portfolio of other mortgage assets that
can enhance portfolio returns and lower risk (such as investments in CMO
floating-rate tranches and interest only stripped Mortgage-Backed Securities).
With respect to Adjustable Rate Fund, Government Income Fund, Short
Duration Government Fund, High Yield Fund and Core Fund, the applicable Adviser
expects to utilize Goldman Sachs' sophisticated option-adjusted analytics to
help make strategic asset allocations within the markets for U.S. government,
Mortgage-Backed and other securities and to employ this technology periodically
to re-evaluate the Funds' investments as market conditions change. Goldman
Sachs has also developed a prepayment model designed to estimate mortgage
prepayments and cash flows under different interest rate scenarios. Because a
Mortgage-Backed Security incorporates the borrower's right to prepay the
mortgage, the Advisers use a sophisticated option-adjusted spread (OAS) model to
measure expected returns. A security's OAS is a function of the level and shape
of the yield curve, volatility and the applicable Adviser's expectation of how a
change in interest rates will affect prepayment levels. Since the OAS model
assumes a relationship between prepayments and interest rates, the Advisers
consider it a better way to measure a security's expected return and absolute
and relative values than yield to maturity. In using OAS
B-66
<PAGE>
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and prepayment
sensitivity. The Advisers will then analyze its value relative to alternative
investments and to its own investments. The Advisers will also measure a
security's interest rate risk by computing an option adjusted duration (OAD).
The Advisers believe a security's OAD is a better measurement of its price
sensitivity than cash flow duration, which systematically misstates portfolio
duration. The Advisers also evaluate returns for different mortgage market
sectors and evaluate the credit risk of individual securities. This
sophisticated technical analysis allows the Advisers to develop portfolio and
trading strategies using Mortgage-Backed Securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility
to meet the respective Fund's duration targets and cash flow pattern
requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to calculate projected
security returns under different, discrete interest rate scenarios, and Goldman
Sachs' proprietary prepayment model to generate yield estimates under these
scenarios. The OAS, scenario returns, expected returns, and yields of
securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The Advisers will use OAS analytics to choose what they believe is an
appropriate portfolio of investments for Adjustable Rate Fund, Government Income
Fund, Short Duration Government Fund and Core Fund from a universe of eligible
investments. In connection with initial portfolio selections, in addition to
using OAS analytics as an aid to meeting each Fund's particular composition and
performance targets, the Advisers will also take into account important market
criteria like the available supply and relative liquidity of various mortgage
securities in structuring the portfolio.
The Advisers also expect to use OAS analytics to evaluate the mortgage
market on an ongoing basis. Changes in the relative value of various Mortgage-
Backed Securities could suggest tactical trading opportunities for the Funds.
The Advisers will have access to both current market analysis as well as
historical information on the relative value relationships among different
Mortgage-Backed Securities. Current market analysis and historical information
is available in the Goldman Sachs database for most actively traded Mortgage-
Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive basis,
use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
B-67
<PAGE>
services to third parties or using such services as a basis for trading for its
own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments
in U.S. and foreign fixed-income markets, assesses the outlooks for various
sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed
Income Research Department is at the forefront in developing and using computer-
based tools for analyzing fixed-income securities and markets, developing new
fixed income products and structuring portfolio strategies for investment policy
and tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed-income research and credit research, the Advisers in
managing Global Income Fund are supported by Goldman Sachs' economics research.
The Economics Research Department, based in London, conducts economic, financial
and currency markets research which analyzes economic trends and interest and
exchange rate movements worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In allocating assets in the Global Income Fund's portfolio among
currencies, the Adviser will have access to the Global Asset Allocation Model.
The model is based on the observation that the prices of all financial assets,
including foreign currencies, will adjust until investors globally are
comfortable holding the pool of outstanding assets. Using the model, the
Adviser will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with Goldman Sachs' research
professionals' expectations to produce an optimal currency and asset allocation
for the level of risk suitable for the Fund's investment objective and criteria.
Each Fund's management agreement, (the "Management Agreements"), was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 23, 1997. The applicable Fund's
B-68
<PAGE>
Management Agreement was approved by the shareholders of Adjustable Rate Fund on
October 30, 1991, the shareholders of Short Duration Government Fund on March
27, 1989, the sole initial shareholder of Short Duration Tax-Free Fund on
September 25, 1992, the sole initial shareholder of Core Fund on October 29,
1993, and the shareholders of each other Fund on April 21, 1997. Each
Management Agreement will remain in effect until June 30, 1998 and will continue
in effect with respect to the applicable Fund from year to year thereafter
provided such continuance is specifically approved at least annually by (a) the
vote of a majority of the outstanding voting securities of such Fund or a
majority of the Trustees of the Trust, and (b) the vote of a majority of the
non-interested Trustees of the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
Each Management Agreement will terminate automatically if assigned (as
defined in the Act). Each Management Agreement is also terminable at any time
without penalty by the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund on 60 days' written notice to the
applicable Adviser or by the Adviser on 60 days' written notice of the Trust.
The Management Agreements provide that GSAM, GSFM and GSAMI, in their
capacity as advisers may each render similar services to others so long as the
services under the Management Agreements are not impaired thereby. Pursuant to
the Management Agreements, the Advisers are entitled to receive the fee set
forth below and the Advisers are currently limiting the fee to the rate set
forth below:
<TABLE>
<CAPTION>
Contractual Current
Fund Rate* Rate
- ---- ---- ----
<S> <C> <C>
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .55% .40%
Core Fixed Income .55% .40%
High Yield .70% .65%
GSFM
Short Duration Government .65% .40%
Adjustable Rate Government .55% .40%
GSAMI
Global Income .90% .59%
- ----------------------------
</TABLE>
* The Contractual Rate is identical to the aggregate advisory and
administration fee rates payable by each Fund under the previous separate
advisory (including subadvisory in the case of Global Income Fund) and
administration agreements. For the fiscal year ended October 31, 1996, the
annual rate expressed is the combined advisory and administration fees paid
(after fee waivers). Such reduction or limits, if any, are calculated
B-69
<PAGE>
monthly on a cumulative basis and may be discontinued or modified by the
applicable Adviser at its discretion at any time, although they have no
current intention to do so.
For the fiscal years ended October 31, 1996, 1995 and 1994, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Adjustable Rate Fund $2,535,709 $2,947,492 $6,798,185
Short Duration Government 411,360 517,091 1,063,867
Fund/(1)/
Short Duration Tax-Free Fund 169,796 260,970 468,868
Core Fund/(2)/ 246,568 137,158 56,255
Global Income Fund/(3)(6)/ 1,117,226 706,460 1,518,814
Government Income Fund/(4)(6)/ 74,060 44,037 0
Municipal Income Fund/(5)(6)/ 211,283 154,707 35,494
</TABLE>
_________________________
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $514,200, $646,364 and $1,329,834,
respectively, for such years.
/(2)/ Core Fund commenced operations January 5, 1994.
/(3)/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of
$837,920, $1,412,921 and $3,037,627, respectively. If expense limitations
had not been in effect, Global Income Fund would have paid advisory and
subadvisory fees of $1,474,204 and $491,401, respectively, for the year
ended October 31, 1996 and $789,127 and $1,578,254, respectively, for the
year ended October 31, 1995.
/(4)/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $148,120, $101,737 and $65,604, respectively,
for such years.
/(5)/ Had expense limitations not been in effect for the years ended October 31,
1995 and 1994, Municipal Income Fund would have paid advisory fees of
$200,207 and $174,161, respectively, for such years.
/(6)/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
The fees and services under the Investment Advisory and Administration
Agreements are identical to the fees and services under the Management
Agreement.
Each Adviser performs administrative services for the applicable Funds
under the Management Agreement. Such
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<PAGE>
administrative services include, subject to the general supervision of the
Trustees of the Trust, (a) providing supervision of all aspects of the Funds'
non-investment operations (other than certain operations performed by others
pursuant to agreements with the Funds), (b) providing the Funds, to the extent
not provided pursuant to the agreement with the Trust's custodian, transfer and
dividend disbursing agent or agreements with other institutions, with personnel
to perform such executive, administrative and clerical services as are
reasonably necessary to provide effective administration of the Funds, (c)
arranging, to the extent not provided pursuant to such agreements, for the
preparation, at the Funds' expense, of each Fund's tax returns, reports to
shareholders, periodic updating of the Funds' prospectuses and statements of
additional information, and reports filed with the SEC and other regulatory
authorities, (d) providing the Funds, to the extent not provided pursuant to
such agreements, with adequate office space and certain related office equipment
and services, and (e) maintaining all of the Funds' records other than those
maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
- ----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed-income markets, in each case on a proprietary basis and
for the accounts of customers. As such, Goldman Sachs and its affiliates are
actively engaged in transactions in the same securities, currencies, and
instruments in which the Funds invest. Such activities could affect the prices
and availability of the securities, currencies, and instruments in which the
Funds invest, which could have an adverse impact on each Fund's performance.
Such transactions, particularly in respect of proprietary accounts or customer
accounts other than those included in the Advisers' and their advisory
affiliates' asset management activities, will be executed independently of the
Funds' transactions and thus at prices or rates that may be more or less
favorable. When the Advisers and their advisory affiliates seek to purchase or
sell the same assets for their managed accounts, including the Funds, the assets
actually purchased or sold may be allocated among the accounts on a basis
determined in its good faith discretion of such entitles to be equitable. In
some cases, this system may adversely affect the size or the price of the assets
purchased or sold for the Funds.
B-71
<PAGE>
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which, or in securities of issuers for
which, the Advisers and/or their affiliates are performing services or when
position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs
B-72
<PAGE>
or their affiliated entities. As a result, the performance by these principals
and employees of their obligations to such other entities may be a consideration
of which investors in the Funds should be aware.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income, High Yield and Core Funds, currencies on behalf of
the applicable Funds in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Funds, and such party may
have no incentive to assure that the Funds obtain the best possible prices or
terms in connection with the transactions. Goldman Sachs and its affiliates may
also create, write or issue derivative instruments for customers of Goldman
Sachs or its affiliates, the underlying securities currencies or instruments of
which may be those in which the Funds invest or which may be based on the
performance of a Fund. The Funds may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter into transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the Funds. At times, these activities may cause
departments of the Firm to give advice to clients that may cause these clients
to take actions adverse to the interest of the client. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on a Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
B-73
<PAGE>
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust. Pursuant to the distribution agreement, after the Funds'
Prospectuses and periodic reports have been prepared, set in type and mailed to
shareholders, Goldman Sachs will pay for the printing and distribution of copies
thereof used in connection with the offering to prospective investors. Goldman
Sachs will also pay for other supplementary sales literature and advertising
costs. Goldman Sachs has entered into sales agreements with certain investment
dealers and financial service firms (the "Authorized Dealers") to solicit
subscriptions for Class A, Class B and Class C Shares of each of the Funds that
offer such classes of shares. Goldman Sachs receives a portion of the sales
load imposed on the sale, in the case of Class A Shares, or redemption in the
case of Class B and Class C Shares, of such Fund shares. No Class B Shares were
outstanding during the fiscal years ended October 31, 1994 and 1995. No Class C
Shares were outstanding during the fiscal years ended October 31, 1994, 1995 and
1996. Goldman Sachs retained approximately the following combined commissions
on sales of Class A and B shares during the following periods:
<TABLE>
<CAPTION>
1996** 1995* 1994
------- -------- --------
<S> <C> <C> <C>
Adjustable Rate Fund* $79,000 $40,000 N/A
Municipal Income Fund $24,900 $48,000 $ 76,000
Government Income Fund $17,300 $22,000 $ 5,000
Global Income Fund $52,600 $15,000 $350,000
- ---------------------
</TABLE>
* Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
** Prior to May 1, 1997, the Municipal, Government Income and Global Income
Funds did not offer Class B shares.
Goldman Sachs serves as the Trust's transfer and dividend disbursing agent.
Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken
with the Trust with respect to each Fund to (i) record the issuance, transfer
and redemption of shares, (ii) provide confirmations of purchases and
redemptions, and quarterly statements, as well as certain other statements,
(iii) provide certain information to the Trust's custodian and the relevant
subcustodian in connection with redemptions, (iv) provide dividend crediting and
certain disbursing agent services, (v) maintain shareholder accounts, (vi)
provide certain state Blue Sky and other information, (vii) provide shareholders
and certain regulatory authorities with tax-related information, (viii) respond
to shareholder inquiries, and (ix) render certain other miscellaneous services.
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer and dividend disbursing agent and the
B-74
<PAGE>
assumption by Goldman Sachs of the expenses related thereto, Goldman Sachs
received fees for the fiscal years ended October 31, 1996, 1995 and 1994 by each
Fund then in existence as follows:
Fund 1996 1995 1994
- ---- ------- ------- -------
Adjustable Rate Fund 278,337 306,662 679,819
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 16,980 26,098 46,887
Core Fund/(1)/ 24,657 13,716 5,637
Global Income Fund 121,212 106,764 132,123
Municipal Income Fund 90,284 63,695 70,811
Government Income Fund 72,237 94,095 57,960
- ------------------------
/(1)/ Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
each provides thereunder to the Funds are not impaired thereby. Each such
agreement also provides that the Trust will indemnify Goldman Sachs against
certain liabilities.
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser, the fees and expenses of
the Trust's custodian, transfer agent fees, brokerage fees and commissions,
filing fees for the registration or qualification of the Trust's shares under
federal or state securities laws, expenses of the organization of the Trust,
fees and expenses incurred by the Trust in connection with membership in
investment company organizations, taxes, interest, costs of liability insurance,
fidelity bonds or indemnification, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal, tax and auditing fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
B-75
<PAGE>
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees (in the
case of Global Income Fund and High Yield Fund) and other extraordinary
expenses) to the following percentage of each Fund's average daily net assets:
Short Duration Government Fund 0.05%
Adjustable Rate Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fund 0.05%
Global Income Fund 0.06%
High Yield Fund 0.01%
Such reductions or limits are calculated monthly on a cumulative
basis. Although the Advisers have no current intention of modifying or
discontinuing such expense limitations or the limitations on the management
fees, described above under "Management -- Investment Advisers," each may do so
in the future at its discretion. For the fiscal year ended October 31, 1996,
October 31, 1995 and October 31, 1994, Other Expenses of each Fund were reduced
by the Advisers in the following amounts:
1996 1995 1994
------- ------- -------
Adjustable Rate Fund 386,863 551,405 442,880
Short Duration
Government Fund 169,069 219,994 115,389
Short Duration
Tax-Free Fund 238,097 213,139 192,696
Core Fund* 233,065 176,469 141,815
Municipal Income Fund 238,203 196,265 198,806
Government Income Fund 219,091 242,036 224,285
Global Income Fund** 337,079 70,195 0
- ----------------------
* Core Fund commenced operations on January 5, 1994.
** For the fiscal year ended October 31, 1994, there was no expense
limitation.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by the
Advisers in performing certain accounting services not being provided by the
Trust's custodian.
CUSTODIAN AND SUB-CUSTODIANS
- ----------------------------
B-76
<PAGE>
State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, is the custodian of the Trust's portfolio
securities and cash. State Street also maintains the Trust's accounting
records. State Street may appoint sub-custodians from time to time to hold
certain securities purchased by the Trust in foreign countries and to hold cash
and currencies for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------
Arthur Andersen LLP, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the Trust.
In addition to audit services, Arthur Andersen LLP prepares the Trust's federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a dealer is dealing with a Fund as
principal and receives compensation equal to the spread between the dealer's
cost for a given security and the resale price of such security). In certain
foreign countries, debt securities in which the Global Income Fund, Core Fund
and High Yield Fund may invest are traded on exchanges at fixed commission
rates. In connection with portfolio transactions, the Management Agreement
provides that the Advisers shall attempt to obtain the best net price and the
most favorable execution. The Management Agreement provides that, on occasions
when an Adviser deems the purchase or sale of a security to be in the best
interests of a Fund as well as its other customers (including any other fund or
other investment company or advisory account for which the Advisers or an
affiliate act as investment adviser), a Fund, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution. In
such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the applicable Adviser in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to the applicable Fund and such other customers. In some instances,
this procedure may adversely affect the size and price of the position
obtainable for a Fund. The Management Agreement permits each Adviser, in its
discretion, to purchase and sell portfolio securities to and from dealers who
provide the Trust with brokerage or research services in which dealers may
execute brokerage transactions at a higher cost to the Fund. Brokerage and
research services furnished by firms through which the Fund's effect their
securities transactions may be used by the Advisers in servicing other accounts
and not all of these services may be used by the Adviser in connection with the
specific Fund generating the brokerage credits. The fees received under the
Management Agreement
B-77
<PAGE>
are not reduced by reason of the Adviser receiving such brokerage and research
services. In addition, in selecting brokers and dealers, the Advisers may take
into account sales of shares of the Funds and other funds in the Goldman Sachs
Group of Funds by such brokers and dealers.
For the fiscal years ended October 31, 1995 and 1994, the Funds then in
existence paid no brokerage commissions.
B-78
<PAGE>
For the fiscal year ended October 31, 1996, the Funds then in existence paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid/3/ Research
=========== ================= ======================= ==========
<S> <C> <C> <C> <C>
Fiscal Year Ended
October 31, 1996:
Adjustable Rate Fund $108,000 $108,000(100%)/1/ $2,121,317,579(100%)/2/ $N/A
Short Duration Government Fund 24,000 24,000(100%)/1/ 447,205,928(100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000(100%)/1/ 8,559,280(100%)/2/ N/A
Core Fixed Income Fund 4,000 4,000(100%)/1/ 43,548,299(100%)/2/ N/A
Government Income Fund 1,200 1,200(100%)/1/ 24,437,288(100%)/2/ N/A
Municipal Income Fund 2,750 2,750(100%)/1/ 51,101,625(100%)/2/ N/A
</TABLE>
_______________________________
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Refers to Market Value of Futures Contracts.
B-79
<PAGE>
During the fiscal year ended October 31, 1996, the Funds acquired and
sold securities of their regular broker-dealers: Chase Securities, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1996, Short Duration Tax-Free Fund, Global Income Fund
and Municipal Income Fund held no securities of their regular broker-dealers.
As of the same date, Short Duration Government Fund, Adjustable Rate Fund,
Government Income Fund and Core Fund held the following amounts of securities of
their regular broker-dealers, as defined in Rule 10b-1 under the 1940 Act, or
their parents ($ in thousands): Short Duration Government Fund: Lehman
Brothers, Inc. ($370), Nomura Securities ($280) and Bear Stearns ($280);
Adjustable Rate Fund: Lehman Brothers, Inc. ($4,531), Bear Stearns ($3,430) and
Nomura Securities ($3,430); Government Income Fund: Lehman Brothers, Inc.
($2,774), Nomura Securities (2,774) and Bear Stearns ($2,100); Nomura Securities
(2,774); Core Fund: Lehman Brothers, Inc. ($4,808), Nomura Securities ($3,640)
and Bear Stearns ($3,640).
SHARES OF THE TRUST
The Funds were reorganized from series of a Massachusetts business
trust as part of Goldman Sachs Trust, a Delaware business trust, by a
Declaration of Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees have authority to classify and reclassify any series of shares into one
or more classes of shares. As of the date of this Additional Statement, the
Trustees have authorized: (i) the issuance of six classes of shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares; (ii) the issuance of four classes of shares
of Adjustable Rate Fund: Institutional Shares, Administration Shares, Service
Shares and Class A Shares; and (iii) the issuance of five classes of shares of
Global Income Fund, Government Income Fund, Municipal Income Fund and High Yield
Fund: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. As of October 31, 1996, no Service Shares of the Adjustable
Rate Fund were outstanding; no Class A, Class B or Class C Shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund were
outstanding; no Class C Shares of Government Income Fund and Municipal Income
Fund were outstanding; and no shares of High Yield Fund were outstanding.
B-80
<PAGE>
Each Institutional Share, Administration Share, Service Share, Class A
Share, Class B Share and Class C Share of a Fund represents a proportionate
interest in the assets belonging to the applicable class of the Fund. All
expenses of a Fund are borne at the same rate by each class of shares, except
that fees under Administration and Service Plans are borne exclusively by
Administration and Service Shares, fees under Distribution and Authorized Dealer
Service Plans are borne exclusively by Class A, Class B or Class C Shares and
transfer agency fees are borne at different rates by Class A, Class B or Class C
Shares than Institutional, Administration and Service Shares. The Trustees may
determine in the future that it is appropriate to allocate other expenses
differently between classes of shares and may do so to the extent consistent
with the rules of the SEC and positions of the Internal Revenue Service. Each
class of shares may have different minimum investment requirements and be
entitled to different shareholder services. Currently, shares of a class may
only be exchanged for shares of the same or an equivalent class of another fund.
See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the institution's customers.
Administration Shares may be purchased for accounts held in the name
of an institution that provides certain account administration services to its
customers, including maintenance of account records and processing orders to
purchase, redeem and exchange Administration Shares. Administration Shares bear
the cost of account administration fees at the annual rate of up to 0.25% of the
average daily net assets of such Administration Shares.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge, through brokers
and dealers who are members of the National Association of Securities Dealers,
Inc. and certain other financial service firms that have sales agreements with
Goldman Sachs. Class A Shares of the Funds bear the cost of distribution (Rule
12b-1) fees at the aggregate rate of up to 0.25% of the average daily net assets
of such Class A Shares. Class A Shares also bear the cost of an Authorized
Dealer Service Plan at an annual rate of up to 0.25% of average daily net assets
attributable to Class A Shares.
B-81
<PAGE>
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge through brokers and dealers who are members of the National
Association of Securities Dealers, Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. Class B shares bear the
cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of
the average daily net assets attributable to Class B shares. Class B shares
also bear the cost of an Authorized Dealer Service Plan at an annual rate of up
to 0.25% of the average daily net assets attributable to Class B shares.
Class C Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 1.0% through brokers and dealers who are members of the
National Association of Securities Dealers Inc. and certain other financial
services firms that have sales arrangements with Goldman Sachs. Class C Shares
bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to
0.75% of the average daily net assets attributable to Class C Shares. Class C
Shares also bear the cost of an Authorized Dealer Service Plan at an annual rate
of up to 0.25% of the average daily net assets attributable to Class C Shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A, Class B and Class C Shares) to its customers and thus receive different
compensation with respect to different classes of shares of each Fund.
Dividends paid by each Fund, if any, with respect to each class of shares will
be calculated in the same manner, at the same time on the same day and will be
in the same amount, except for differences caused by the fact that the
respective account administration, service, authorized dealer service plan and
distribution fees relating to a particular class will be borne exclusively by
that class. Similarly, the net asset value per share may differ depending upon
the class of shares purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, each Fund's shares are fully paid and non-assessable by
the Trust. In the event of liquidation of a Fund, shareholders of that Fund are
entitled to share pro rata in the net assets of that Fund available for
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of July 15, 1997, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following Funds: Adjustable
Rate Fund:
Short Duration Government Fund:
Short Duration Tax-Free Fund:
Government Income Fund:
Core Fund:
B-82
<PAGE>
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act, applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company (such as
the Trust) shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of Trustees from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the election of Trustees (this method of voting being
referred to at "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for
any act or obligation of the series and satisfy any judgment thereon from the
assets of the series.
B-83
<PAGE>
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have
the right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of the Delaware Trust, all the powers and authorities of
Trustees under the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations
B-84
<PAGE>
of a Fund. Notice of such disclaimer will normally be given in each agreement,
obligation or instrument entered into or executed by a series or the Trustees.
The Declaration of Trust provides for indemnification by the relevant Fund for
all loss suffered by a shareholder as a result of a obligation of the series.
The Declaration of Trust also provides that a series shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of the series and satisfy any judgment thereon. In view of the above, the risk
of personal liability of shareholders is remote.
In addition to the requirement under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the series or class to which such action relates, shall join in the request for
the Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of other advisers in considering the merits of the request
and shall require an undertaking by the shareholders making such request to
reimburse the Fund for the expense of any such advisers in the event that the
Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason or willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
NET ASSET VALUE
Under the Act, the Trustees of the Trust are responsible for
determining in good faith the fair value of securities of the Funds. In
accordance with procedures adopted by the Trustees of the Trust, the net asset
value per share of each class of each Fund is calculated by determining the
value of the net assets attributable to each class of that Fund (assets,
including securities at value, minus liabilities) and dividing by the number of
outstanding shares of that class. All securities are valued as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time) on each Business Day (as defined in each Fund's Prospectus).
For the purpose of calculating the net asset value of the Funds,
investments are valued under valuation procedures established by the Trustees.
Portfolio securities, other than money market instruments and with the exception
of Global Income Fund, for which accurate market quotations are readily
available are valued as follows: (a) via electronic feeds to the custodian bank
containing dealer-supplied bid quotations or bid quotations
B-85
<PAGE>
from a nationally recognized pricing service; (b) securities for which the
custodian bank is unable to obtain an external price or with respect to which
the Adviser believes an external price does not reflect accurate market values,
will be valued by the Adviser in good faith based on valuation models that take
into account daily spread and yield changes on U.S. Treasury securities (i.e.,
matrix pricing); (c) overnight repurchase agreements will be valued by the
Adviser at cost; (d) term repurchase agreements (i.e., those whose maturity
exceeds seven days) and interest rate swaps, caps, collars and floors will be
valued at the average of the bid quotations obtained daily from at least two
dealers or, for term repurchase agreements, recognized counterparties; (e) debt
securities with a remaining maturity of 60 days or less are valued by the
Adviser at amortized cost, which the Trustees have determined to approximate
fair value; (f) spot and forward foreign currency exchange contracts will be
valued using a pricing service such as Reuters then calculating then mean
between the last bid and asked quotations supplied by certain independent
dealers in such contracts; (g) exchange-traded options and futures contracts
will be valued by the custodian bank at the last sale price on the exchange
where such contracts and options are principally traded; and (h) over-the-
counter options will be valued by an independent unaffiliated broker identified
by the portfolio manager/trader and contacted by the custodian bank.
Portfolio securities of the Global Income Fund for which accurate
market quotations are available are valued as follows: (a) securities listed on
any U.S. or foreign stock exchange or on the National Association of Securities
Dealers Automated Quotations System ("NASDAQ") will be valued at the last sale
price on the exchange or system in which they are principally traded, on the
valuation date. If there is no sale on the valuation day, securities traded
principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean between
the closing bid and asked prices, and (ii) on a foreign exchange will be valued
at the official bid price. The last sale price and official bid price for
securities traded principally on a foreign exchange will be determined as of the
close of the London Foreign Exchange; (b) over-the-counter securities not quoted
on NASDAQ will be valued at the last sale price on the valuation day or, if no
sale occurs, at the mean between the last bid and asked prices; (c) options and
futures contracts will be valued at the last sale price in the market where such
contract is principally traded; and (d) forward foreign currency exchange
contracts will be valued at the mean between the last bid and asked quotations
supplied by a dealer in such contracts.
All other securities, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved by the Board of Trustees.
Money market instruments held by a Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost
B-86
<PAGE>
method, which the Trustees have determined approximates market value.
The value of all assets and liabilities expressed in foreign
currencies will be converted into U.S. dollar values at current exchange rates
of such currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the time the Global Income, Core and High
Yield Funds calculate their net asset value. Occasionally, events affecting the
values of such securities may occur between the times at which they are
determined and the calculation of net asset value which will not be reflected in
the computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value, in which case an adjustment
may be made.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies and financial institutions. Each prospective
shareholder is urged to consult his own tax adviser with respect to the specific
federal, state, local and foreign tax consequences of investing in the Funds.
This summary is based on the laws in effect on the date of this Additional
Statement, which are subject to change.
GENERAL
- -------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect to
be treated and intends to continue to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its gross
income (including tax-exempt interest) for its taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks or securities, or foreign currencies or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"); (b) a Fund derive less than 30% of its
gross income for its taxable year from the sale or other disposition of any of
the following which was held for less than three months: (i) stock or
securities,
B-87
<PAGE>
(ii) options, futures or forward contracts (other than options, futures or
forward contracts on foreign currencies) and (iii) foreign currencies and
foreign currency options, futures and forward contracts that are not directly
related to the Fund's principal business of investing in stocks or securities or
options and futures with respect to stocks or securities (the "short-short
test"); and (c) a Fund diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the market value of its total
(gross) assets is comprised of cash, cash items, United States Government
Securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (gross) assets is invested in the securities of any
one issuer (other than United States Government Securities and securities of
other regulated investment companies) or two or more issuers controlled by a
Fund and engaged in the same, similar or related trades or businesses. Gains
from the sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that are not directly related to Core
Fund's or Global Income Fund's principal business of investing in stock or
securities or options and futures with respect to stock or securities will be
treated as gains from the sale of investments held for less than three months
under the short-short test (even though characterized as ordinary income for
some purposes) if such currencies or instruments were held for less than three
months. In addition, future Treasury regulations could provide that qualifying
income under the 90% gross income test will not include gains from foreign
currency transactions that are not directly related to Core Fund's or Global
Income Fund's principal business of investing in stock or securities or options
and futures with respect to stock or securities. Using foreign currency
positions or entering into foreign currency options, futures and forward
contracts for purposes other than hedging currency risk with respect to
securities in Core Fund's or Global Income Fund's portfolio or anticipated to be
acquired may not qualify as "directly related" under these tests.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on the portion of its income and capital gains that it
distributes to its shareholders in any taxable year for which it distributes, in
compliance with the Code's timing and other requirements, at least 90% of its
"investment company taxable income" (which includes dividends, taxable interest,
taxable original issue discount income, market discount income, income from
securities lending, net short-term capital gain in excess of net long-term
capital loss, certain net realized foreign exchange gains, and any other taxable
income other than "net capital gain" as defined below and is reduced by
deductible expenses) and at least 90% of the excess of its gross tax-exempt
interest income over certain disallowed deductions ("net tax-exempt interest").
A Fund may retain for investment its "net capital gain" (which consists of the
excess of its net long-term capital gain over its
B-88
<PAGE>
net short-term capital loss). However, if a Fund retains any investment company
taxable income or net capital gain, it will be subject to tax at regular
corporate rates on the amount retained. If a Fund retains any net capital gain,
that Fund may designate the retained amount as undistributed net capital gain in
a notice to its shareholders who, if subject to U.S. federal income tax on long-
term capital gains, (i) will be required to include in income for federal income
tax purposes, as long-term capital gain, their shares of such undistributed
amount, and (ii) will be entitled to credit their proportionate shares of the
tax paid by that Fund against their U.S. federal income tax liabilities, if any,
and to claim refunds to the extent the credit exceeds such liabilities. For
U.S. federal income tax purposes, the tax basis of shares owned by a shareholder
of the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute for each taxable year to its
shareholders all or substantially all of its investment company taxable income
(if any), net capital gain and any net tax-exempt interest. Exchange control or
other foreign laws, regulations or practices may restrict repatriation of
investment income, capital or the proceeds of securities sales by foreign
investors such as Global Income Fund or Core Fund and may therefore make it more
difficult for Global Income Fund or Core Fund to satisfy the distribution
requirements described above, as well as the excise tax distribution
requirements described below. However, Global Income Fund and Core Fund
generally expect to be able to obtain sufficient cash to satisfy such
requirements from new investors, the sale of securities or other sources. If
for any taxable year a Fund does not qualify as a regulated investment company,
it will be taxed on all of its investment company taxable income and net capital
gain at corporate rates, its net tax-exempt interest (if any) may be subject to
the alternative minimum tax, and its distributions to shareholders will be
taxable as ordinary dividends to the extent of its current and accumulated
earnings and profits.
For federal income tax purposes, each Fund is permitted to carry
forward a net capital loss in any year to offset its own capital gains, if any,
during the eight years following the year of the loss. At October 31, 1996, the
Funds had approximately the following amounts of capital loss carry forwards:
Years of
Amount Expiration
----------- ----------
Adjustable Rate Fund $47,923,000 2000-2003
Short Duration
Government Fund $13,272,000 2002-2003
Short Duration
Tax-Free Fund $ 4,271,000 2002-2003
Core Fixed Income Fund $ 77,000 2004
Global Income Fund $ 4,472,000 2002
Municipal Income Fund $ 1,535,000 2002
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These amounts are available to be carried forward to offset future capital
gains to the extent permitted by the Code and applicable tax regulations.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year) and 100% of any taxable
ordinary income and the excess of capital gains over capital losses for the
prior year that were not distributed during such year and on which the Fund did
not pay federal income tax. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will be treated as if they were received by
shareholders on December 31 of the year declared.
The Tax Exempt Funds may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." The Tax Exempt Funds may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, the Tax
Exempt Funds may purchase beneficial interests in Municipal Securities held by
trusts, custodial arrangements or partnerships and/or combined with third-party
puts and other types of features such as interest rate swaps; those investments
may require the Fund to pay "tender fees" or other fees for the various features
provided.
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that tax-
exempt interest received by a regulated investment company with respect to such
obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax Exempt Funds intends to take
the position that it
B-90
<PAGE>
is the owner of any municipal obligations acquired subject to a standby
commitment or other third party put and that tax-exempt interest earned with
respect to such municipal obligations will be tax-exempt in its hands. There is
no assurance that the Service will agree with such position in any particular
case. Additionally, the federal income tax treatment of certain other aspects
of these investments, including the treatment of tender fees paid by these
Funds, in relation to various regulated investment company tax provisions is
unclear. However, the Adviser intends to manage the Tax Exempt Funds'
portfolios in a manner designed to minimize any adverse impact from the tax
rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging transactions entered into by a Fund, that
Fund may be required to defer the recognition of losses on futures or forward
contracts and options or underlying securities or foreign currencies to the
extent of any unrecognized gains on related positions held by the Fund and the
characterization of gains or losses as long-term or short-term may be changed.
The short-short test described above may limit each Fund's ability to use
options, futures and forward transactions as well as its ability to engage in
short sales. The tax provisions described above applicable to options, futures
and forward contracts may affect the amount, timing, and character of a Fund's
distributions to shareholders. Certain tax elections may be available to the
Funds to mitigate some of the unfavorable consequences described in this
paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by Core Fund and Global Income
Fund. Under these rules, foreign exchange gain or loss realized by Core Fund or
Global Income Fund with respect to foreign currencies and certain futures and
options thereon, foreign currency-denominated debt instruments, foreign currency
forward contracts, and foreign currency-denominated payables and receivables
will generally be treated as ordinary income or loss, although in some cases
elections may be available that would alter this treatment. If a net foreign
exchange loss treated as ordinary loss under Section 988 of the Code were to
exceed a Fund's investment company taxable income
B-91
<PAGE>
(computed without regard to such loss) for a taxable year, the resulting loss
would not be deductible by the Fund or its shareholders in future years. Net
loss, if any, from certain foreign currency transactions or instruments could
exceed net investment income otherwise calculated for accounting purposes with
the result being either no dividends being paid or a portion of Core Fund's,
High Yield Fund's or Global Income Fund's dividends being treated as a return of
capital for tax purposes, nontaxable to the extent of a shareholder's tax basis
in his shares and, once such basis is exhausted, generally giving rise to
capital gains.
Core and Global Income, and High Yield Funds may be subject to foreign
taxes on income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes in some cases. Because more than 50% of Global Income
Fund's total assets at the close of any taxable year will generally consist of
stock or securities of foreign corporations, Global Income Fund will generally
qualify to file an election with the Internal Revenue Service pursuant to which
shareholders of Global Income Fund would be required to (i) include in ordinary
gross income (in addition to taxable dividends actually received) their pro rata
shares of foreign income taxes paid by Global Income Fund that are treated as
income taxes under U.S. tax regulations (which excludes, for example, stamp
taxes, securities transaction taxes, and similar taxes) even though not actually
received by such shareholders, and (ii) treat such respective pro rata portions
as foreign income taxes paid by them. Global Income Fund may or may not make
this election for any particular taxable year. Core Fund will not satisfy the
50% requirement described above and, therefore, will not make this election.
Core Fund and, if it does not make the election, Global Income Fund will,
however, be entitled to deduct such taxes in computing the amounts they are
required to distribute.
If Global Income Fund makes this election, its shareholders may then deduct
such pro rata portions of qualified foreign taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of qualified foreign taxes paid by
Global Income Fund, although such shareholders will be required to include their
shares of such taxes in gross income if Global Income Fund makes the election
referred to above.
If a shareholder chooses to take a credit for the foreign taxes deemed paid
by such shareholder as a result of any such election by Global Income Fund, the
amount of the credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken which the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. For
this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by Global Income Fund
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<PAGE>
will generally not be treated as income from foreign sources. This foreign tax
credit limitation may also be applied separately to certain specific categories
of foreign-source income and the related foreign taxes. As a result of these
rules, which have different effects depending upon each shareholder's particular
tax situation, certain shareholders of Global Income Fund may not be able to
claim a credit for the full amount of their proportionate shares of the foreign
taxes paid by the Fund.
Shareholders who are not liable for U.S. federal income taxes, including
tax-exempt shareholders, will ordinarily not benefit from this election. Each
year, if any, that Global Income Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of qualified foreign income taxes paid by Global Income Fund and (ii) the
portion of Fund dividends which represents income from each foreign country.
If Core, or Global Income or High Yield Funds acquire stock (including,
under proposed regulations, an option to acquire stock such as is inherent in a
convertible bond) in certain foreign corporations that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gain) or hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies") Core, Global Income or High Yield Funds could be subject to federal
income tax and additional interest charges on "excess distributions" received
from such companies or gain from the sale of such stock in such companies, even
if all income or gain actually received by Core, Global Income or High Yield
Funds is timely distributed to its shareholders. Core, Global Income or High
Yield Funds would not be able to pass through to their shareholders any credit
or deduction for such a tax. Certain elections may, if available, ameliorate
these adverse tax consequences, but any such election would require Core, Global
Income or High Yield Funds to recognize taxable income or gain without the
concurrent receipt of cash. Core, Global Income or High Yield Funds may limit
and/or manage their holdings in passive foreign investment companies to minimize
its tax liability or maximize its return from these investments.
A Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark-to-market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
B-93
<PAGE>
The federal income tax rules applicable to mortgage dollar rolls and
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations concerning the tax-exempt status of such obligations, nor does it
guarantee or represent that bond counsels' opinions are correct. Bond counsels'
opinions will generally be based in part upon covenants by the issuers and
related parties regarding continuing compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex requirements
that must be satisfied on a continuing basis in order for bonds to be and remain
tax-exempt. If the issuer of a bond or a user of a bond-financed facility fails
to comply with such requirements at any time, interest on the bond could become
taxable, retroactive to the date the obligation was issued. In that event, a
portion of a Tax Exempt Fund's distributions attributable to interest the Fund
received on such bond for the current year and for prior years could be
characterized or recharacterized as taxable income. The availability of tax-
exempt obligations and the value of a Tax Exempt Fund's portfolio may be
affected by restrictive federal income tax legislation enacted in recent years
or by similar, future legislation. If a Tax Exempt Fund satisfies the
applicable requirements, dividends paid by the Fund which are attributable to
tax exempt interest on Municipal Securities and designated by the Fund as
exempt-interest dividends in a written notice mailed to its shareholders within
sixty days after the close of its taxable year may be treated by shareholders
as items of interest excludable from their gross income under Section 103(a) of
the Code. Exempt-interest dividends a Tax Exempt Fund receives from other
regulated investment companies, including exempt-interest dividends on auction
rate preferred securities of such companies held by a Fund, are treated as
interest on Municipal Securities and may be distributed by a Tax Exempt Fund as
exempt-interest dividends. The recipient of tax-exempt income is required to
report such income on his federal income tax return. However, a shareholder is
advised to consult his tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Section 103(a) if such shareholder would be
treated as a
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<PAGE>
"substantial user" under Section 147(a)(1) with respect to some or all of the
tax-exempt obligations held by a Tax Exempt Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of a
Tax Exempt Fund is not deductible to the extent attributable to exempt-interest
dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions from investment company taxable income, as
defined above, are taxable to shareholders who are subject to tax as ordinary
income whether paid in cash or reinvested in additional shares. Taxable
distributions include distributions from any Fund, including Short Duration Tax-
Free Fund and Municipal Income Fund, that are attributable to (i) taxable
income, including but not limited to dividends, taxable bond interest,
recognized market discount income, original issue discount income accrued with
respect to taxable bonds, income from repurchase agreements, income from
securities lending, income from dollar rolls, income from interest rate or
currency swaps, caps, floors and collars, and a portion of the discount from
certain stripped tax-exempt obligations or their coupons or (ii) capital gains
from the sale of securities or other investments (including from the disposition
of rights to when-issued securities prior to issuance) or from options, futures
or certain forward contracts. Any portion of such taxable distributions that is
attributable to a Fund's net capital gain, as defined above, may be designated
by the Fund as a "capital gain dividend," taxable to shareholders as long-term
capital gain whether received in cash or additional shares and regardless of the
length of time their shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less
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<PAGE>
than a minimum period, generally 46 days. Receipt of certain distributions
qualifying for the deduction may result in reduction of the tax basis of the
corporate shareholder's shares and may give rise to or increase its liability
for federal corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes,
will first reduce a shareholder's basis in his shares and, after the
shareholder's basis is reduced to zero, will generally constitute capital gains
to a shareholder who holds his shares as capital assets. Amounts that are not
allowable as a deduction in computing taxable income, including expenses
associated with earning tax-exempt interest income, do not reduce a Fund's
current earnings and profits for these purposes. Consequently, the portion, if
any, of Short Duration Tax-Free Fund's or Municipal Income Fund's distributions
from gross tax-exempt interest income that exceeds its net tax-exempt interest
would be taxable as ordinary income to the extent of such disallowed deductions
even though such excess portion may represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash and will have a cost basis in the shares received equal
to such amount.
TAXABLE U.S. SHAREHOLDERS -- SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of in
a transaction that is treated as a sale for tax purposes, the shareholder will
generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale, such gain or loss should be capital in
character, and long-term if the shareholder has a tax holding period for the
shares of more than one year, otherwise short-term, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund Shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. All or a portion
of a sales charge paid in purchasing Class A shares of Adjustable Rate Fund or
Global Income Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of that Fund or another fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment or
exchange privilege. Any disregarded portion of such charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired. If
a shareholder received a capital gain dividend with respect to
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<PAGE>
shares and such shares have a tax holding period of six months or less at the
time of the sale or redemption, then any loss the shareholder realizes on the
sale or redemption will be treated as a long-term capital loss to the extent of
such capital gain dividend. Also, any losses realized by shareholders who
dispose of shares of Short Duration Tax-Free or Municipal Income Funds with a
tax holding period of six months or less are disallowed to the extent of any
exempt-interest dividends received with respect to such shares. Additionally,
any loss realized on a sale or redemption of shares of a Fund may be disallowed
under "wash sale" rules to the extent the shares disposed of are replaced with
other shares of the same Fund within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of, such as pursuant to
a dividend reinvestment in shares of the Fund. If disallowed, the loss will be
reflected in an adjustment to the basis of the shares acquired.
After the close of each calendar year, each of Short Duration Tax-Free Fund
and Municipal Income Fund will inform shareholders of the federal income tax
status of its dividends and distributions for such year, including the portion
of such dividends that qualifies as tax-exempt and the portion, if any, that
should be treated as a tax preference item for purposes of the federal
alternative minimum tax. Shareholders who have not held shares of Short
Duration Tax-Free Fund or Municipal Income Fund for such Fund's full taxable
year may have designated as tax-exempt or as a tax preference item a percentage
of distributions which is not equal to the actual amount of tax-exempt income or
tax preference item income earned by Short Duration Tax-Free Fund or Municipal
Income Fund during the period of their investment in Short Duration Tax-Free
Fund or Municipal Income Fund, as the case may be.
All distributions, whether received in shares or in cash, as well as
redemptions and exchanges, must be reported by each shareholder who is required
to file a U.S. Federal income tax return.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of
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31% in the case of non-exempt shareholders who fail to furnish the Funds with
their correct taxpayer identification number and with certain required
certifications or if the Service or a broker notifies the Funds that the number
furnished by the shareholder is incorrect or that the shareholder is subject to
backup withholding as a result of failure to report interest or dividend income.
However, any taxable distributions from Short Duration Tax-Free Fund or
Municipal Income Fund will not be subject to backup withholding if the
applicable Fund reasonably estimates that at least 95% of its distributions will
be exempt-interest dividends. A Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment company taxable income distributed by a
Fund to a shareholder who is not a U.S. person will be subject to U.S.
withholding tax at the rate of 30% (or a lower rate provided by an applicable
tax treaty) unless the dividends are effectively connected with a U.S. trade or
business of the shareholder, in which case the dividends will be subject to tax
on a net income basis at the graduated rates applicable to U.S. individuals or
domestic corporations. Distributions of net capital gain, including amounts
retained by a Fund which are designated as undistributed capital gains, to a
shareholder who is not a U.S. person will not be subject to U.S. federal income
or withholding tax unless the distributions are effectively connected with the
shareholder's trade or business in the United States or, in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met. Non-U.S. shareholders may also be subject to U.S.
withholding tax on deemed income resulting from any election by Global Income
Fund to treat qualified foreign taxes it pays as passed through to shareholders
(as described above), but they may not be able to claim a U.S. tax credit or
deduction with respect to such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the
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United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Thirty-day yield and average annual total return values are computed pursuant to
formulas specified by the SEC. Each Fund may also from time to time quote
distribution rates in reports to shareholders and in sales literature.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price per share on the
last day of such period. Yield is then annualized by assuming that yield is
realized each month for twelve months and is reinvested every six months. Net
investment income per share is equal to the dividends and interest earned during
the period, reduced by accrued expenses for the period. The calculation of net
investment income for these purposes may differ from the net investment income
determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, a Tax Exempt Fund's tax-free yield. Tax equivalent yield is
calculated by dividing a Tax Exempt Fund's tax-exempt yield by one minus a
stated federal and/or state tax rate.
Distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share on the last day of the period.
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<PAGE>
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price applicable to the relevant
class (i.e., net asset value in the case of each class other than Class A) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption (and in the case
of Class B and Class C Shares payment of any contingent deferred sales charge)
at the end of the period. This calculation assumes a complete redemption of the
investment. It also assumes that all dividends and distributions are reinvested
at net asset value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price per share with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period.
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
Thirty-day yield, tax equivalent yield (Short Duration Tax-Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A, Class B or Class C Shares which is based upon a Fund's net asset value per
share would be reduced if a sales charge were taken into account.
B-100
<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- -------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 6.00% 5.94%
Administration Shares 5.75% 5.69%
Service Shares/2/
Class A Shares
- Assumes 1.5% sales charge 5.66% 5.35%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.43% 6.16%
Administration Shares 6.19% 5.93%
Service Shares 5.96% 5.71%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.34% 3.71%
Administration Shares 4.09% 3.42%
Service Shares 3.84% 3.22%
CORE FUND
Institutional Shares 6.60% 6.25%
Administration Shares 6.37% 6.03%
Service Shares 6.12% 5.78%
GLOBAL INCOME FUND
Institutional Shares 5.20% 4.76%
Service Shares/2/
Class A Shares
(Assumes 4.5% sales charge) 4.54% 4.08%
Class B Shares 4.23% 3.80%
MUNICIPAL INCOME FUND
Class A Shares 4.21% 3.56%
(assumes 4.5% sales charge)
Class B Shares 3.68% 3.25%
GOVERNMENT INCOME FUND
Class A Shares 6.04% 4.76%
(assumes 4.5% sales charge)
Class B Shares 5.57% 4.48%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION RATE
<S> <C> <C> <C>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- -------------------------------- ------------------ ----------- ------------
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 5.87% 5.81%
Administration Shares 5.62% 5.56%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.62% 5.31%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.24% 5.97%
Administration Shares 6.00% 5.72%
Service Shares 5.78% 5.49%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.19% 3.56%
Administration Shares 3.94% 3.28%
Service Shares 3.69% 3.06%
MUNICIPAL INCOME FUND
Class A Shares 4.27% 3.59%
-assumes no sales charge
Class B Shares 3.53% 3.09%
GOVERNMENT INCOME FUND
Class A Shares 6.33% 5.00%
-assumes no sales charge
Class B Shares 5.58% 4.50%
CORE FUND
Institutional Shares 6.46% 6.12%
Administration Shares 6.23% 5.89%
Service Shares 5.98% 5.63%
GLOBAL INCOME FUND
Institutional Fund 5.95% 6.18%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.44% 4.96%
Class B Shares 5.02% 4.59%
</TABLE>
B-102
<PAGE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---------------------------- --------------------- ------------- -----------------
<S> <C> <C> <C>
30-Days
ended
10/31/96
SHORT DURATION
TAX-FREE FUND/3/
Institutional Shares 6.94% 5.89%
Administration Shares 6.52% 5.43%
Service Shares 6.11% 5.07%
MUNICIPAL INCOME FUND/3/
Class A Shares 7.07% 5.94%
-assumes no sales charge
Class B Shares 5.84% 5.12%
_______________________________
</TABLE>
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to limit its advisory fees and to maintain
expenses at a specified level.
2 There were no Service Shares outstanding during the periods indicated.
3 The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 39.6% federal income tax rate.
The above tables should not be considered a representation of future
performance.
B-103
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-------------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Expense Expense
Fund Date Investment Period Limitations Limitations
- -------------------------------- ---------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/96 5.32% 5.19%
11/1/95 one year ended
10/31/96 6.86% 6.80%
11/1/91 five years ended
10/31/96 5.13% 5.05%
Administration Shares 4/15/93/1b/ ended 10/31/96 4.69% 4.64%
11/1/95 one year ended
10/31/96 6.60% 6.53%
Service Shares/1c/ N/A N/A
Class A Shares 5/12/95/1d/ ended 10/31/96
Assumes 1.5% Sales Charge 5.29% 4.96%
Assumes No Sales Charge 6.40% 6.07%
11/1/95 one year ended
Assumes 1.5% Sales Charge 10/31/96 4.99% 4.66%
Assumes No Sales Charge 6.60% 6.27%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/96 7.24% 6.84%
11/1/95 one year ended
10/31/96 6.75% 6.47%
11/1/91 five years
ended 10/31/96 5.67% 5.44%
Administration Shares 2/28/96/2b/ ended 10/31/96 4.00% 3.82%
Service Shares 4/10/96/2b/ ended 10/31/96 4.35% 4.20%
</TABLE>
B-104
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-----------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ------------------------------ -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
Institutional Shares 10/1/92/3a/ ended 10/31/96 4.21% 3.71%
11/1/95 one year ended
10/31/96 4.50% 3.92%
Administration Shares 5/20/93/3b/ ended 10/31/96 3.51% 3.15%
11/1/95 one year ended
10/31/96 4.24% 3.66%
Service Shares 9/20/94/3c/ ended 10/31/96 4.36% 3.92%
11/1/95 one year ended
10/31/96 3.98% 3.40%
CORE FUND
Institutional Shares 1/15/94/4a/ 10/31/96 6.34% 5.70%
11/1/95 one year ended
10/31/96 5.98% 5.58%
Administration Shares 2/28/96/4b/ ended
10/31/96 3.56% 3.29%
Service Shares 3/13/96/4b/ ended
10/31/96 4.90% 4.69%
</TABLE>
B-105
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-----------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ------------------------------ -------------- ------------------- --------------- ------------
<S> <C> <C> <C> <C>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/96
Assumes 4.5% Sales Charge 7.08% 6.76%
Assumes No Sales Charge 8.02% 7.71%
Assumes 4.5% Sales Charge 11/1/95 one year 6.08% 5.57%
Assumes No Sales Charge ended 10/31/96 11.05% 10.53%
Assumes 4.5% Sales Charge 11/1/91 five years 7.02% 6.73%
Assumes No Sales Charge ended 10/31/96 8.01% 7.69%
Class B Shares/5b/ 5/1/96 ended 10/31/96/5d/ 6.24% 6.01%
Institutional Shares 8/1/95/5e/ ended 10/31/96 12.95% 12.45%
11/1/95 one year
ended 10/31/96 11.55% 11.05%
Service Shares/5f/
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/96
Assumes 4.5% Sales Charge 3.80% 2.78%
Assumes No Sales Charge 5.27% 4.23%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.35% 0.65%
Assumes No Sales Charge 6.13% 5.40%
Class B Shares/6b/ 5/1/96 ended 10/31/96 4.40% 4.07%
</TABLE>
B-106
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
--------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ----------------------------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/96
Assumes 4.5% Sales Charge 5.41% 2.92%
Assumes No Sales Charge 6.72% 4.21%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.06% -0.33%
Assumes No Sales Charge 5.80% 4.35%
Class B Shares/7b/ 5/1/96 ended 10/31/96 4.85% 4.17%
- ----------------
</TABLE>
1a Institutional Shares of Adjustable Rate Fund commenced operations on
July 17, 1991.
1b Administration Shares of Adjustable Rate Fund commended operations on
April 15, 1993.
1c No Service Shares of Adjustable Rate Fund were outstanding during the
periods indicated.
1d Class A shares of Adjustable Rate Fund commenced operations on May 12,
1995.
2a Institutional Shares of Short Duration Government Fund commenced
operations on August 15, 1988.
2b Administration Shares of Short Duration Government Fund commenced
operations on February 28, 1996. Service Shares of Short Duration
Government Fund commenced operations on April 10, 1996. An aggregate
total return (not annualized) is shown instead of an average annual
total return since Administration and Service Shares have not
completed a full 12 months of operation as of October 31, 1996.
3a Institutional Shares of Short Duration Tax-Free Fund commenced
operations on October 1, 1992.
3b Administration Shares of Short Duration Tax-Free Fund commenced
operations on May 20, 1993.
3c Service Shares of Short Duration Tax-Free Fund commenced operations on
September 20, 1994.
4a Institutional Shares of Core Fund commenced operations on January 5,
1994.
4b Administration Shares of Core Fund commenced operations on February
28, 1996. Service Shares of Core Fund commenced operations on March
13, 1996. An aggregate total return (not annualized) is shown instead
of an average annual total return since Administration and Service
Shares have not completed a full 12 months of operation as of October
31, 1996.
5a Class A Shares of Global Income Fund commenced operations on August 2,
1991.
5b Class B Shares of Global Income Fund commenced operations on May 1,
1996.
5c On November 27, 1992, the maximum sales charge was changed from 3% to
4.5% of the offering price. All performance figures in this table
incorporate the sales charge currently in effect.
5d An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a
full 12 months of operation as of October 31, 1996.
5e Institutional Shares of Global Income Fund commenced operations on
August 1, 1995.
5f No Service Shares of Global Income Fund were outstanding during the
periods indicated.
6a Class A shares of Municipal Income Fund commenced operations on July
20, 1993.
6b Class B Shares of Municipal Income Fund commenced operations on May 1,
1996. An aggregate total return (not annualized) is shown instead of
an average annual total return since Class B Shares have not completed
a full 12 months of operation as of October 31, 1996.
B-107
<PAGE>
7a Class A Shares of Government Income Fund commenced operations on
February 10, 1993.
7b Class B Shares of Government Income Fund commenced operations on May
1, 1996. An aggregate total return (not annualized) is shown instead
of an average annual total return since Class B Shares have not
completed a full 12 months of operation as of October 31, 1996.
The above table should not be considered a representation of future
performance.
B-108
<PAGE>
Occasionally statistics may be used to specify a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare a Fund's net
asset value or performance relative to a market index. One measure of volatility
is beta. Beta is the volatility of a fund relative to the total market. A beta
of more than 1.00 indicates volatility greater than the market, and a beta of
less than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
Each Fund may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to, Lipper
------
Analytical Services, Inc., Donaghues Money Fund Report, Barron's, The Wall
- ------------------------- --------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- ----------------- -------------------------------- -----
In addition, Adjustable Rate, Government Income and Short Duration
Government Funds may from time to time advertise their performance relative to
certain indices and benchmark investments, including: (a) the Shearson Lehman
Government/Corporate (Total) Index, (b) Shearson Lehman Government Index, (c)
Merrill Lynch 1-3 Year Treasury Index, (d) Merrill Lynch 2-Year Treasury Curve
Index, (e) the Salomon Brothers Treasury Yield Curve Rate of Return Index, (f)
the Payden & Rygel 2-Year Treasury Note Index, (g) 1 through 3 year U.S.
Treasury Notes, (h) constant maturity U.S. Treasury yield indices, (i) the
Consumer Price Index, (j) the London Interbank Offered Rate, (k) other taxable
investments such as certificates of deposit, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds, repurchase
agreements, commercial paper and (l) historical data concerning the performance
of adjustable and fixed-rate mortgage loans.
Short Duration Tax-Free and Municipal Income Funds may from time to
time advertise their performance relative to certain indices, any components of
such indices and benchmark investments, including but not limited to: (a) the
Lipper Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed Income
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
Lehman Brothers Municipal Bond Indices; (c) the Merrill Lynch Municipal Bond
Institutional Total Rate of Return Indices; (d) Bond Buyer Indices; (e)
IBC/Donoghue's Money Fund Averages/Institutional Only Tax Free; and constant
maturity U.S. Treasury yield indices.
Core, Global Income and High Yield Funds may each from time to time
advertise its performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income
B-109
<PAGE>
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
CDA Mutual Fund Report published by CDA Investment Technologies, Inc. (which
analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Salomon Brothers' World Bond Index (which measures the total
return in U.S. dollar terms of government bonds, Eurobonds and foreign bonds of
ten countries, with all such bonds having a minimum maturity of five years); (f)
the Lehman Brothers Aggregate Bond Index or its component indices; (g) the
Standard & Poor's Bond Indices (which measure yield and price of corporate,
municipal and U.S. government bonds); (h) the J.P. Morgan Global Government Bond
Index; (i) other taxable investments including certificates of deposit (CDs),
money market deposit accounts (MMDAs), checking accounts, savings accounts,
money market mutual funds and repurchase agreements; (j) historical investment
data supplied by the research departments of Goldman Sachs, Lehman Brothers
Inc., First Boston Corporation, Morgan Stanley & Co. Incorporated, Salomon
Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson
Lufkin and Jenrette Securities Corporation; and (k) Donoghue's Money Fund Report
(which provides industry averages for 7-day annualized and compounded yields of
taxable, tax-free and U.S. government money funds).
The composition of the investments in the above-referenced indices and
the characteristics of a Fund's benchmark investments are not identical to, and
in some cases may be very different from, those of a Fund's portfolio. These
indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by the a Fund to calculate its performance figures.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Goldman Sachs as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
regulated matters believed to be of relevance to a Fund.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
.. The performance of various types of securities (taxable money market funds,
U.S. Treasury securities, adjustable rate mortgage securities, government
securities, municipal bonds) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
B-110
<PAGE>
.. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/ All
Taxable Index) over varying periods of time.
.. Credit Ratings of domestic government bonds in various countries
.. Price volatility comparisons of types of securities over different periods
of time.
.. Price and yield comparisons of a particular security over different periods
of time.
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other material
which highlight or summarize the services provided in support of an asset
allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein.
Performance data is based on historical results and is not intended to
indicate future performance. Total return, thirty-day yield, tax equivalent
yield and distribution rate will vary based on changes in market conditions,
portfolio expenses, portfolio investments and other factors. The value of a
Fund's shares will fluctuate and an investor's shares may be worth more or less
than their original cost upon redemption. The Trust may also, at its
discretion, from time to time make a list of a Fund's holdings available to
investors upon request.
OTHER INFORMATION
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value of each Fund during any 90-day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net
B-111
<PAGE>
asset value of each respective Fund at the time of redemption by a distribution
in kind of securities (instead of cash) from such Fund. The securities
distributed in kind would be readily marketable and would be valued for this
purpose using the same method employed in calculating each Fund's net asset
value per share. See "Net Asset Value." If a shareholder receives redemption
proceeds in kind, the shareholder should expect to incur transaction costs upon
the disposition of the securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such other period as the
SEC may by order permit for the protection of shareholders of a Fund.
The Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen LLP,
independent public accounts, for each Fund contained in each Fund's 1996 Annual
Report are hereby incorporated by reference and attached hereto. A copy of the
annual reports may be obtained without charge by writing Goldman, Sachs & Co.,
4900 Sears Tower, Chicago, Illinois 60606 or by calling Goldman, Sachs & Co., at
the telephone number on the back cover of each Fund's Prospectus. Unaudited
financial statements for each Fund for the six months ended April 30, 1997 are
also attached hereto.
B-112
<PAGE>
OTHER INFORMATION REGARDING PURCHASES,
REDEMPTIONS,EXCHANGES AND DIVIDENDS
The following information supplements the information in the Prospectus
under the captions "How to Invest," "How to Sell Shares of the Funds" and
"Dividends." Please see the Prospectus for more complete information.
OTHER PURCHASE INFORMATION
==========================
If shares of a Fund are held in a "street name" account with an Authorized
Dealer, all recordkeeping, transaction processing and payments of distributions
relating to the beneficial owner's account will be performed by the Authorized
Dealer, and not by the Fund and its Transfer Agent. Since the Funds will have
no record of the beneficial owner's transactions, a beneficial owner should
contact the Authorized Dealer to purchase, redeem or exchange shares, to make
changes in or give instructions concerning the account or to obtain information
about the account. The transfer of shares in a "street name" account to an
account with another dealer or to an account directly with the Fund involves
special procedures and will require the beneficial owner to obtain historical
purchase information about the shares in the account from the Authorized Dealer.
Authorized Dealers and other financial intermediaries provide varying
arrangements for their clients to purchase and redeem Fund shares. Some may
establish higher minimum investment requirements and others may limit the
availability of certain privileges with respect to the purchase and redemption
of shares or the reinvestment of dividends. Firms may arrange with their
clients for other investment or administrative services and may independently
establish and charge additional amounts to their clients for such services,
which charges would reduce a client's return. If shares of a Fund are held in a
"street name" account or were purchased through an Authorized Dealer,
shareholders should contact the Authorized Dealer to purchase, redeem or
exchange shares, to make changes in or give information about the account.
The Adviser, Distributor and/or their affiliates may pay, out of their own
assets, compensation to Authorized Dealers and other persons for the sale and
distribution of Class A, Class B and Class C Shares of the Funds and/or for the
servicing of those shares. These payments ("Additional Payments") would be in
addition to the payments by the Funds described in the Funds' Prospectus and
this Statement of Additional Information for distribution and shareholder
servicing and processing, and would also be in addition to the sales commissions
payable to dealers as set forth in the Prospectus. These Additional Payments
may take the form of "due diligence" payments for an Authorized Dealer's
examination of the Funds and payments for providing extra employee
B-119
<PAGE>
training and information relating to the Funds; "listing" fees for the placement
of the Funds on a dealer's list of mutual funds available for purchase by its
customers; "finders" or "referral" fees for directing investors to the Funds;
"marketing support" fees for providing assistance in promoting the sale of the
Funds' Class A, Class B and Class C Shares; and payments for the sale of Class
A, Class B and Class C Shares and/or the maintenance of Shares balances. In
addition, the Adviser, Distributor and/or their affiliates may make Additional
Payments for subaccounting, administrative and/or shareholder processing
services that are in addition to the shareholder servicing and processing fees
paid by the Funds. The Additional Payments made by the Adviser, Distributor and
their affiliates may be a fixed dollar amount, may be based on the number of
customer accounts maintained by an Authorized Dealer, or may be based on a
percentage of the value of Shares sold to, or held by, customers of the
Authorized Dealers involved, and may be different for different Authorized
Dealers. Furthermore, the Adviser, Distributor and/or their affiliates may
contribute to various non-cash and cash incentive arrangements to promote the
sale of shares, as well as sponsor various educational programs, sales contests
and/or promotions in which participants may receive prizes such as travel
awards, merchandise and cash and/or investment research pertaining to particular
securities and other financial instruments or to the securities and financial
markets generally, educational information and related support materials and
hardware and/or software. The Adviser, Distributor and their affiliates may also
pay for the travel expenses, meals, lodging and entertainment of Authorized
Dealers and their salespersons and guests in connection with educational, sales
and promotional programs, subject to applicable NASD regulations. The
Distributor currently expects that such additional bonuses or incentives will
not exceed 0.50% of the amount of any sales.
RIGHT OF ACCUMULATION - (CLASS A)
=================================
A Class A shareholder qualifies for cumulative quantity discounts if the
current purchase price of the new investment plus the shareholder's current
holdings of existing Class A Shares (acquired by purchase or exchange) of the
Funds and Class A Shares of any other Goldman Sachs Fund (as defined in the
Prospectus) total the requisite amount for receiving a discount. For example,
if a shareholder owns shares with a current market value of $65,000 and
purchases additional Class A Shares of the Government Income Fund with a
purchase price of $45,000, the sales charge for the $45,000 purchase would be
3.0% (the rate applicable to a single purchase of more than $100,000). Class A
Shares purchased without the imposition of a sales charge and shares of another
class of the Funds may not be aggregated with Class A Shares purchased subject
to a sales charge. Class A Shares of the Funds and any other Goldman Sachs Fund
purchased (i) by an individual, his spouse and his minor children, and (ii) by a
trustee, guardian or other fiduciary of a single trust estate or a single
fiduciary account,
B-120
<PAGE>
will be combined for the purpose of determining whether a purchase will qualify
for such right of accumulation and, if qualifying, the applicable sales charge
level. For purposes of applying the right of accumulation, shares of the Funds
and any other Goldman Sachs Fund purchased by an existing client of the Private
Client Services Division of Goldman Sachs will be combined with Class A Shares
held by any other account over which such client or the client's spouse
exercises investment or voting power. In addition, Class A Shares of the Funds
and Class A Shares of any other Goldman Sachs Fund purchased by partners,
directors, officers or employees of the same business organization or by groups
of individuals represented by and investing on the recommendation of the same
accounting firm, certain affinity groups or other similar organization
(collectively, "eligible persons") may be combined for the purpose of
determining whether a purchase will qualify for the right of accumulation and,
if qualifying, the applicable sales charge level. This right of accumulation is
subject to the following conditions: (i) the business organization's, group's
or firm's agreement to cooperate in the offering of the Funds' shares to
eligible persons; and (ii) notification to the Funds at the time of purchase
that the investor is eligible for this right of accumulation.
STATEMENT OF INTENTION - (CLASS A)
==================================
If a shareholder anticipates purchasing at least $100,000 ($500,000 in the
case of Adjustable Rate Government Fund and $250,000 in the case of Short
Duration Government and Short Duration Tax-Free Funds) of Class A Shares of a
Fund alone or in combination with Class A Shares of any other Goldman Sachs Fund
within a 13-month period, the shareholder may purchase shares of the Fund at a
reduced sales charge by submitting a Statement of Intention (the "Statement").
Shares purchased pursuant to a Statement will be eligible for the same sales
charge discount that would have been available if all of the purchases had been
made at the same time. The shareholder or his Authorized Dealer must inform
Goldman Sachs that the Statement is in effect each time shares are purchased.
There is no obligation to purchase the full amount of shares indicated in the
Statement. A shareholder may include the value of all Class A Shares on which a
sales charge has previously been paid as an "accumulation credit" toward the
completion of the Statement, but a price readjustment will be made only on Class
A Shares purchased within ninety (90) days before submitting the Statement. The
Statement authorizes the Transfer Agent to hold in escrow a sufficient number of
shares which can be redeemed to make up any difference in the sales charge on
the amount actually invested. For purposes of satisfying the amount specified
on the Statement, the gross amount of each investment, exclusive of any
appreciation on shares previously purchased, will be taken into account.
B-121
<PAGE>
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
=================================================
A Fund shareholder should obtain and read the prospectus relating to any
other Goldman Sachs Fund or ILA Portfolio (as defined in the Prospectus) and its
shares or units and consider its investment objective, policies and applicable
fees before electing cross-reinvestment into that Fund or Portfolio. The
election to cross-reinvest dividends and capital gain distributions will not
affect the tax treatment of such dividends and distributions, which will be
treated as received by the shareholder and then used to purchase shares of the
acquired fund. Such reinvestment of dividends and distributions in shares of
other Goldman Sachs Funds or in units of ILA Portfolios is available only in
states where such reinvestment may legally be made.
AUTOMATIC EXCHANGE PROGRAM
==========================
A Fund shareholder may elect cross-reinvestment into an identical account
or an account registered in a different name or with a different address, social
security or other taxpayer identification number, provided that the account in
the acquired fund has been established, appropriate signatures have been
obtained and the minimum initial investment requirement has been satisfied. A
Fund shareholder should obtain and read the prospectus relating to any other
Goldman Sachs Fund and its shares and consider its investment objective,
policies and applicable fees and expenses before electing an automatic exchange
into that Goldman Sachs Fund.
SYSTEMATIC WITHDRAWAL PLAN
==========================
A systematic withdrawal plan (the "Systematic Withdrawal Plan") is
available to shareholders of a Fund whose shares are worth at least $5,000. The
Systematic Withdrawal Plan provides for monthly payments to the participating
shareholder of any amount not less than $50.
Dividends and capital gain distributions on shares held under the
Systematic Withdrawal Plan are reinvested in additional full and fractional
shares of the applicable Fund at net asset value. The Transfer Agent acts as
agent for the shareholder in redeeming sufficient full and fractional shares to
provide the amount of the systematic withdrawal payment. The Systematic
Withdrawal Plan may be terminated at any time. Goldman Sachs reserves the right
to initiate a fee of up to $5 per withdrawal, upon thirty (30) days written
notice to the shareholder. Withdrawal payments should not be considered to be
dividends, yield or income. If periodic withdrawals continuously exceed new
purchases and reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. The maintenance of a withdrawal plan concurrently with purchases of
additional Class A, Class B or Class C Shares
B-122
<PAGE>
would be disadvantageous because of the sales charge imposed on purchases of
Class A Shares or the imposition of a CDSC on redemptions of Class A, Class B
and Class C Shares. The CDSC applicable to Class B and Class C Shares redeemed
under a systematic withdrawal plan may be waived. See "How to Invest--Waiver or
Reduction of Contingent Deferred Sales Charge" in the Prospectus. In addition,
each withdrawal constitutes a redemption of shares, and any gain or loss
realized must be reported for federal and state income tax purposes. A
shareholder should consult his or her own tax adviser with regard to the tax
consequences of participating in the Systematic Withdrawal Plan. For further
information or to request a Systematic Withdrawal Plan, please write or call the
Transfer Agent.
OFFERING PRICE OF CLASS A SHARES
================================
Class A Shares of Government Fund, Municipal Fund, Core Fund and Global
Income Fund are sold at a maximum sales charge of 4.5%, Adjustable Rate Fund at
1.5% and Short Duration Government Fund and Short Duration Tax-Free Fund at 2%.
Using the offering price as of October 31, 1996, the maximum offering price of
the class A shares of each Fund's shares then in existence would be as follows:
<TABLE>
<CAPTION>
Offering
Net Asset Maximum Price
Value Sales Charge to Public
--------- ------------ ---------
<S> <C> <C> <C>
Adjustable Rate Fund $ 9.82 $0.15 $ 9.97
Municipal Income Fund $14.37 $0.68 $15.05
Government Income Fund $14.36 $0.68 $15.04
Global Income Fund $14.53 $0.68 $15.21
Short Duration Government N/A N/A N/A
Short Duration Tax-Free N/A N/A N/A
Core Fixed Income N/A N/A N/A
</TABLE>
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
CLASS A DISTRIBUTION PLANS. As described in the Prospectus, the Trust
with respect to the Class A Shares of each Fund has adopted a distribution plan
(the "Class A Plans") pursuant to Rule 12b-1 under the Act. See "Distribution
and Authorized Dealer Service Plans" in the Prospectus.
B-123
<PAGE>
The Class A Plans were most recently approved on April 23, 1997 by a
majority vote of the Trustees of the Trust, including a majority of the non-
interested Trustees of the Trust who have no direct or indirect financial
interest in the Class A Plans, cast in person at a meeting called for the
purpose of approving the Plans. The Plans were approved by the sole initial
shareholder of Class A Shares of Adjustable Rate Fund on May 12, 1995, Municipal
Income Fund on July 16, 1993, Government Income Fund on January 29, 1993, and
Global Income Fund on December 5, 1991.
The compensation payable under the Class A Plans may not exceed 0.25%
per annum of each Fund's average daily net assets attributable to its Class A
Shares. Currently, Goldman Sachs is waiving its entire fee under the Class A
Plans applicable to each Fund other than Global Income Fund and is limiting the
fee payable by Global Income Fund to 0.21% of average daily net assets
attributable to Class A Shares. Goldman Sachs has no current intention of
modifying or discontinuing such waivers and limitation, but may do so in the
future at its discretion.
Effective June 30, 1995, the Class A Plan for Adjustable Rate
Government, Government Income, Municipal and Global Income Funds was amended to
reduce the fee payable under the Plan from 0.50% to 0.25% of a Fund's average
daily net assets attributable to Class A Shares. At the same time, each Fund
adopted an Authorized Dealer Service Plan. See "Authorized Dealer Service
Plans." For the fiscal years ended October 31, 1996, 1995 and 1994, each Fund
paid Goldman Sachs the following amounts under the Class A Plans:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- ----------
<S> <C> <C> <C>
Adjustable Rate
Government Fund
with fee waivers $ 0 $ 0 $ N/A
without fee waivers 30,905 17,967 N/A
Municipal Income Fund
with fee waivers 0 70,023 85,242
without fee waivers 131,925 195,152 217,701
Government Income Fund
with fee waivers 0 25,630 14,350
without fee waivers 73,949 76,499 65,604
Global Income Fund
with fee waivers 493,170 645,259 1,518,814
without fee waivers 549,164 1,257,211 3,037,628
</TABLE>
Goldman Sachs may pay up to the entire amount of such fee under the Plans
to Authorized Dealers for providing services in connection with the sale of each
Fund's shares. To the extent such fee is not paid to such dealers, Goldman
Sachs may retain such fee
B-124
<PAGE>
as compensation for its services and expenses incurred in accordance with the
Plans of distributing a Fund's shares. If such fee exceeds its expenses,
Goldman Sachs may realize a profit from these arrangements.
The Plans are compensation plans which provide for the payment of a
specified fee without regard to the expenses actually incurred by Goldman Sachs.
If a Plan were terminated by the Trustees of the Trust and no successor plan
were adopted, the Fund would cease to make payments under the Plan to Goldman
Sachs and Goldman Sachs would be unable to recover the amount of any of its
unreimbursed expenditures. However, Goldman Sachs does not intend to make
expenditures for which it may be compensated under a Plan at a rate that
materially exceeds the rate of compensation received under the Plan.
During the fiscal year ended October 31, 1996, Goldman Sachs incurred the
following distribution expenses under the Class A Plan on behalf of Adjustable
Rate Government, Government Income, Municipal Income and Global Income Funds
(Goldman Sachs used the fees, if any, received under the Plan in the same
proportion to the amounts set forth below).
<TABLE>
<CAPTION>
Fiscal Year Compensation Compensation Allocable Printing and Preparation and
ended to Dealers and Expenses Overhead, Mailing of Distribution of
October 31, of the Telephone Prospectuses Sales Literature
1996 Distributor and Travel to Other than and Advertising
and its Sales Expenses Current
Personnel Shareholders
<S> <C> <C> <C> <C> <C>
Adjustable
Rate Fund/1/ N/A N/A N/A N/A N/A
Municipal
Income Fund/2/ N/A N/A N/A N/A N/A
Government
Income Fund/2/ N/A N/A N/A N/A N/A
Global
Income Fund 0 $274,757 $116,417 $36,868 $102,215
</TABLE>
_________________________
/1/ No expenses are reflected for Class A shares of Adjustable Rate Fund.
Since inception of this class, Goldman Sachs has waived the 0.25% Class A Plan
fee; no revenue has therefore been earned for the period.
/2/ Commencing June 1, 1995, Goldman Sachs is waiving the 0.25% Class A Plan
fee; as no distribution revenue has therefore been earned after June 1, 1995, no
expenses are reflected above.
B-125
<PAGE>
Under the Class A Plans, Goldman Sachs, as distributor of each Fund's Class
A Shares, will provide to the Trustees of the Trust for their review, and the
Trustees of the Trust will review at least quarterly a written report of the
services provided and amounts expended by Goldman Sachs under the Plans and the
purposes for which such services were performed and expenditures were made.
The Class A Plans will remain in effect until May 1, 1998 and from year to
year thereafter, provided such continuance is approved annually by a majority
vote of the Trustees of the Trust, including a majority of the non-interested
Trustees of the Trust who have no direct or indirect financial interest in the
Class A Plans. A Class A Plan may not be amended to increase materially the
amount to be spent for the services described therein without approval of a
majority of the outstanding Class A Shares of the applicable Fund. All material
amendments of the Class A Plan must also be approved by the Trustees of the
Trust in the manner described above. A Class A Plan may be terminated at any
time without payment of any penalty by a vote of a majority of the non-
interested Trustees of the Trust or by vote of a majority of the Class A Shares
of the applicable Fund. So long as a Class A Plan is in effect, the selection
and nomination of non-interested Trustees of the Trust shall be committed to the
discretion of the non-interested Trustees of the Trust. The Trustees of the
Trust have determined that in their judgment there is a reasonable likelihood
that the Plans will benefit the Funds and their Class A Shareholders.
CLASS B DISTRIBUTION PLAN. As described in the Prospectus, the Trust has
adopted on behalf of Short Duration Government Fund, Short Duration Tax Free
Fund, Municipal Income Fund, Government Income Fund, Core Fixed Income Fund,
Global Income Fund and High Yield Fund, distribution plans (the "Class B Plans")
pursuant to Rule 12b-1 under the Act with respect to Class B Shares. See
"Distribution and Authorized Dealer Service Plans" in the Prospectus.
The Class B Plans were most recently approved on April 23, 1997 on behalf
of Municipal Income, Government Income, Global Income, High Yield, Short
Duration Government, Short Duration Tax-Free and Core Fixed Income Funds, in
each case by a majority vote of the Trust's Board of Trustees, including a
majority of the Trustees who are not interested persons of the Trust and have no
direct or indirect financial interest in the Class B Plans (the "non-interested
Trustees"), cast in person at a meeting called for the purpose of approving the
Class B Plans.
With respect to each Fund, the compensation payable under the Class B Plans
is equal to 0.75% per annum of the average daily net assets attributable to
Class B Shares of that Fund. The fees
B-126
<PAGE>
received by Goldman Sachs under the Class B Plans and contingent deferred sales
charge on Class B Shares may be sold by Goldman Sachs as distributor to entities
which provide financing for payments to Authorized Dealers in respect of sales
of Class B Shares. To the extent such fee is not paid to such dealers, Goldman
Sachs may retain such fee as compensation for its services and expenses of
distributing the Funds' Class B Shares. If such fee exceeds its expenses,
Goldman Sachs may realize a profit from these arrangements.
For the fiscal years ended October 31, 1996, each Fund paid Goldman Sachs
the following amounts under the Class B Plans:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Municipal Income Fund
with fee waivers 378
without fee waivers 378
Government Income Fund
with fee waivers 332
without fee waivers 332
Global Income Fund
with fee waivers 374
without fee waivers 374
</TABLE>
Goldman Sachs may pay up to the entire amount of such fee under the Plans
to Authorized Dealers for providing services in connection with the sale of each
Fund's shares. To the extent such fee is not paid to such dealers, Goldman
Sachs may retain such fee as compensation for its services and expenses incurred
in accordance with the Plans of distributing a Fund's shares. If such fee
exceeds its expenses, Goldman Sachs may realize a profit from these
arrangements.
The Class B Plans are compensation plans which provide for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class B Plans were terminated by the Trust's
Board of Trustees and no successor plan were adopted, the Funds would cease to
make distribution payments to Goldman Sachs and Goldman Sachs would be unable to
recover the amount of any of its unreimbursed distribu tion expenditures.
During the fiscal year ended October 31, 1996, Goldman Sachs incurred the
following expenses in connection with distribution under the Class B Plan on
behalf of each Fund (Goldman Sachs used the fees, if any, received under the
Plan in the same proportion to the amounts set forth below).
B-127
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Compensation Compensation Allocable Printing and Preparation and
ended to Dealers and Expenses Overhead, Mailing of Distribution of
October 31, of the Telephone Prospectuses Sales Literature
1996 Distributor and Travel to Other than and Advertising
and its Sales Expenses Current
Personnel Shareholders
<S> <C> <C> <C> <C> <C>
Municipal
Income Fund $241/(1)/ N/A N/A N/A N/A
Government
Income Fund $299/(1)/ N/A N/A N/A N/A
Global
Income Fund $247/(1)/ N/A N/A N/A N/A
</TABLE>
_______________________
(1) Advance commissions paid to dealers of 4% on Class B sales are
considered deferred assets which are amortized over a period of 6
years; amounts presented above reflect amortization expense recorded
during the period presented.
Under the Class B Plans, Goldman Sachs, as distributor of the Funds'
shares, will provide to the Board of Trustees for its review, and the Board will
review at least quarterly, a written report of the services provided and amounts
expended by Goldman Sachs under the Class B Plans and the purposes for which
such services were performed and expenditures were made.
The Class B Plans will remain in effect with respect to the Funds from year
to year, provided such continuance is approved annually by a majority vote of
the Board of Trustees, including a majority of the non-interested Trustees. A
Class B Plan may not be amended to increase materially the amount to be spent
for the services described therein as to any Fund without approval of a majority
of the outstanding Class B Shares of that Fund. All material amendments of the
Class B Plan must also be approved by the Board of Trustees of the Trust in the
manner described above. With respect to any Fund, a Class B Plan may be
terminated at any time without payment of any penalty by a vote of the majority
of the non-interested Trustees or by vote of a majority of the outstanding
voting securities of the Class B Shares of that Fund. So long as a Class B Plan
is in effect, the selection and nomination of non-interested Trustees shall be
committed to the discretion of the non-interested Trustees. The Trustees have
determined that in their judgment there is a reasonable likelihood that the
Class B Plans will benefit each Fund and their respective Class B shareholders.
CLASS C DISTRIBUTION PLANS. As described in the Prospectus, the Trust has
adopted, on behalf of the Funds, distribution plans (the "Class C Plans")
pursuant to Rule 12b-1 under the Act with
B-128
<PAGE>
respect to the Class C Shares. See "Distribution and Authorized Dealer Service
Plans" in the Prospectus.
The Class C Plans of each Fund were approved for the Funds on July 22,
1997, on behalf of the Trust by a majority vote of the Trustees, including a
majority of the non-interested Trustees who have no direct or indirect financial
interest in the Class C Plans, cast in person at a meeting called for the
purpose of approving the Class C Plans. The Class C Plans for the Funds were
approved by the sole initial shareholders of the Class C Shares of the Funds on
___, 1997.
With respect to each Fund, the compensation payable under the Class C Plans
is equal to 0.75% per annum of the average daily net assets attributable to
Class C Shares of that Fund. To the extent such fee is not paid to such
dealers, Goldman Sachs may retain such fee as compensation for its services and
expenses of distributing the Funds' Class C Shares.
The Class C Plans are compensation plans which provide for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class C Plans were terminated by the Trustees
and no successor plan were adopted, the Funds would cease to make distribution
payments to Goldman Sachs and Goldman Sachs would be unable to recover the
amount of any of its unreimbursed distribution expenditures.
Under the Class C Plans, Goldman Sachs, as distributor of the Funds'
shares, will provide to the Board of Trustees for its review, and the Board will
review at least quarterly, a written report of the services provided and amounts
expended by Goldman Sachs under the Class C Plans and the purposes for which
such services were performed and expenditures were made.
The Class C Plans will remain in effect until May 1, 1998 and from year to
year, provided such continuance is approved annually by a majority vote of the
Trustees, including a majority of the non-interested Trustees. A Class C Plan
may not be amended to increase materially the amount to be spent for the
services described therein as to any Fund without approval of a majority of the
outstanding Class C Shares of that Fund. All material amendments of the Class C
Plans must also be approved by the Trustees in the manner described above. With
respect to any Fund, a Class C Plan may be terminated at any time without
payment of any penalty by a vote of the majority of the non-interested Trustees
or by vote of a majority of the outstanding voting securities of the Class C
Shares of that Fund. So long as Class C Plans are in effect, the selection and
nomination of non-interested Trustees shall be committed to the discretion of
the non-interested Trustees. The Trustees have determined that in their
judgment there is a reasonable likelihood that the Class C Plans will benefit
each Fund and their respective Class C shareholders.
B-129
<PAGE>
AUTHORIZED DEALER SERVICE PLAN. As described in the Prospectus, the Trust
with respect to each Fund has adopted non-Rule 12b-1 Authorized Dealer Service
Plans (the "Service Plans") with respect to Class A, Class B and Class C Shares.
See "Distribution and Authorized Dealer Service Plans" in the Prospectus.
The compensation under the Service Plans may not exceed 0.25% per annum of
the average daily net assets attributable to the class of shares to which the
plan relates. Up to the entire amount of the fee under the Service Plans may be
paid to Authorized Dealers for providing personal and account maintenance
services in connection with each Fund's Shares. Under the Service Plans,
Goldman Sachs will provide to the Trustees for their review at least quarterly a
written report of the services provided and amount expended under the Service
Plans.
For the fiscal years ended October 31, 1996 and October 31, 1995 the
Adjustable Rate Government, Government Income, Municipal Income and Global
Income Funds paid Goldman Sachs the following amounts under their respective
Service Plans with respect to its Class A Shares and Class B shares:
<TABLE>
<CAPTION>
Class A Class B
1996 1995 1996
-------- ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund $ 30,905 17,967 $ N/A
Municipal Income Fund 131,925 55,106 126
Government Income Fund 74,060 25,239 111
Global Income Fund 549,164 281,949 125
</TABLE>
The Service Plans applicable to Class A, Class B and Class C Shares were
most recently approved on April 23, 1997 by a majority of the Board of Trustees
of the Trust. The Service Plans will remain in effect until May 1, 1998 and
from year to year thereafter, provided that such continuance is approved
annually by a majority vote of the Trustees, including a majority of the non-
interested Trustees who have no direct or indirect financial interest in the
Service Plans.
B-130
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders
- -------------------------------------------------------------------------------
Dear Shareholders:
A return of robust economic growth during the period under review fueled
fears of higher inflation, which pushed Treasury yields higher across the
maturity spectrum. In this semiannual report, we will review the performance of
the Goldman Sachs Fixed Income Funds for the six-month period ended April 30,
1997, as well as provide a brief overview of the U.S. economy and the bond
market. We are pleased to note that during the period, the Goldman Sachs Fixed
Income Funds performed well compared with their peers.
Economic Activity Rebounded, Led by Consumer Spending
After a sluggish third quarter, the pace of economic growth strengthened
during the period. During November and December, consumer spending rebounded,
the trade deficit narrowed and industrial production climbed significantly. As a
result, fourth-quarter real Gross Domestic Product (GDP) growth was 3.8%
(annualized), up from 2.1% in the prior quarter.
Economic activity continued to gain momentum during the first quarter of
1997, with real GDP surging 5.8%, the largest jump in a decade. Signs of
strength were led by a sharp increase in consumer spending, which resulted in
solid sales gains for automobile manufacturers and retailers. In addition,
upbeat reports on factory orders and inventories, construction outlays and labor
market conditions all pointed towards economic acceleration. Despite the growth
spurt, reported inflation remained surprisingly mild during the period.
Furthermore, several economic reports for April came in at the low end of
consensus expectations, which suggested that the economy could moderate during
the second quarter.
The Bond Market Rallied, Then Fell as Inflation Fears Reemerged
The U.S. fixed income market came under pressure during the period under
review. In November, bonds performed well in anticipation of a continued
slowdown in U.S. economic growth. However, the market experienced a reversal in
December when better-than-expected economic data, in particular, robust
employment figures, triggered a sell-off and drove interest rates higher. In
early February, bond prices briefly rebounded, but later faltered as it became
increasingly likely that the U.S. Federal Reserve would raise short term
interest rates in March. By the end of March, the yield on the benchmark 30-year
Treasury bond rose above the psychologically important 7% threshold. Despite the
lackluster performance of the U.S. bond market for the period as a whole, a
sharp rebound at the end of April helped bonds recoup part of their earlier
losses.
The Fed Raised the Federal Funds Rate in March
In March 1997, the Fed raised the federal funds rate by 25 basis points to
5.50%. Though there were few signs of actual inflation, the Fed tightening was
prompted by the economy's pervasive strength. The Fed's action was its first
since a quarter-point cut in January 1996.
During the period under review, the yield curve shifted higher across all
maturities. The yield on six-month Treasury bills rose from 5.26% on October 31,
1996 to approximately 5.52% on April 30, 1997. For the same period, the yield on
the 30-year U.S. Treasury bond rose more dramatically, climbing from 6.64% to
6.95%.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Table of Contents
<S> <C>
Market Overview 1
Goldman Sachs Adjustable Rate Government Fund 3
Goldman Sachs Short Duration Government Fund 9
Goldman Sachs Short Duration Tax-Free Fund 14
Goldman Sachs Core Fixed Income Fund 20
Financial Statements 28
Notes to Financial Statements 32
Financial Highlights 39
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
1
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
10/31/96 4/30/97
<S> <C> <C>
3-Month 5.14% 5.23%
6-Month 5.26% 5.52%
1 5.40% 5.89%
2 5.73% 6.27%
3 5.86% 6.40%
5 6.07% 6.57%
10 6.34% 6.71%
15 6.64% 6.95%
</TABLE>
Source: Bloomberg, L.P.
The yield curve shifted upward across all maturities and steepened sharply at
the short end.
Outlook: Strengthening Economic Growth May
Trigger Further Preemptive Rate Hikes
Despite reports of economic moderation and minimal price acceleration, the
economy's broad-based fundamental strength and resilient equity market make
additional Fed rate increases likely this year. Goldman Sachs' economists
believe that the speed and extent of Fed tightening will depend in large part on
the emergence of conclusive signs that the economy is nearing maximum capacity,
rather than immediate evidence of increased inflationary pressures.
In conclusion, we thank you for your support of the Goldman Sachs Fixed
Income Funds and we look forward to continuing our relationship.
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
May 30, 1997
- -------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs 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.
Special Events
As of March 27, 1997, the fund opened a new share class (Service). In
addition, effective May 1, 1997, the name of the GS Adjustable Rate Government
Fund was changed to the Goldman Sachs Adjustable Rate Government Fund. The
fund's objective and investment focus remain the same.
ARM Market Performed Well, Buoyed by Low Volatility and Strong Investor Demand
The ARM market performed well during the period under review, supported by
low volatility and stable prepayments. In addition, investor interest in the
sector increased as opportunities in short-duration alternatives diminished. In
combination, these factors drove ARM spreads approximately 15 basis points
tighter over the period.
Performance Review
During the six-month period ended April 30, the fund's Institutional,
Administration and Class A shares all outperformed the six-month U.S. Treasury
bill and the one-year U.S. Treasury bill. (The fund's duration as of April 30
was 0.7 years, in between that of the six-month and the one-year U.S. Treasury
bill.) The fund's positive performance was due to the tightening of yield
spreads between ARMs and Treasuries, as well as the incremental yield of ARMs
over similar-duration Treasuries.
The fund also performed well compared with its peers. For the 12 months
ended April 30, 1997, the fund's Institutional shares ranked 11th out of 47
adjustable rate mortgage funds based on total return, as tracked by Lipper
Analytical Services, Inc. (Lipper does not rank the fund's Administration,
Service 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.)
We are pleased to announce that for the three- and five-year periods ended
April 30, 1997, the fund's Institutional shares were rated "five stars" (out of
1,193 taxable bond funds) and "four stars" (out of 641 taxable bond funds),
respectively, according to Morningstar, Inc., an independent rating agency. In
addition, as of April 30, Morningstar rated the fund's Administration shares
"five stars" for the one-year period (out of 1,709 taxable bond funds) and "four
stars" (out of 1,193 taxable bond funds) for the three-year period./1/
- ------------------------------------------------
/1/Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-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" for the one-year period and were rated among 1,709 taxable bond funds.
The Morningstar ratings apply only to the fund's Institutional and
Administration shares; the fund's Class A and Service shares have not been
rated. Class A and Service shares are subject to additional fees and expenses
which may have the effect of lowering performance and may affect any future
Morningstar rating. Morningstar rates each fund against its peers in the same
category. In all, there are four Morningstar categories (domestic equity,
international equity, taxable bond and municipal). 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.
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
6-Month 1-Year
Institu- Adminis- Treasury Treasury
tional tration Class A Service* Bill Bill
------ ------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Return 3.28% 3.16% 3.16% 0.74% 2.65% 2.56%
(based on net
asset value)
- --------------------------------------------------------------------------------
Return From 2.97% 2.85% 2.85% 0.20% NA NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From 0.31% 0.31% 0.31% 0.54% NA NA
Price
Appreciation
- --------------------------------------------------------------------------------
NAV (4/30/97) $9.86 $9.86 $9.86 $9.86 NA NA
- --------------------------------------------------------------------------------
NAV Change +$0.03 +$0.03 $0.03 $0.02 NA NA
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period. Performance and net asset value
(NAV) change are from its inception date on 3/27/97.
Portfolio Composition and Investment Strategies
Portfolio composition remained similar compared with six months ago, with
the exception of a slight reduction in collateralized mortgage obligations
(CMOs) and an increase in repurchase agreements/cash equivalents.
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
ARMs 85.8%
SBA Floaters 7.4%
Repos/Cash Equivalents 4.8%
CMOs 2.0%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
.. ARMs. As of April 30, 1997, the fund's primary investment continued to be
in ARMs, which accounted for 85.8% of the portfolio. We emphasized seasoned,
fully indexed one-year Constant Maturity Treasury (CMT) securities that were
issued prior to 1990, which are attractive because of their lower prepayment
risk. (Seasoned issues are less likely to be impacted by prepayments than newly
issued mortgages because homeowners who did not refinance in earlier periods of
lower rates are generally less likely to refinance in the future.)
.. SBA Floaters. The portfolio's position in securities backed by Small
Business Administration (SBA) loans was 7.4%, approximately the same as six
months ago. The sector offered incremental yield over similar-duration
Treasuries and increased fund diversification.
.. CMOs. We reduced the portfolio's CMO allocation to 2.0%, down from 3.5%
last October. Within the sector, the fund's largest holding was a 1.1% position
in super floaters. Because super floaters are generally considered to be higher
risk than conventional floaters, we use them selectively in seeking to enhance
fund performance. The remainder of the CMO position (0.9%) was invested in a
variety of other structures.
.. Duration. We seek excess return over similar-duration U.S. Treasuries
through our sector weightings and specific security selection rather than
attempting to make interest rate predictions. Therefore, we manage the fund's
duration to approximate that of the Index, partly through the use of futures. As
of April 30, the fund's duration was 0.7 years, unchanged from six months ago.
Credit Quality. The fund invests exclusively in securities issued by the U.S.
government, its agencies or instrumentalities, which are considered to be of the
highest credit quality.
Market Outlook
Despite some suggestion of economic moderation, we continue to believe that
interest rates are likely to move higher during the balance of the year. This
expectation is
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
- --------------------------------------------------------------------------------
predicated on the economy's broad-based fundamental strength, as well as the
Fed's well-publicized commitment to monetary discipline.
As of the end of the period, we have a neutral outlook for the ARM sector.
ARMs are currently trading at fair value, reflecting a stable prepayment
outlook. Seasoned one-year CMT ARMs remain attractive as a core holding due to
their prepayment stability in a falling rate environment and reduced cap risk in
a rising rate environment.
Distribution Policy
During the six-month period ended April 30, 1997, the fund's
Institutional, Administration and Class A shares distributed $0.29, $0.28 and
$0.28 per share, respectively. From their inception on March 27 through April
30, the fund's Service shares paid out $0.05 per share.
The fund distributes substantially all of its investment company taxable
income. The dividend is set at the start of each month, based on the income the
fund is expected to generate. However, because the fund invests primarily in
mortgage securities that are subject to prepayments, we cannot precisely predict
the amount of principal and interest that a portfolio will receive. Therefore,
at times a portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy has not affected the management of
the fund or significantly affected its NAV per share.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
Goldman Sachs Adjustable Rate Government Fund
May 30, 1997
- --------------------------------------------------------------------------------
5
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--94.4%
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a)--25.6%
$ 2,499,665 7.41% 07/01/18 $ 2,603,551
1,337,640 7.57 12/01/18 1,390,932
10,052,878 7.45 05/01/19 10,420,411
19,024,919 7.65 11/01/19/(b)/ 19,952,383
4,828,320 7.75 05/01/20 5,061,431
17,560,720 7.50 06/01/20/(b)/ 18,260,339
36,305,075 7.77 02/01/22/(b)/ 38,097,820
6,736,255 7.27 06/01/22 6,940,632
3,743,219 7.48 08/01/22 3,889,430
6,343,944 7.55 09/01/22 6,616,543
5,798,265 7.29 09/01/22 5,961,312
16,426,906 7.65 11/01/22 17,181,558
9,544,724 7.68 06/01/24 10,002,584
3,422,929 7.32 02/01/28 3,543,279
1,677,210 7.68 07/01/30 1,756,089
- -------------------------------------------------------------------------------
$ 151,678,294
- -------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association (FNMA)(a)--53.9%
$ 1,626,928 7.45% 04/01/03 $ 1,648,729
1,063,451 7.81 11/01/14 1,116,453
671,988 7.60 12/01/15 696,771
5,800,505 6.72 03/01/17 5,911,063
3,475,919 7.56 03/01/17 3,625,279
11,078,486 7.04 04/01/17 11,476,093
734,378 7.51 11/01/17 764,216
4,070,446 6.49 03/01/18 4,114,976
755,256 7.67 05/01/18 781,101
1,196,229 7.88 05/01/18 1,250,167
1,291,177 7.32 06/01/18/(c)/ 1,326,271
7,811,611 7.50 06/01/18 8,172,898
4,895,608 7.48 07/01/18 5,117,428
6,964,915 7.61 07/01/18 7,297,907
5,963,754 7.27 08/01/18 6,190,198
3,775,708 7.75 08/01/18 3,964,493
3,424,816 7.60 10/01/18 3,584,275
6,244,935 7.49 11/01/18 6,486,927
1,919,120 7.39 12/01/18 1,992,296
12,663,766 7.67 12/01/18/(b)/ 13,296,954
3,245,589 7.37 06/01/19 3,366,779
4,222,057 7.31 07/01/19 4,376,415
1,572,328 7.40 07/01/19 1,632,768
1,466,614 7.35 08/01/19 1,513,589
4,212,924 7.63 09/01/19 4,404,485
2,660,817 7.31 01/01/20 2,761,848
2,845,244 7.79 03/01/20 2,987,506
8,236,162 7.39 07/01/20 8,548,889
4,385,557 7.67 02/01/21 4,600,713
4,953,699 7.40 04/01/21 5,140,998
69,652,900 7.65 09/01/21/(b)/ 72,928,676
5,721,530 7.10 01/01/22 5,920,639
20,957,781 7.66 02/01/22/(b)/ 21,972,976
13,609,253 7.80 06/01/22 14,266,989
645,000 7.56 08/01/22 661,628
2,036,342 7.73 08/01/22 2,137,202
29,003,668 7.67 09/01/22/(b)/ 30,449,210
1,821,772 7.57 02/01/23 1,868,464
272,046 6.23 12/01/23 268,986
15,812,397 7.56 04/01/25 16,501,660
16,515,667 7.59 09/01/25 17,302,804
3,390,319 7.41 08/01/27 3,523,830
2,373,397 7.43 10/01/27 2,466,102
1,077,506 7.09 07/01/29 1,111,350
- -------------------------------------------------------------------------------
$ 319,529,001
- -------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association (GNMA)(a)--3.9%
$ 1,430,321 7.00% 03/20/16 $ 1,462,732
1,877,843 7.13 08/20/17 1,929,784
975,525 7.13 08/20/18 1,004,186
6,329,270 7.00 02/20/21 6,492,439
3,551,234 6.50 01/20/22 3,624,282
4,539,525 7.13 04/20/22 4,679,978
3,724,927 7.00 03/20/23 3,816,299
- -------------------------------------------------------------------------------
$ 23,009,700
- -------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(a)--7.3%
$ 1,395,750 7.00% 10/25/14 $ 1,435,878
2,310,178 7.00 02/25/15 2,370,450
2,799,672 7.00 04/25/15 2,871,428
1,880,379 7.00 05/25/15 1,928,573
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Adjustable Rate Small Business Administration
(SBA)(continued)
$ 1,022,753 7.00% 08/25/15 $ 1,055,992
1,661,578 7.00 09/25/15 1,709,348
2,041,631 7.00 10/25/15 2,094,591
1,059,044 6.62 09/25/16 1,070,302
4,076,904 6.62 07/25/17 4,121,505
4,036,805 6.62 08/25/17 4,080,967
2,744,035 6.62 08/25/17 2,774,055
1,756,376 6.62 08/25/17 1,775,590
3,752,990 6.62 09/25/17 3,794,048
1,761,608 6.62 10/25/17 1,781,144
1,774,313 6.62 10/25/17 1,793,990
8,582,508 6.62 02/25/18 8,677,688
- -------------------------------------------------------------------------------
$ 43,335,549
- -------------------------------------------------------------------------------
Collateralized Mortgage Obligations--3.7%
Adjustable Rate CMOs/(a)/ --1.8%
FNMA Remic Trust 1990-145, Class A
$ 10,348,000 6.58% 12/25/20 $ 10,437,510
- -------------------------------------------------------------------------------
$ 10,437,510
- -------------------------------------------------------------------------------
Inverse Floater/(a)/--0.0%
FNMA Remic Trust 1991-91, Class S
$ 138,928 8.55% 07/25/98 $ 149,631
- -------------------------------------------------------------------------------
$ 149,631
- -------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only/(a)/--0.0%
FNMA Remic Trust 1992-157, Class SA
$ 1,384,066/(d)/ 55.35% 03/25/04 $ 86,712
- -------------------------------------------------------------------------------
$ 86,712
- -------------------------------------------------------------------------------
Inverse IOette--0.1%
FHLMC Series 1164, Class O
$ 33,045/(d)/ 19.07% 11/15/06 $ 431,596
- -------------------------------------------------------------------------------
$ 431,596
- -------------------------------------------------------------------------------
IOette--0.1%
FNMA Remic Trust 1990-145, Class B
$ 25,428/(d)/ 10.00% 12/25/20 $ 850,208
- -------------------------------------------------------------------------------
$ 850,208
- -------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--0.6%
FHLMC Series 1645, Class B
$ 2,956,606 5.50% 01/15/08 $ 2,730,573
FNMA Remic Trust 1990-65, Class U
185,451 9.50 11/25/06 185,160
FNMA Remic Trust 1991-37, Class E
838,752 8.50 04/25/05 839,801
- -------------------------------------------------------------------------------
$ 3,755,534
- -------------------------------------------------------------------------------
Super Floater CMOs/(a)/ --1.1%
FNMA Remic Trust 1992-157, Class FA
$ 6,813,861 2.16% 03/25/04 $ 6,632,817
- -------------------------------------------------------------------------------
$ 6,632,817
- -------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 22,344,009
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $557,420,929) $ 559,896,552
- -------------------------------------------------------------------------------
Repurchase Agreement--6.2%
Joint Repurchase Agreement Account
$ 36,700,000 5.49% 05/01/97/(b)/ $ 36,700,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $36,700,000) $ 36,700,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $594,120,929)/(e)/ $ 596,596,552
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long (Short)(f) Month Gain (Loss)
- ---------------------------- ---------------- ----------------- -------------
<S> <C> <C> <C>
1-Month Libor 110 May 1997 $(20,500)
1-Month Libor 115 June 1997 21,563
Euro Dollars 325 June 1997 (210,188)
Euro Dollars 285 September 1997 (104,813)
Euro Dollars 145 December 1997 (50,000)
Euro Dollars 10 March 1998 (14,500)
Euro Dollars (20) December 1998 (14,000)
Euro Dollars 10 June 1999 (18,000)
Euro Dollars 20 September 1999 (33,000)
5 Year U.S. Treasury Notes 64 June 1997 (5,781)
10 Year U.S. Treasury Notes (281) June 1997 70,063
------------
$(379,156)
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 3,264,098
Gross unrealized loss for investments in which cost
exceeds value (925,961)
- -------------------------------------------------------------------------------
Net unrealized gain $ 2,338,137
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(b)/ Portions of these securities are being segregated for futures margin
requirements and when-issued securities.
/(c)/ When-issued security.
/(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 $594,258,415.
/(f)/ Each Euro dollar contract represents $1,000,000 in notional par value.
Each 1-month Libor contract represents $3,000,000 in notional par value.
Each 5-Year and 10-year U.S. Treasury Note contract represents $100,000
in notional par value. The total notional amount and market value are
$1,524,500,000 and $281,048,344 respectively. The determination of
notional amounts and market value and 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
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs 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. Secondarily, the fund may, in
seeking current income, also consider the potential for capital appreciation.
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.
Special Events
Effective May 1, 1997, the name of the GS Short Duration Government Fund
was changed to the Goldman Sachs Short Duration Government Fund. In addition, to
accommodate different clients' needs and preferences, the fund added two new
share classes as of May 1: Class A shares, which have a front-end load but no
contingent deferred sales charge (on amounts less than $1 million), and Class B
shares, which are subject to a contingent deferred sales charge but no up-front
sales charge. The fund's investment focus remains the same.
Performance Review
During the six-month period ended April 30, the fund's Institutional,
Administration and Service shares all outperformed their benchmark, the two-year
U.S. Treasury security. Despite a slight decline in net asset value (NAV) due to
the backup in interest rates, the fund's positions in collateralized mortgage
obligations (CMOs) and adjustable rate mortgage (ARM) securities significantly
contributed to performance.
The fund performed very well relative to its peers. For the 12-month period
ended April 30, 1997, the fund's Institutional and Administration shares ranked
third and fifth, respectively, out of 97 short-intermediate U.S. government
funds based on total return, according to Lipper Analytical Services, Inc. In
addition, the fund's Service shares ranked within the top 20% (14th out of 97)
for the same time period. (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, the fund's Institutional shares were rated "four stars"
(out of 641 taxable bond funds) by Morningstar, Inc., an independent rating
agency, for the five years ended April 30./1/
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on net 2.67% 2.55% 2.42%
asset value)
- -------------------------------------------------------------------------------
Return From Monthly 3.39% 3.27% 3.14%
Distributions
- -------------------------------------------------------------------------------
Return From Price -0.72% -0.72% -0.72%
Depreciation
- -------------------------------------------------------------------------------
Total Return of Two-Year 2.09% 2.09% 2.09%
U.S. Treasury
- -------------------------------------------------------------------------------
NAV (4/30/97) $9.76 $9.78 $9.75
- -------------------------------------------------------------------------------
NAV Change -$0.07 -$0.07 -$0.07
- -------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-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 "four
stars" for both the three- and one-year periods and were rated among 1,193 and
1,709 taxable bond funds for the three- and one-year periods, respectively. The
Morningstar ratings apply only to the funds' Institutional shares; the fund's
Administration and Service shares have not been rated. The Administration and
Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates each fund against its peers in the same category. In all,
there are four Morningstar categories (domestic equity, international equity,
taxable bond and municipal). 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.
- -------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
Portfolio Composition and Investment Strategies
The most significant changes in the portfolio's sector composition
during the period were a reduction in U.S. Treasuries in favor of CMOs and a new
position in agency debentures.
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
CMOs 61.8%
ARMS 19.0%
Fixed Rate Mortgage Pass-Throughs 9.7%
Agency Debentures 4.8%
U.S. Treasuries 3.6%
Repos/Cash Equivalents 1.1%
</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.
.. CMOs. CMOs accounted for 61.8% of the portfolio, up from 56.9% six
months ago. The CMO sector performed very well during the period, bolstered by
low volatility and strong investor demand. CMOs were particularly attractive to
investors because they offered substantial yield over similar-duration Treasury
and non-Treasury alternatives. Within the sector, the portfolio's positions
included sequential-pay/support CMOs (24.5%) and planned amortization class
(PAC) CMOs (21.2%). These securities were short duration issues that offered
relatively predictable cash flows.
.. ARMs. As of April 30, the fund's allocation to ARMs was 19.0%, unchanged
from last October. We emphasized seasoned, fully indexed one-year Constant
Maturity Treasury (CMT) securities that were issued prior to 1990, which are
attractive because of their lower prepayment risk. (Seasoned issues are less
likely to be impacted by prepayments than newly issued mortgages because
homeowners who did not refinance in earlier periods of lower rates are generally
less likely to refinance in the future.)
.. Fixed Rate Mortgage Pass-Throughs. The fixed rate mortgage pass-through
sector accounted for 9.7% of the portfolio, up from 7.2% six months ago. We
continued to favor the sector because of its attractive yield enhancement
potential.
.. Agency Debentures. We established a new 4.8% position in agency debentures,
which are bonds issued by agencies of the U.S. government. This sector offered
incremental yield over Treasuries and added to portfolio diversification.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. During the
period, we sold more than three-quarters of the fund's Treasury allocation in
favor of other sectors that offered better relative value. By April 30, the
fund's position in the sector was down to 3.6%, while repurchase agreements/cash
equivalents were 1.1%, unchanged from six months ago.
.. Issuer Composition. The portfolio's mortgage-backed security composition by
issuer was 47.6% in Federal National Mortgage Association (FNMA) issues, 37.0%
in Federal Home Loan Mortgage Corporation (FHLMC) issues and 5.8% in Government
National Mortgage Association (GNMA) issues.
.. Credit Quality. The fund invests exclusively in securities issued by the
U.S. government and its agencies or instrumentalities.
.. Prudent Use of Derivatives. The fund's CMO position included several
securities typically considered to be
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
lower risk derivatives. These included sequential-pay/support CMOs and PAC CMOs
(24.5% and 21.2% of the portfolio, respectively), as noted previously, and a
9.0% allocation in CMO floaters (whose coupons reset upward when interest rates
rise). The fund also held a 2.8% position in super floaters (whose coupons reset
higher than conventional floaters when rates rise), a 2.1% position in inverse
floaters (whose coupons reset in the opposite direction of interest rates), and
small positions in PAC interest-only (IO) and inverse IO securities. We invest
in these higher risk derivatives only when we believe such securities will
enhance returns without incurring undue risk. These positions contributed to the
fund's positive performance along with the other CMO securities. In addition, we
used futures as a tool to help manage the portfolio's duration.
Market Outlook
Our outlook is cautious for CMOs: the sector is now trading at fair spreads
relative to equal-duration Treasuries and does not appear to offer significant
tightening potential. Despite the lack of general value, we continue to look for
issues within the CMO market that offer favorable investment characteristics
that are not fully valued by the market. In the ARM market, seasoned one-year
CMT ARMs remain attractive as a core holding relative to other ARM sectors.
Distribution Policy
During the six-month period under review, the fund's Institutional,
Administration and Service shares paid out distributions of $0.33, $0.32 and
$0.30 per share, respectively. The fund distributes substantially all of its
investment company taxable income, as required by tax law.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Short Duration Government Fund
May 30, 1997
- -------------------------------------------------------------------------------
11
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--90.0%
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a)--13.8%
$ 1,862,421 7.38% 08/01/17/(b)/ $ 1,928,183
1,799,630 7.58 12/01/18/(b)/ 1,871,327
7,952,048 7.77 02/01/22/(b)/ 8,344,720
2,036,342 7.73 08/01/22/(b)/ 2,137,202
- -------------------------------------------------------------------------------
$ 14,281,432
- -------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association (FNMA)(a)--11.6%
$ 306,024 9.00% 12/01/97 $ 307,489
2,894,069 6.50 04/01/03/(b)/ 2,853,696
812,321 6.00 01/01/14 762,436
2,961,367 6.00 03/01/14/(b)/ 2,771,662
2,552,281 7.81 11/01/14/(b)/ 2,679,487
2,569,866 7.58 08/01/22 2,636,117
- -------------------------------------------------------------------------------
$ 12,010,887
- -------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (FNMA)--3.2%
$ 504,862 6.00% 10/01/08 $ 484,981
1,032,431 6.00 06/01/09 991,774
1,949,537 6.00 10/01/09/(b)/ 1,878,671
- -------------------------------------------------------------------------------
$ 3,355,426
- -------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--61.4%
Inverse Floater(a)--3.0%
FHLMC Series 1296, Class J
$ 890,613 12.15% 07/15/99 $ 954,683
FHLMC Series 1325, Class C
944,285 6.83 07/15/97 943,086
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 9.27 05/25/99 1,217,824
- -------------------------------------------------------------------------------
$ 3,115,593
- -------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.2%
FHLMC Series 1684, Class JD
$ 2,524,793/(c)/ 3.72% 08/15/20 $ 170,222
FNMA Remic Trust 1993-110, Class SC
2,010,905/(c)/ 3.52 04/25/19 74,564
- -------------------------------------------------------------------------------
$ 244,786
- -------------------------------------------------------------------------------
Planned Amortization - Accrual Bond--1.2%
FHLMC Series 1560, Class X
$ 1,245,394 6.00% 11/15/16 $ 1,234,885
- -------------------------------------------------------------------------------
Planned Amortization Class (PAC) CMOs--21.9%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,937,180
FHLMC Series 1684, Class F
5,000,000 5.75 08/15/20/(b)/ 4,756,650
FNMA Remic Trust 1992-138, Class C
2,375,000 6.00 12/25/18/(b)/ 2,351,986
FNMA Remic Trust, Series 1997-9, Class B
4,000,000 6.50 10/25/22/(b)/ 3,850,040
FNMA Series 1991-31, Class PJ
3,000,000 6.55 10/25/20 2,920,290
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09/(b)/ 5,982,420
- -------------------------------------------------------------------------------
$ 22,798,566
- -------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--1.3%
FHLMC Series 1552, Class JE
$ 7,308,380/(c)/ 7.00% 02/15/14 $ 313,822
FHLMC Series 1587, Class HA
9,090,222/(c)/ 6.50 10/15/08 1,032,104
- -------------------------------------------------------------------------------
$ 1,345,926
- -------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.4%
FNMA Remic Trust 1992-198, Class K
$ 34,647/(c)/ 12.81% 12/25/15 $ 370,318
- -------------------------------------------------------------------------------
Regular Floater CMOs(a)--8.8%
FHLMC Series 1296, Class I
$ 2,493,715 5.16% 07/15/97/(b)/ $ 2,462,544
FHLMC Series 1325, Class B
2,219,071 6.38 07/15/97/(b)/ 2,219,759
FHLMC Series 1684, Class JC
2,524,793 5.28 08/15/20/(b)/ 2,472,706
FNMA Remic Trust 1993-110, Class FC
2,010,905 5.48 04/25/19/(b)/ 1,987,639
- -------------------------------------------------------------------------------
$ 9,142,648
- -------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--24.6%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,046,860
FHLMC Series 1645, Class B
4,927,677 5.50 01/15/08/(b)/ 4,550,956
FNMA Remic Trust 1988-12, Class A
3,743,398 10.00 02/25/18/(b)/ 3,973,692
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
FNMA Remic Trust 1988-12, Class B
$ 2,955,314 4.74% 02/25/18/(b)/ $ 2,840,796
FNMA Remic Trust 1989-12, Class X
1,588,415 10.00 12/25/14 1,642,024
FNMA Remic Trust 1989-18, Class B
1,051,388 9.50 01/25/04 1,081,279
FNMA Remic Trust 1989-59, Class H
3,840,291 7.75 10/25/18/(b)/ 3,882,265
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,351,960
FNMA Series 1989-34, Class E
2,113,584 9.85 08/25/14/(b)/ 2,176,992
- -------------------------------------------------------------------------------
$ 25,546,824
- -------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 63,799,546
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $93,441,725) $ 93,447,292
- -------------------------------------------------------------------------------
Agency Debentures--4.7%
Sri Lanka Aid/(a)/
$ 5,000,000 6.06% 02/21/16/(b)/ $ 4,928,150
- -------------------------------------------------------------------------------
Total Agency Debentures
(Cost $4,925,000) $ 4,928,150
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--3.6%
United States Treasury Notes
$ 3,800,000 5.63% 11/30/00/(b)/ $ 3,696,678
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $3,672,738) $ 3,696,678
- -------------------------------------------------------------------------------
Repurchase Agreement--0.6%
Joint Repurchase Agreement Account
$ 600,000 5.49% 05/01/97/(b)/ $ 600,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $600,000) $ 600,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $102,639,463)/(d)/ $ 102,672,119
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts
Long Unrealized
Type (Short)/(e)/ Settlement Month Gain (Loss)
- ----------------------------- --------------- ----------------- ---------------
<S> <C> <C> <C>
1-Month Libor 14 June 1997 $2,625
1-Month Libor 15 May 1997 (4,125)
Euro Dollars 56 June 1997 (12,525)
Euro Dollars 53 September 1997 30,525
Euro Dollars 55 December 1997 21,750
Euro Dollars 45 March 1998 (23,125)
Euro Dollars 40 June 1998 (35,500)
Euro Dollars 35 September 1998 (15,250)
5 Year U.S. Treasury Notes (71) June 1997 (1,109)
2 Year U.S. Treasury Notes 71 June 1997 (53,250)
10 Year U.S. Treasury Notes (131) June 1997 101,500
U.S. Long Term Bond (4) June 1997 11,843
---------------
$23,359
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value exceeds
cost $ 554,824
Gross unrealized loss for investments in which cost exceeds
value (522,168)
- -------------------------------------------------------------------------------
Net unrealized gain $ 32,656
- -------------------------------------------------------------------------------
</TABLE>
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(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 amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/ Each Euro Dollar contract represents $1,000,000 in notional par value.
Each 1-Month Libor contract represents $3,000,000 in notional par value.
Each 2-Year U.S. Treasury Note contract represents $200,000 in notional
par value. Each 5-Year and 10-Year U.S. Treasury Note and each U.S. Long
Term Bond contract represents $100,000 in notional par value. The total
notional amount and market value are $405,800,000 and $109,850,675,
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.
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs 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 investment-grade
municipal securities. 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.
Special Event
The fund's name was changed to Goldman Sachs Short Duration Tax-Free Fund
from GS Short Duration Tax-Free Fund on May 1, 1997. In addition, Class A and
Class B shares have been added to the existing Institutional, Administration and
Service shares. The fund's focus and investment objective remain the same.
A Strong, Stable Municipal Bond Market
The municipal market has remained at relatively rich levels compared with
the taxable market since the end of 1996, as light primary and secondary supply
has been consumed easily by stable demand. The average price of a three-year
municipal bond (as calculated from data provided by Municipal Market Data, an
independent municipal market information provider) declined approximately 1.25%,
while yields rose from 4.15% on October 31, 1996 to 4.60% on April 30, 1997.
Supply increased throughout most of the period, though it remained light
compared with historical averages. In November, municipal bond issuance was up
30% versus the prior three-month average. As is typical, increased supply
continued in early December due to the approaching year-end. The 1997 new issue
supply has followed historical early-month patterns, with January and February
supply well below annual averages (slightly more than $10 billion each month)
and March and April supply closer to normal levels ($13 to $14 billion).
Demand from individual investors (who control approximately two-thirds of
municipal bond ownership either through mutual funds or direct investment)
remained stable, but not strong, as long-term municipal yields were below the
psychologically significant 6% level. While yields have not yet cracked that
barrier, President Clinton's reelection and the loss of Republican momentum have
put talk of tax reform and talk of significant changes in the tax-exempt status
of municipal bonds on the back burner, comforting some of the investors
concerned about the market. In addition, the emergence of "nontraditional"
buyers during April has helped support the long end of the market.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
4/30/97 10/31/96
<S> <C> <C>
1998 3.85% 3.90%
1999 4.40% 4.15%
2000 4.60% 4.30%
2001 4.70% 4.40%
2002 4.80% 4.50%
2003 4.85% 4.60%
2004 4.90% 4.70%
2005 4.95% 4.80%
2006 5.00% 4.90%
2007 5.05% 5.00%
2008 5.10% 5.10%
2009 5.20% 5.20%
2010 5.30% 5.25%
2011 5.35% 5.30%
2012 5.40% 5.35%
2013 5.45% 5.40%
2014 5.50% 5.40%
2015 5.50% 5.45%
2016 5.55% 5.45%
2017 5.55% 5.45%
2018 5.55% 5.50%
2019 5.55% 5.50%
2020 5.60% 5.50%
2021 5.60% 5.50%
2022 5.60% 5.50%
2023 5.60% 5.50%
2024 5.60% 5.50%
2025 5.60% 5.50%
2026 5.60% 5.50%
2027 5.60% 5.50%
</TABLE>
The yield curve steepened and shifted upward at the short end, remained nearly
the same in the mid-range, and shifted marginally upward at the longer end, in
contrast to six months ago.
Performance Review
The performance of the fund's Institutional shares exceeded the benchmark,
the Lehman Brothers Three-Year Municipal Bond Index (the "Index"), for the
six-month period ended April 30, 1997. The Administration and Service shares
also performed well, but lagged the benchmark.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on 1.91% 1.79% 1.56%
net asset value)
- -------------------------------------------------------------------------------
Return From 2.11% 1.99% 1.86%
Monthly Distributions
- -------------------------------------------------------------------------------
Return From Price -0.20% -0.20% - 0.30%
Depreciation
- -------------------------------------------------------------------------------
Lehman Brothers 3-Year 1.83% 1.83% 1.83%
Municipal Bond Index
- -------------------------------------------------------------------------------
NAV (as of 4/30/97) $9.94 $9.94 $9.94
- -------------------------------------------------------------------------------
NAV Change -$0.02 -$0.02 -$0.03
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
14
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
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. One
example of this is our purchase of an A-rated hospital bond that our credit
analysis indicated would likely be defeased with the purchase of Treasury
securities placed in an escrow account, thereby significantly enhancing the
credit quality of the security. Our analysis proved correct and the fund
benefited from the appreciation associated with the higher quality.
We are pleased to report that the fund's Institutional shares ranked third
out of 28 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the one-year period ended April 30, 1997 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 April
30, 1997, the fund's Institutional and Administration shares were awarded a
"four-star" rating for the three-year period (out of 1,257 municipal bond funds)
by Morningstar, Inc. For the one-year period, the Institutional shares received
a "five-star" rating (out of 1,746 municipal bond funds)./1/
Portfolio Composition and Investment Strategies:
Emphasis on Revenue Bonds
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Revenue Bonds 56.1%
Insured Revenue Bonds 28.1%
Pre-Refunded Bonds 7.8%
Insured General Obligations 6.8%
Variable Rate Demand Notes 1.3%
</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) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. For the one-year period, the Administration
shares received four stars and were rated among 1,746 municipal bond funds. Ten
percent of the funds receive the five-star rating. The Morningstar rating
applies only to the fund's Institutional and Administration shares; the fund's
Service shares have not been rated. 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 four Morningstar categories (domestic equity,
international equity, taxable bond and municipal bond). 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.
- -------------------------------------------------------------------------------
15
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- -------------------------------------------------------------------------------
.. Revenue Bonds. As of April 30, the portfolio's combined position in insured
and uninsured revenue bonds was significantly overweighted compared with the
Index, 84.2% versus 31.7%. We increased the portfolio's total revenue bond
allocation from 79.7% six months 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.)
.. Pre-refunded Bonds. Over the course of the year, we re-established the
fund's holdings in pre-refunded bonds to 7.8% from zero. The Index weighting of
pre-refunded bonds was 18.0%.
.. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 6.8% of the
portfolio, down from 15.6% six months ago. The allocation as of April 30 was
significantly underweighted versus the Index's 50.2%. 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 use to manage the portfolio's excess liquidity. VRDNs represented 1.3%
of the fund, down from 4.7% six months ago.
.. Duration. As of April 30, the fund's duration was effectively in line with
that of the Index at 2.7 years.
.. Credit Quality. During the year, the fund's credit quality allocations
shifted. We continued the trend from the last reporting period by reducing the
portfolio's allocation in triple-A-rated GOs, shifting in favor of
double-A-rated revenue bonds. This 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 quality securities in the one- to three-year
maturity range. As of April 30, 42.7% of the portfolio was invested in
triple-A-rated bonds, while double-A- and single-A-rated securities accounted
for 30.2% and 27.1%, respectively.
Market Outlook
Our long-term outlook for municipal bond supply is essentially neutral, as
rates are at high levels compared with one year ago. As a result, the current
rate environment encourages neither supply (low rates bring refinancing) nor
demand (high rates attract buyers). At this point, the municipal market does not
perceive any real threats from the federal budget accord. Without any
fundamental problems in view for tax-exempts, we are left with technical forces
as the key driver in relative market performance.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
six-month period ended April 30, 1997, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.21,
$0.20 and $0.19 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- -------------------------------------------------------------------------------
16
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- -------------------------------------------------------------------------------
We value your continued confidence in the Goldman Sachs 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
Goldman Sachs Short Duration Tax-Free Fund
May 30, 1997
- -------------------------------------------------------------------------------
17
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--99.7%
Alabama--2.6%
Selma, AL IDB for International Paper Co. PCRB (A-/A3)
$ 1,000,000 4.15% 07/15/08 $ 1,000,000
- -------------------------------------------------------------------------------
Arizona--2.8%
Mesa, Arizona IDA Health Care Facilities (AAA/Aaa)
$ 1,000,000 7.50% 01/01/04 $ 1,055,940
- -------------------------------------------------------------------------------
Arkansas--3.5%
West Memphis, AK Public Utility System RB (MBIA) (AAA/Aaa)
$ 1,310,000 5.25% 12/01/00 $ 1,333,816
- -------------------------------------------------------------------------------
Connecticut--6.6%
Connecticut State Housing Mortgage Revenue Town Colony Project (NR/Aa3)
$ 1,000,000 5.00% 04/01/08 $ 1,000,260
Connecticut State Residential Recovery Authority, Series A RB (AA-/NR)
1,500,000 5.60 11/15/99 1,542,945
- -------------------------------------------------------------------------------
$ 2,543,205
- -------------------------------------------------------------------------------
District of Columbia--2.7%
DC Ref Series A (Big 1) Tcc (AAA/Aaa)
$ 1,000,000 7.70% 06/01/98 $ 1,032,600
- -------------------------------------------------------------------------------
Georgia--5.1%
Burke County, GA Development Authority Oglethorpe Power Corp. (A/A3)/(a)/
$ 2,000,000 4.35% 01/01/01 $ 1,961,500
- -------------------------------------------------------------------------------
Illinois--9.4%
Chicago, IL GO (MBIA) (AAA/Aaa)
$ 1,500,000 5.40% 10/31/00 $ 1,533,405
Illinois Health Facilities Authority Highland Park Hospital, Series A
(AAA/Aaa)
1,000,000 5.20 10/01/01 1,003,770
Illinois Housing Development Authority, Series 1991 A (A+/A1)
1,000,000 7.90 07/01/99 1,057,620
- -------------------------------------------------------------------------------
$ 3,594,795
- -------------------------------------------------------------------------------
Louisiana--2.7%
Louisiana Offshore Deepwater Port Authority Term B RB (A/Baa1)
$ 1,000,000 5.85% 09/01/00 $ 1,030,880
- -------------------------------------------------------------------------------
Maryland--4.2%
Maryland State Health and Higher Educational Facilities Authority
GO(A-/NR)/(c)/
$ 1,600,000 5.50% 01/01/02 $ 1,600,000
- -------------------------------------------------------------------------------
Michigan--3.6%
Wayne Charter County, MI Airport (AAA/Aaa)
$ 1,250,000 6.75% 12/01/19 $ 1,371,775
- -------------------------------------------------------------------------------
Missouri--7.1%
Kansas City Municipal Assistance Corp. (AAA/Aaa)
$ 1,000,000 5.88% 10/15/00 $ 1,036,930
St. Louis, MO Municipal Finance Corp., Series A (A/Aa3)
1,655,000 5.30 07/15/02 1,677,740
- -------------------------------------------------------------------------------
$ 2,714,670
- -------------------------------------------------------------------------------
New York--11.8%
Clifton Park, NY Water Authority System, Series A (AAA/Aaa)
$ 1,500,000 6.38% 10/01/11 $ 1,630,695
New York City Municipal Assistance Corp., Series 62 (AA-/Aa2)
1,500,000 5.50 07/01/08 1,503,885
Syracuse, NY IDA RB (AA/NR)
1,365,000 4.60 10/15/98 1,371,020
- -------------------------------------------------------------------------------
$ 4,505,600
- -------------------------------------------------------------------------------
Oklahoma--5.3%
Southern Oklahoma Memorial Hospital RB (A/A)/(a)/
$ 2,000,000 5.60% 02/01/00 $ 2,048,159
- -------------------------------------------------------------------------------
Pennsylvania--8.9%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB (FGIC)
(AAA/Aaa)
$ 1,500,000 5.75% 06/15/00 $ 1,545,870
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,859,850
- -------------------------------------------------------------------------------
$ 3,405,720
- -------------------------------------------------------------------------------
Tennessee--3.9%
Clarksville, TN Public Building Authority (AA/NR)
$ 1,500,000 4.75% 12/01/00 $ 1,499,940
- -------------------------------------------------------------------------------
Texas--3.9%
Memorial Villages, TX Water Authority (NR/Aa)
$ 1,435,000 7.00% 09/01/00 $ 1,497,968
- -------------------------------------------------------------------------------
Virginia--4.7%
Petersburg, VA Hospital Authority RB GO (NR/A)
$ 1,760,000 5.50% 07/01/99 $ 1,795,658
- -------------------------------------------------------------------------------
Washington--4.2%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$ 1,500,000 7.20% 07/01/02 $ 1,608,840
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Wisconsin--2.6%
Oshkosh, WI Water Rev., Series C (NR/MIG1)/(b)/
$ 1,000,000 4.88% 01/01/00 $ 998,090
- --------------------------------------------------------------------------------
Wyoming--4.1%
Uinta County, WY School District Series A (FSA) (AAA/Aaa)
$ 1,500,000 6.88% 06/01/00 $ 1,593,570
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $38,115,334) $ 38,192,726
- --------------------------------------------------------------------------------
Short-Term Obligations--3.9%
New York City Municipal Water Finance Authority, Series A (A-1+/VMIG1)
$ 1,300,000 4.25% 05/01/97 $ 1,300,000
- --------------------------------------------------------------------------------
Wisconsin State Health Facilities Authority (A-1+/VMIG1)
200,000 4.50 05/01/97 200,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,500,000) $ 1,500,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $39,615,334)/(d)/ $ 39,692,726
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 140,632
Gross unrealized loss for investments in which cost
exceeds value (63,240)
- --------------------------------------------------------------------------------
Net unrealized gain $ 77,392
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Investment Abbreviations:
<S> <C>
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 Board
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
/(a)/ Portions of these securities are being segregated for when-issued
securities.
/(b)/ 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.
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.
19
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs 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.
Special Events
Effective May 1, 1997, the name of the GS Core Fixed Income Fund was
changed to the Goldman Sachs Core Fixed Income Fund. In addition, to accommodate
different clients' needs and preferences, the fund added two new share classes
as of May 1: Class A shares, which have a front-end load but no contingent
deferred sales charge (on amounts less than $1 million), and Class B shares,
which are subject to a contingent deferred sales charge but no up-front sales
charge. The fund's objective and investment focus remain the same.
Performance Review
We are pleased to report that the fund's Institutional and Administration
shares outperformed the Index during the period under review. The fund's
positive performance was primarily due to its overweighting in non-Treasury
sectors compared with the Index. Specifically, mortgage-backed securities and
corporate bonds were the most significant contributors to performance, and
asset-backed securities and emerging market debt also performed very well. The
fund's Service shares achieved positive results, but slightly lagged the
benchmark.
The fund performed well compared with its peers. For the three-year period
ended April 30, 1997, the fund's Institutional shares were rated "four stars"
(out of 1,193 taxable bond funds) by Morningstar, Inc., an independent rating
agency./1/
During the period, the net asset value (NAV) of the fund's Institutional,
Administration and Service shares each fell $0.14 due to rising interest rates.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on 1.87% 1.75% 1.63%
net asset value)
- --------------------------------------------------------------------------------
Return From Monthly 3.30% 3.18% 3.06%
Distributions
- --------------------------------------------------------------------------------
Return From Price -1.43% -1.43% -1.43%
Depreciation
- --------------------------------------------------------------------------------
Total Return of Lehman 1.70% 1.70% 1.70%
Brothers Aggregate
Bond Index
- --------------------------------------------------------------------------------
NAV (as of 4/30/97) $9.71 $9.70 $9.72
- --------------------------------------------------------------------------------
NAV Change -$0.14 -$0.14 -$0.14
- --------------------------------------------------------------------------------
</TABLE>
- -----------------------------------------
/1/Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-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 "four
stars" for the one-year period and were rated among 1,709 taxable bond funds.
The Morningstar ratings apply only to the fund's Institutional shares; the
fund's Administration and Service shares have not been rated. The Administration
and Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates each fund against its peers in the same category. In all,
there are four Morningstar categories (domestic equity, international equity,
taxable bond and municipal). 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.
- -------------------------------------------------------------------------------
20
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
Portfolio Composition and Investment Strategies
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Corporate Bonds 26.7%
Fixed Rate Mortgage Pass-Throughs 20.5%
U.S. Treasuries 17.1%
ABSs 13.2%
CMOs 13.2%
Emerging Market Debt 4.7%
Repos/Cash Equivalents 2.3%
Other Foreign Debt 2.3%
</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.
.. Corporate Bonds. Corporate bonds were the largest allocation at 26.7% of the
portfolio, overweighted compared with the Index (18.0%). The sector performed
well during the period as the healthy economy caused spreads to tighten across
subsectors. The fund's best performers were industrials, which included selected
cable issues that benefited from positive earnings trends (e.g., Time Warner,
Inc. and Tele-Communications, Inc.), as well as specific finance issues that
fared well due to continuing industry consolidation. We underweighted utilities
due to the regulatory and competitive pressures affecting that industry.
Fixed Rate Mortgage Pass-Throughs. The fund was underweighted in fixed rate
mortgage pass-throughs relative to the Index, 20.5% versus 29.9%. During the
period, the sector was supported by a combination of favorable trends, including
low volatility, range-bound interest rates, tight yield spreads on alternative
sectors, and light issuance of corporate and asset-backed securities (ABS).
After the sector rallied and became more fully priced, we trimmed the fund's
allocation in favor of securities that offered greater relative value.
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 liquid assets equal to the dollar amount of the forward
commitment in a segregated account with the fund's custodian.
.. U.S. Treasuries. We significantly underweighted U.S. Treasuries relative to
the Index, 17.1% compared with 44.5%, to emphasize sectors that offered greater
return potential.
.. Asset-Backed Securities. As of April 30, the fund's ABS position was 13.2%,
approximately the same weighting as six months ago. Though negative credit
events among selected credit card and sub-prime auto lenders raised investor
uncertainty during the period, investor interest remained broad-based, ratings
held firm and, relative to similarly rated spread products, ABSs continued to
offer attractive yield enhancement opportunities.
.. CMOs. The fund's collateralized mortgage obligation (CMO) holdings performed
very well and significantly contributed to the fund's performance. During the
period, CMOs enjoyed strong demand from yield-seeking investors who found the
sector particularly compelling relative to other high-quality alternatives. As
of the end of the period, CMOs were a 13.2% allocation, up from 9.8% last
October. This increase was primarily in sequential-pay/support CMOs, which
accounted for 8.8% of the portfolio, while the balance was invested in planned
- -------------------------------------------------------------------------------
21
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
amortization class (PAC) CMOs (3.3%) and floaters (1.1%). Sequential-pay/support
CMOs, PAC CMOs and floaters are typically considered to be lower risk derivative
securities.
.. Emerging Market Debt. As of April 30, 4.7% of the portfolio was invested in
emerging market debt. Our strategy in the sector is to control exposure by
stressing high-credit-quality, short-duration bonds. We continued to emphasize
Latin American issuers because structural and economic reforms in this region
are helping improve credit fundamentals. During the period, the fund held bonds
from Chile, Colombia, Mexico and the Andean region development bank, as well as
Indonesia. The sector also benefited from substantial global liquidity, which
has helped support the credit-sensitive areas of the lower grade bond markets.
.. Other Foreign Debt. During the period, we initiated a 2.3% position in a
10-year, fully hedged Australian government bond that offered attractive
incremental yield over U.S. Treasuries, as well as potential price appreciation
should Australian interest rates decline as we expect.
.. Agency Debentures. We sold the fund's allocation to agency debentures (1.5%
as of October 31, 1996) because their risk/reward profile indicated that we were
not being adequately compensated for holding the position.
.. Duration. As always, we seek to add incremental return over the Index
through sector weighting and individual security selection rather than
attempting to predict the direction of interest rates. Therefore, we manage the
fund's duration to approximate that of the Index, partly through the use of
financial futures. As of April 30, the fund's duration was in line with the
Index at 4.6 years.
.. Credit Quality. As of April 30, 39.7% of the portfolio was invested in
government and agency securities, 21.3% was invested in triple-A-rated
securities, 3.4% was invested in double-A-rated securities and 12.6% was
invested in single-A-rated securities. Triple-B-rated securities (20.7%) and
repurchase agreements/cash equivalents (2.3%) make up the remainder of the
portfolio.
Market Outlook
Though indications of economic moderation emerged in April, the economy's
fundamental strength remains intact, which leads us to believe that interest
rates will move higher during the balance of the year.
In terms of specific fixed income sectors, we have a neutral view of the
corporate market. While we anticipate no near-term deterioration in the
fundamental state of the economy, we are concerned that a series of Fed
tightenings may cause spreads to widen slightly in the near term. In the
mortgage-backed security market, spreads relative to Treasuries have remained
impressively resilient. Nonetheless, mortgage technicals may come under pressure
due to a potential increase in supply as the housing market accelerates during
the summer. We expect the portfolio's allocation to the ABS market to remain
stable in the near future, as it has become more challenging to identify
unrecognized value within the sector, particularly among the higher quality
issues that we tend to emphasize. Finally, we are optimistic regarding the
performance prospects of the emerging market debt sector, as credit trends
continue to improve and global liquidity remains plentiful. In the near future,
Latin America is likely to remain the fund's geographic focus; however, we will
actively seek attractive investment opportunities in other regions to increase
fund diversification.
- -------------------------------------------------------------------------------
22
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
Distribution Policy
During the six-month period under review, the fund's Institutional,
Administration and Service shares distributed $0.32, $0.31 and $0.30 per share,
respectively. Dividends are declared daily and paid on a monthly basis. As
required by tax law, the fund distributes substantially all of its investment
company taxable income.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Mark A. Van Wyk
Mark A. Van Wyk
Portfolio Managers
Goldman Sachs Core Fixed Income Fund
May 30, 1997
- -------------------------------------------------------------------------------
23
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds--25.4%
Finance Bonds--9.8%
BankAmerica Corp.
$ 200,000 6.03% 05/17/99 /(a)/ $ 205,042
300,000 7.75 07/15/02 305,466
Capital One Bank
600,000 6.66 02/03/00 593,580
400,000 6.88 04/24/00 399,284
800,000 6.58 04/17/01 780,976
500,000 6.60 08/20/01 487,010
Conseco Finance
170,000 8.70 11/15/26 169,252
Conseco Inc.
340,000 10.50 12/15/04 394,101
Continental Bank N.A.
525,000 11.25 07/01/01 551,565
Countrywide Funding Corp.
125,000 6.08 07/14/99 123,531
250,000 8.43 11/16/99 259,772
250,000 7.75 08/10/01 257,025
375,000 8.00 12/15/26 354,994
First U.S.A. Bank
160,000 6.13 10/30/97 159,872
Meditrust, Inc.
390,000 7.82 09/10/26 400,082
Mic Finance Trust
360,000 8.38 02/01/27 353,495
Phoenix RE Capital Trust
165,000 8.85 02/01/27 164,594
Security Pacific Corp.
995,000 11.50 11/15/00 /(a)/ 1,133,693
Signet Banking Corp.
240,000 9.63 06/01/99 252,629
Taubman Realty Group
480,000 8.00 07/30/01 489,811
Washington Real Estate Investment Trust
120,000 7.13 08/13/03 118,458
- -------------------------------------------------------------------------------
$ 7,954,232
- -------------------------------------------------------------------------------
Industrial Bonds--14.4%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 515,949
Continental Airlines, Inc.
339,989 7.75% 07/02/14 348,451
553,994 8.56 07/02/14 590,857
Edison Mission Energy Funding Corp.
170,564 6.77 09/15/03 168,785
Ford Capital Corp.
300,000 9.50 07/01/01 326,253
Ford Motor Corp.
300,000 7.00 09/25/01 300,474
General Motors Acceptance Corp.
275,000 7.63 03/09/98 277,989
200,000 7.13 05/10/00 201,840
375,000 9.63 12/15/01 412,492
H + T Master Trust
550,000 8.18 08/15/02 550,000
Harrahs Operations, Inc.
300,000 8.75 03/15/00 301,500
Hertz Corp.
400,000 7.00 07/15/03 391,260
Mitchell Energy and Dev. Corp.
310,000 9.25 01/15/02 328,758
Northwest Airlines Corp.
163,540 8.26 03/10/06 170,804
567,358 8.97 01/02/15 588,117
NWCG Holding Crp
680,000 7.05 06/15/99 586,786
Panamerican Beverage Co.
130,000 8.13 04/01/03 133,416
RJR Nabisco Inc.
175,000 8.00 07/15/01 172,440
550,000 8.63 12/01/02 548,218
Tele-Communications, Inc.
100,000 7.13 02/02/98 100,396
300,000 8.25 01/15/03 304,011
1,135,000 6.27 09/15/03 1,132,912
50,000 6.82 09/15/10 49,846
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,690,128
350,000 9.63 05/01/02 384,776
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds(continued)
Industrial Bonds(continued)
Time Warner, Inc. (continued)
$ 400,000 7.98% 08/15/04 $ 406,440
U.S. Air Inc.
553,242 6.76 04/15/08 528,761
USI American Holdings Corp.
150,000 7.25 12/01/06 145,070
- -------------------------------------------------------------------------------
$ 11,656,729
- -------------------------------------------------------------------------------
Utility Bonds--1.1%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 326,215
Salton Sea Funding
580,000 7.02 05/30/00 580,922
- -------------------------------------------------------------------------------
$ 907,137
- -------------------------------------------------------------------------------
Total Corporate Bonds
(Cost $20,576,762) $ 20,518,098
- -------------------------------------------------------------------------------
Asset-Backed Securities--14.1%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 /(a)/ $ 157,232
Asset Securitization Corp., Series 1996, Class A1
600,000 6.88 11/13/26 /(a)/ 591,398
Asset Securitization Corp., Series 4, Class A
900,000 7.49 04/14/27 914,800
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
177,654 5.80 06/15/02 176,876
Discover Card Master Trust 1996-4, Class A
1,910,000 6.06 10/16/13 /(a)/ 1,942,222
Discover Card Master Trust 1996-4, Class B
1,100,000 6.24 10/16/13 1,108,250
DVI Equipment Lease Trust Series 1996-1, Class A
1,011,139 6.55 07/10/04 1,006,286
General Motors Acceptance Corp. Series 1995, Class A
69,659 7.15 03/15/00 70,203
Navistar Financial Trust, Series 1995-A, Class A2
214,878 6.55 11/20/01 215,549
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
245,032 6.85 06/15/01 247,048
Premier Auto Trust Series 1995-1, Class A4
123,449 7.85 09/04/98 123,680
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 80,625
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20% 02/16/06 667,250
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 565,983
Sears Credit Account Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 302,718
Standard Credit Card Master Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 714,422
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,120,694
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 910,683
World Financial Tower B Series 1996, Class B
498,093 6.91 09/01/13 483,679
- -------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $11,543,903) $ 11,399,598
- -------------------------------------------------------------------------------
Emerging Market Debt--4.4%
Bancoldex
$ 60,000 8.63% 06/02/00 $ 61,372
BCO De Colombia
110,000 8.63 06/02/00 112,516
Bridas Corp.
110,000 12.50 11/15/99 118,581
Empresa Col Petroleos
900,000 7.25 07/08/98 903,438
Financiera Energy Nacional
50,000 9.38 06/15/06 50,504
90,000 9.38 06/15/06 94,271
Instituto de Fomento Industrial
140,000 8.38 07/29/01 141,558
130,000 8.38 07/29/01 131,447
Republic of Colombia
30,000 7.13 05/11/98 30,139
Republic of Croatia
210,000 7.00 02/27/02 204,091
Sampoerna International
120,000 8.38 06/15/06 120,164
United Mexican States
180,000 7.56 08/06/01 181,940
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Emerging Market Debt(continued)
United Mexican States (continued)
$ 650,000 7.62% 08/06/01 $ 657,007
YPF Sociedad Anonima
633,003 7.50 10/26/02 637,687
118,531 7.00 10/26/02 118,835
- -------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $3,558,558) $ 3,563,550
- -------------------------------------------------------------------------------
Government Bonds--3.0%
Australia Commonwealth
AUD 2,400,000 7.50% 07/15/05 $ 1,845,509
Province of Quebec
$ 520,000 13.25 09/15/14 611,666
- -------------------------------------------------------------------------------
Total Government Bonds
(Cost $2,524,905) $ 2,457,175
- -------------------------------------------------------------------------------
Mortgage Backed Obligations--31.9%
Bear Stearns Mortgage Securities, Inc.
$ 2,045,784 6.50% 03/28/09/(a)/ $ 1,883,062
Federal Home Loan Mortgage Corp. (FHLMC)
1,000,000 7.00 TBA-15 Yr./(b)/ 990,938
1,245,394 6.00 11/15/16 1,234,885
1,000,000 6.35 03/25/18 976,870
Federal National Mortgage Association (FNMA)
1,000,000 6.50 TBA-7 Yr./(b)/ 981,560
1,000,000 7.00 TBA-30 Yr./(b)/ 968,750
4,500,000 7.50 TBA-30 Yr./(b)/ 4,466,250
500,000 6.25 07/25/18 486,875
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24/(a)/ 1,771,240
Government National Mortgage Association (GNMA)
3,000,000 7.50 TBA-30 Yr./(b)/ 2,973,750
3,000,000 8.00 TBA-30 Yr./(b)/ 3,040,290
335,213 8.00 02/15/17 344,240
30,057 7.00 11/15/22 29,296
362,778 7.00 12/15/22 353,592
596,838 7.00 12/15/22 581,726
184,742 7.00 01/15/23 179,892
787,526 7.50 03/15/23 785,313
779,931 7.00 05/15/23 759,457
120,766 7.50 08/15/23 120,427
39,068 7.00 11/15/23 38,042
JP Morgan Commercial Mortgage Finance Corp., Series 1997-C4
1,000,000 7.32% 12/26/28 997,227
Morgan Stanley Capital Commercial Mortgage, Inc. Series 1997-C1
900,000 7.46 05/15/06 912,375
Prudential Home Mortgage Securities Corp. 1992-39 A8
1,000,000 7.11 12/25/07 860,550
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $25,637,886) $ 25,736,607
- -------------------------------------------------------------------------------
Sovereign Credit--0.4%
State of Israel
$ 370,000 6.38% 12/15/05 $ 343,748
- -------------------------------------------------------------------------------
Total Sovereign Credit
(Cost $346,061) $ 343,748
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--17.0%
United States Treasury Bonds
$ 330,000 8.75% 05/15/17 $ 390,070
550,000 8.88 08/15/17/(a)/ 657,938
2,230,000 8.75 05/15/20 2,656,488
120,000 7.88 02/15/21/(a)/ 131,174
2,240,000 7.63 02/15/25 2,402,400
United States Treasury Interest-Only Stripped Securities/(c)/
2,250,000 6.99 08/15/09 966,893
350,000 7.04 11/15/10 136,808
United States Treasury Notes
4,000,000 6.88 08/31/99 4,044,360
280,000 5.63 11/30/00 272,387
590,000 7.88 11/15/04/(a)/ 630,380
United States Treasury Principal-Only Stripped Securities/(d)/
40,000 5.78 11/15/97 38,781
410,000 6.81 11/15/04/(a)/ 247,566
5,730,000 7.22 05/15/20 1,119,356
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,742,043) $ 13,694,601
- -------------------------------------------------------------------------------
Yankee Bonds--0.3%
Korea Electric Power
$ 263,790 7.40% 04/01/16 $ 265,088
- -------------------------------------------------------------------------------
Total Yankee Bonds
(Cost $255,077) $ 265,088
- -------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase Agreement--20.1%
Joint Repurchase Agreement Account/(a)/
$ 16,200,000 5.49% 05/01/97 $ 16,200,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $16,200,000) $ 16,200,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $94,385,195)/(e)/ $ 94,178,465
- -------------------------------------------------------------------------------
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(f) Month Gain (Loss)
- ---------------------------- -------------- ----------------- -------------
Euro Dollars 5 June 1997 $4,250
Euro Dollars 8 September 1997 (2,338)
Euro Dollars 5 December 1997 (1,000)
Euro Dollars 5 June 1998 (2,250)
5 Year U.S. Treasury Notes 10 June 1997 (2,828)
10 Year U.S. Treasury Notes 17 June 1997 (12,750)
U.S. Long Term Bond (14) June 1997 42,682
-------------
$25,766
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $382,996
Gross unrealized loss for investments in which cost
exceeds value (704,905)
- ------------------------------------------------------------------------------
Net unrealized loss $(321,909)
- --------------------------------------------------------------------------------
</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)/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 interest rate disclosed for these securitites represents effective
yields to maturity.
/(e)/The aggregate cost for federal income tax purposes is $94,500,374.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and each U.S. Long Term Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $27,100,000 and $9,088,344, 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.
27
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Adjustable
Rate Short Duration
Government Government
Fund Fund
--------------------------------------
<S> <C> <C>
Assets:
Investments in securities, at value (cost $594,120,929, $102,639,463, $39,615,334
and $94,385,195, respectively) $ 596,596,552 $ 102,672,119
Cash 57,183 89,184
Receivables:
Investment securities sold 295,632 --
Interest 6,240,961 1,042,023
Forward foreign currency exchange contracts -- --
Fund shares sold 2,978,910 203,746
Variation margin -- --
Deferred organization expenses, net -- --
Other assets 64,048 50,879
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 606,233,286 104,057,951
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,032,523 109,251
Investment securities purchased 1,331,393 --
Fund shares repurchased 10,604,905 1,707
Investment adviser fees 191,592 34,620
Transfer agent fees 42,054 --
Authorized dealer service fees 6,616 --
Variation margin 87,000 46,971
Accrued expenses and other liabilities 59,487 15,162
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 13,355,570 207,711
- ------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 643,684,171 117,737,007
Accumulated undistributed (distributions in excess of) net investment income (2,943,415) 599,277
Accumulated net realized loss on investment and futures transactions (49,959,507) (14,542,059)
Accumulated net realized foreign currency loss -- --
Net unrealized gain (loss) on investments and futures 2,096,467 56,015
Net unrealized gain on translation of assets and liabilities denominated in
foreign currencies -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net assets $ 592,877,716 $ 103,850,240
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:
Institutional shares $9.86 $9.76
Administration shares $9.86 $9.78
Service shares $9.86 $9.75
Class A shares (a) $9.86 --
- ------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Institutional shares 55,732,381 10,231,208
Administration shares 424,079 153,792
Service shares 2,171 258,644
Class A shares 3,960,437 --
- ------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value (unlimited
number of shares authorized) 60,119,068 10,643,644
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
---------------------------------
<S> <C> <C>
Assets:
Investments in securities, at value (cost $594,120,929, $102,639,463, $39,615,334
and $94,385,195, respectively) $ 39,692,726 $ 94,178,465
Cash 91,511 94,989
Receivables:
Investment securities sold 145,393 1,331,207
Interest 554,155 1,045,248
Forward foreign currency exchange contracts -- 34,692
Fund shares sold -- 60,750
Variation margin -- 6,750
Deferred organization expenses, net 10,458 41,206
Other assets 51,608 29,277
- -------------------------------------------------------------------------------------------------------------------------
Total assets 40,545,851 96,822,584
- -------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 18,312 43,289
Investment securities purchased 2,144,574 15,935,315
Fund shares repurchased 10,296 --
Investment adviser fees 11,244 26,250
Transfer agent fees 12,983 2,771
Authorized dealer service fees -- --
Variation margin -- --
Accrued expenses and other liabilities 31,430 30,169
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,228,839 16,037,794
- -------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 42,243,143 81,193,439
Accumulated undistributed (distributions in excess of) net investment income 90,133 36,949
Accumulated net realized loss on investment and futures transactions (4,093,656) (267,089)
Accumulated net realized foreign currency loss -- (32,353)
Net unrealized gain (loss) on investments and futures 77,392 (175,768)
Net unrealized gain on translation of assets and liabilities denominated in
foreign currencies -- 29,612
- -------------------------------------------------------------------------------------------------------------------------
Net assets $ 38,317,012 $ 80,784,790
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:
Institutional shares $9.94 $9.71
Administration shares $9.94 $9.70
Service shares $9.94 $9.72
Class A shares (a) -- --
- -------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Institutional shares 3,738,166 7,565,340
Administration shares 11,363 638,323
Service shares 105,100 114,034
Class A shares -- --
- -------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value (unlimited
number of shares authorized) 3,854,629 8,317,697
- -------------------------------------------------------------------------------------------------------------------------
</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 $10.01.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Operations
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Adjustable Short
Rate Duration
Government Government
Fund Fund
-----------------------------------
<S> <C> <C>
Investment income:
Interest/(a)/ $ 19,521,515 $ 3,571,901
- -----------------------------------------------------------------------------------------------------------------------------------
Total income 19,521,515 3,571,901
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 1,196,772 259,279
Distribution fees 24,001 --
Authorized dealer service fees 24,001 --
Administration share fees 5,231 1,118
Service share fees 10 5,244
Transfer agent fees 143,729 --
Custodian fees 65,396 32,437
Professional fees 30,592 30,169
Registration fees 31,419 29,736
Amortization of deferred organization expenses -- --
Trustees' fees 5,754 990
Other 64,428 26,459
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,591,333 385,432
Less--Expenses reimbursable and fees waived by Goldman Sachs (215,722) (145,719)
- -----------------------------------------------------------------------------------------------------------------------------------
Net expenses 1,375,611 239,713
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 18,145,904 3,332,188
- -----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (301,736) 77,934
Futures transactions (575,601) (78,182)
Foreign currency related transactions -- --
Net change in unrealized gain (loss) on:
Investments 3,237,459 (594,540)
Futures (523,110) (9,522)
Translation of assets and liabilities denominated in foreign currencies -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 1,837,012 (604,310)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 19,982,916 $ 2,727,878
- -----------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
-----------------------------
<S> <C> <C>
Investment income:
Interest/(a)/ $ 846,820 $ 2,713,928
- --------------------------------------------------------------------------------------------------------------------------
Total income 846,820 2,713,928
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 72,141 152,651
Distribution fees -- --
Authorized dealer service fees -- --
Administration share fees 79 4,929
Service share fees 2,452 1,908
Transfer agent fees 7,214 15,265
Custodian fees 24,930 43,131
Professional fees 30,238 29,501
Registration fees 29,353 29,627
Amortization of deferred organization expenses 10,290 12,146
Trustees' fees 332 775
Other 15,581 8,570
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 192,610 298,503
Less--Expenses reimbursable and fees waived by Goldman Sachs (108,922) (119,934)
- --------------------------------------------------------------------------------------------------------------------------
Net expenses 83,688 178,569
- --------------------------------------------------------------------------------------------------------------------------
Net investment income 763,132 2,535,359
- --------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions 46,213 (11,091)
Futures transactions -- (15,366)
Foreign currency related transactions -- (32,353)
Net change in unrealized gain (loss) on:
Investments (125,032) (1,032,929)
Futures -- (72,450)
Translation of assets and liabilities denominated in foreign currencies -- 29,612
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions (78,819) (1,134,577)
- --------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 684,313 $ 1,400,782
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Net of $4,391 in foreign withholding tax for the Core Fixed Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Adjustable Short
Rate Duration
Government Government
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 18,145,904 $ 3,332,188
Net realized gain (loss) from investment and futures transactions (877,337) (248)
Net realized loss from foreign currency related transactions -- --
Net change in unrealized gain (loss) on investments and futures 2,714,349 (604,062)
Net change in unrealized gain on translation of assets and liabilities
denominated in foreign currencies -- --
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 19,982,916 2,727,878
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (16,997,708) (3,409,055)
Administration shares (118,601) (29,022)
Service shares (107) (65,458)
Class A shares (531,120) --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (17,647,536) (3,503,535)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 224,637,176 17,764,086
Reinvestment of dividends and distributions 10,493,073 2,378,322
Cost of shares repurchased (272,256,791) (17,534,072)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from shares transactions (37,126,542) 2,608,336
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (34,791,162) 1,832,679
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of period $ 627,668,878 $ 102,017,561
- ----------------------------------------------------------------------------------------------------------------
End of period $ 592,877,716 $ 103,850,240
- ----------------------------------------------------------------------------------------------------------------
Accumulated undistributed (distributions in excess of) net investment income $ (2,943,415) $ 599,277
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 22,833,196 1,813,884
Reinvestment of dividends and distributions 1,066,128 243,233
Shares repurchased (27,664,736) (1,793,383)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,765,412) 263,734
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 763,132 $ 2,535,359
Net realized gain (loss) from investment and futures transactions 46,213 (26,457)
Net realized loss from foreign currency related transactions -- (32,353)
Net change in unrealized gain (loss) on investments and futures (125,032) (1,105,379)
Net change in unrealized gain on translation of assets and liabilities
denominated in foreign currencies -- 29,612
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 684,313 1,400,782
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (743,379) (2,380,508)
Administration shares (1,285) (127,789)
Service shares (18,468) (23,664)
Class A shares -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (763,132) (2,531,961)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 15,143,248 8,630,772
Reinvestment of dividends and distributions 633,411 2,308,481
Cost of shares repurchased (12,937,480) (2,167,703)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from shares transactions 2,839,179 8,771,550
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase 2,760,360 7,640,371
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of period $ 35,556,652 $ 73,144,419
- ----------------------------------------------------------------------------------------------------------------
End of period $ 38,317,012 $ 80,784,790
- ----------------------------------------------------------------------------------------------------------------
Accumulated undistributed (distributions in excess of) net investment income $ 90,133 $ 36,949
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 1,519,494 880,108
Reinvestment of dividends and distributions 63,471 235,763
Shares repurchased (1,297,285) (220,518)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding 285,680 895,353
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Adjustable Short
Rate Duration
Government Government
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 37,031,818 $ 6,604,446
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519)
Administration shares (220,450) (2,548)
Service shares -- (14,792)
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 -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441
Reinvestment of dividends and distributions 18,181,648 4,153,816
Cost of shares repurchased (477,107,914) (47,993,112)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from shares transactions (52,339,892) (1,819,855)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469)
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of year $ 676,133,018 $ 103,760,030
- ----------------------------------------------------------------------------------------------------------------
End of year $ 627,668,878 $ 102,017,561
- ----------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed net investment income $ (3,441,783) $ 770,624
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467
Reinvestment of dividends and distributions 1,856,783 424,274
Shares repurchased (48,741,470) (4,905,357)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616)
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 1,786,304 $ 4,013,477
Net realized gain (loss) from investment and futures transactions 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures (396,071) (75,350)
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,721,871 3,684,707
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (1,766,892) (4,019,797)
Administration shares (2,032) (19,144)
Service shares (17,380) (5,349)
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- (450,016)
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,786,304) (4,494,306)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 22,248,684 21,976,567
Reinvestment of dividends and distributions 1,401,492 4,315,748
Cost of shares repurchased (46,918,400) (7,840,575)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from shares transactions (23,268,224) 18,451,740
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (23,332,657) 17,642,141
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of year $ 58,889,309 55,502,278
- ----------------------------------------------------------------------------------------------------------------
End of year $ 35,556,652 $ 73,144,419
- ----------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed net investment income $ 90,133 $ 33,551
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 2,233,482 2,244,430
Reinvestment of dividends and distributions 140,950 439,299
Shares repurchased (4,727,959) (811,075)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (2,353,527) 1,872,654
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
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 Adjustable Rate Government Fund (Adjustable Rate Government),
Goldman Sachs Short Duration Government Fund (Short Duration Government),
Goldman Sachs Short Duration Tax-Free Fund (Short Duration Tax-Free) and Goldman
Sachs Core Fixed Income Fund (Core Fixed Income), collectively, ("the Funds") or
individually a ("Fund"). The Funds are diversified portfolios of the Trust
offering three classes of shares - Institutional shares, Administration shares
and Service shares. In addition, the Adjustable Rate Government Fund offers
Class A shares. Effective May 1, 1997, the Trust was reorganized from a
Massachusetts business trust to a Delaware business trust and various
operational changes were approved, including updating certain investment
restrictions and amending the management contracts. In addition, Short Duration
Government, Short Duration Tax-Free, and Core Fixed Income added two new share
classes, Class A and Class B, as of May 1.
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
- -----------------------
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. 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 Short Duration Tax-Free. 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 Core Fixed
Income Fund.
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.
- --------------------------------------------------------------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
- ----------------------------------------------
Core Fixed 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. Core Fixed 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
- ------------------------
The Funds, with the exception of Short Duration Tax-Free, may enter into
mortgage "dollar rolls" in which the Fund sells securities in the current month
for delivery and simultaneously contracts with the same counterparty to
repurchase similar (same type, coupon and maturity) but not identical securities
on a specified future date. The Fund loses the right to receive principal and
interest paid on the securities sold. However, the Fund benefits to the extent
of any price received for the securities sold and the lower forward price for
the future purchase (often referred to as the "drop") or fee income plus the
interest earned on the cash proceeds of the securities sold until the settlement
date of the forward purchase. The Fund will hold and maintain in a segregated
account, until the settlement date, cash or liquid, high-grade debt securities
in an amount equal to the forward purchase price. For financial reporting and
tax reporting purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale.
F. Futures Contracts
- --------------------
The Funds may enter into futures transactions to hedge against changes in
interest rates, securities prices, currency exchange rates (in the case of Core
Fixed Income) or to seek to increase total return.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Payments for futures contracts ("variation margin") are paid or received by the
Funds daily, dependent on the daily fluctuations in the value of the contracts,
and are recorded for financial reporting purposes as unrealized gains or losses.
When contracts are closed, the Funds realize a gain or loss equal to the
difference between the value of the futures contract to sell and the value of
futures contract to buy. Gains and losses are reported in the Statement of
Operations.
The use of futures contracts involve, to varying degrees, elements of
market and counterparty risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities. 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 potentially result in a loss.
G. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
H. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are generally allocated to the portfolios based on
each portfolio's relative average net assets for the period.
- --------------------------------------------------------------------------------
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
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 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.
I. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of its investment company taxable and tax-exempt income to its
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial
statement purposes as either from or in excess of net investment income or net
realized gain on investment transactions, or from capital, depends on the type
of book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
The Funds, at their most recent tax year-ends (October 31, 1996 for Core
Fixed Income and December 31, 1996 for Adjustable Rate Government, Short
Duration Government and Short Duration Tax-Free) 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>
Adjustable Rate Government $49,069,000 2000-2004
Short Duration Government $14,141,000 2002-2004
Short Duration Tax-Free $4,058,000 2002-2003
Core Fixed Income $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 Adjustable Rate
Government and 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 Short
Duration Tax-Free and 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 Adjustable Rate Government, Short Duration Tax-Free
and Core Fixed Income and .50% of average daily net assets of Short Duration
Government. Until further notice, GSFM has voluntarily agreed not to impose .10%
of its investment advisory fee for Short Duration Government.
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 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.
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 Adjustable Rate Government Class A shares. During the period ended
April 30, 1997, Goldman Sachs retained approximately $110,300 of sales load
related to Class A shares. Goldman Sachs also serves as Transfer Agent of the
Funds for a fee.
The Trust, on behalf of Adjustable Rate Government, has adopted a
Distribution Plan (the "Plan") pursuant to Rule 12b-1 for the Class A shares.
Under the Plan, Goldman Sachs
- --------------------------------------------------------------------------------
34
<PAGE>
- --------------------------------------------------------------------------------
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.
The Trust, on behalf of Adjustable Rate Government, 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. Adjustable Rate Government pays a fee under the
Service Plan equal, on an annual basis, to .25% of its average daily net assets
attributable to Class A shares.
For the period ended April 30, 1997, the advisors and distributor have
voluntarily agreed to waive certain fees and reimburse other expenses as
follows(in thousands):
<TABLE>
<CAPTION>
Waivers
---------------
Reimburse-
Class A Reimburse- ment
Fund Advisor 12b-1 ment Outstanding
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustable Rate
Government -- $24 $192 $22
Short Duration
Government $52 -- 94 14
Short Duration
Tax-Free -- -- 109 28
Core Fixed
Income -- -- 120 28
</TABLE>
For the period ended April 30, 1997, Adjustable Rate Government, Short
Duration Government, and Core Fixed Income incurred commission expenses of
approximately $35,000, $8,500, and $900, respectively, in connection with
futures contracts entered into with Goldman Sachs. At April 30, 1997, Adjustable
Rate Government and Short Duration Government had approximately $87,000 and
$47,000, respectively, payable to Goldman Sachs related to variation margin on
futures contracts. Approximately $7,000 relating to variation margin was due to
Core Fixed Income from Goldman Sachs.
As of May 1, 1997, the Funds advisory agreements were changed to management
agreements encompassing the same services and fee structure.
4. 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 six months ended April
30, 1997, 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
six months ended April 30, 1997, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Short
Adjustable Rate Short Duration Duration Core Fixed
Government Government Tax-Free Income
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases of U.S.
Government and agency
obligations $ 150,343,674 $46,763,342 -- $115,895,051
- -----------------------------------------------------------------------------------------------
Purchases (excluding U.S.
Government and agency
obligations) -- -- $39,438,868 22,633,489
- -----------------------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 198,396,859 44,501,257 -- 118,193,576
- -----------------------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and agency
obligations) -- -- 35,970,076 12,305,124
- -----------------------------------------------------------------------------------------------
</TABLE>
At April 30, 1997, Core Fixed Income had an outstanding forward foreign
currency exchange contract, to sell foreign currency as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Value on
Foreign Currency Settlement Current Unrealized
Sell Contract Date Value Gain
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
Expiring 6/16/97 $ 1,897,856 $ 1,863,164 $ 34,692
- -----------------------------------------------------------------------------------------------
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered.
6. 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.
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 at the Funds' custodian.
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 April 30, 1997, Adjustable Rate Government, Short Duration Government and
Core Fixed Income had undivided interests in the repurchase agreements in the
following joint account which equaled $36,700,000, $600,000 and $16,200,000,
respectively, in principal amount.
As of April 30, 1997, the repurchase agreement in the joint account along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity data) were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns & Co., dated 4/30/97, repurchase price $680,103,889 (GNMA:
$59,497,211, 7.50%-9.00%, 12/15/21-12/15/26; FNMA: $267,568,394, 5.50%-8.00%,
02/01/09-04/01/27; FHLMC: $373,405,594, 5.50%-7.50%, 2/01/98-4/01/27)
$680,000,000 5.50% 5/01/97 $680,000,000
Nomura Securities International, Inc. dated 4/30/97, repurchase price $300,045,833
(FNMA: $182,812,268, 5.94%-8.01%, 7/22/97-5/11/05; FHLMC: $38,631,543, 6.02%-
6.75%, 1/28/00-12/04/01, FCSB: $49,581,430, 6.05%-6.25%, 5/10/99-12/03/99,
SLMA: $29,222,430, 6.00%, 1/16/01)
300,000,000 5.50 5/01/97 300,000,000
Credit Suisse First Boston, dated 4/30/97, repurchase price $52,307,845 (U.S.
Treasury Bill: $53,475,803, 2/05/98)
52,300,000 5.40 5/01/97 52,300,000
- ---------------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $1,032,300,000
- ---------------------------------------------------------------------------------------
</TABLE>
9. Other Matters
As of April 30, 1997, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 33% of the
outstanding shares of the Short Duration Government Fund.
- --------------------------------------------------------------------------------
36
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10. Summary of Share Transactions
Share activity for the six months ended April 30, 1997 is as follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Short Duration Government
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 18,594,775 $182,930,563 1,584,839 $15,518,375
Reinvestment of dividends
and distributions 1,001,545 9,856,991 234,064 2,288,677
Shares repurchased (26,271,346) (258,542,996) (1,756,576) (17,174,153)
-------------------------------------------------------------
(6,675,026) (65,755,442) 62,327 632,899
-------------------------------------------------------------
Administration shares
Shares sold 105,099 1,034,098 136,265 1,337,724
Reinvestment of dividends
and distributions 5,632 55,427 2,467 24,158
Shares repurchased (72,390) (712,347) (10,477) (102,683)
-------------------------------------------------------------
38,341 377,178 128,255 1,259,199
-------------------------------------------------------------
Service shares
Shares sold 2,161 21,270 92,780 907,987
Reinvestment of dividends
and distributions 11 107 6,702 65,487
Shares repurchased (1) (10) (26,330) (257,236)
-------------------------------------------------------------
2,171 21,367 73,152 716,238
-------------------------------------------------------------
Class A shares
Shares sold 4,131,161 40,651,245 -- --
Reinvestment of dividends
and distributions 58,940 580,548 -- --
Shares repurchased (1,320,999) (13,001,438) -- --
-------------------------------------------------------------
2,869,102 28,230,355 -- --
-------------------------------------------------------------
Net increase (decrease) (3,765,412) $(37,126,542) 263,734 $2,608,336
==============================================================
<CAPTION>
Short Duration Tax-Free Core Fixed Income
-------------------------------------------------------------
Shares Dollars Shares Dollars
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 1,341,295 $13,363,572 212,032 $2,070,524
Reinvestment of dividends
and distributions 61,868 617,418 227,665 2,229,551
Shares repurchased (1,159,405) (11,559,759) (186,679) (1,835,467)
-------------------------------------------------------------
243,758 2,421,231 253,018 2,464,608
-------------------------------------------------------------
Administration shares
Shares sold 6,402 63,690 579,102 5,684,739
Reinvestment of dividends
and distributions 116 1,153 5,675 55,281
Shares repurchased -- -- (17,694) (174,314)
-------------------------------------------------------------
6,518 64,843 567,083 5,565,706
-------------------------------------------------------------
Service shares
Shares sold 171,797 1,715,986 88,974 875,509
Reinvestment of dividends
and distributions 1,487 14,840 2,423 23,649
Shares repurchased (137,880) (1,377,721) (16,145) (157,922)
-------------------------------------------------------------
35,404 353,105 75,252 741,236
-------------------------------------------------------------
Class A shares
Shares sold -- -- -- --
Reinvestment of dividends
and distributions -- -- -- --
Shares repurchased -- -- -- --
-------------------------------------------------------------
-- -- -- --
-------------------------------------------------------------
Net increase (decrease) 285,680 $2,839,179 895,353 $8,771,550
============================================================
</TABLE>
37
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(unaudited)
- -------------------------------------------------------------------------------
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Short Duration Government
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 39,981,299 $391,363,204 4,072,082 $39,855,638
Reinvestment of dividends
and distributions 1,780,288 17,432,484 422,559 4,137,041
Shares repurchased (46,666,343) (456,776,795) (4,893,286) (47,875,174)
- ---------------------------------------------------------------------------------------------
(4,904,756) (47,981,107) (398,645) (3,882,495)
- ---------------------------------------------------------------------------------------------
Administration shares
Shares sold 148,981 1,457,872 33,251 326,101
Reinvestment of dividends
and distributions 9,641 94,420 207 2,032
Shares repurchased (138,609) (1,356,764) (7,921) (77,312)
- ---------------------------------------------------------------------------------------------
20,013 195,528 25,537 250,821
- ---------------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 188,134 1,837,702
Reinvestment of dividends
and distributions -- -- 1,508 14,743
Shares repurchased -- -- (4,150) (40,626)
- ---------------------------------------------------------------------------------------------
-- -- 185,492 1,811,819
- ---------------------------------------------------------------------------------------------
Class A shares
Shares sold 1,404,698 13,765,298 -- --
Reinvestment of dividends
and distributions 66,854 654,744 -- --
Shares repurchased (1,936,518) (18,974,355) -- --
- ---------------------------------------------------------------------------------------------
(464,966) (4,554,313) -- --
- ---------------------------------------------------------------------------------------------
Net increase (decrease) (5,349,709) $(52,339,892) (187,616) $(1,819,855)
=============================================================================================
<CAPTION>
Short Duration Tax-Free Core Fixed Income
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 2,085,253 $20,777,050 2,094,833 $20,524,422
Reinvestment of dividends
and distributions 139,126 1,383,351 436,903 4,292,533
Shares repurchased (4,601,865) (45,664,878) (769,104) (7,431,360)
- ---------------------------------------------------------------------------------------------
(2,377,486) (23,504,477) 1,762,632 17,385,595
- ---------------------------------------------------------------------------------------------
Administration shares
Shares sold 10,672 105,302 106,074 1,029,912
Reinvestment of dividends
and distributions 203 2,017 1,847 17,883
Shares repurchased (10,644) (105,478) (36,681) (358,284)
- ---------------------------------------------------------------------------------------------
231 1,841 71,240 689,511
- ---------------------------------------------------------------------------------------------
Service shares
Shares sold 137,557 1,366,332 43,525 422,233
Reinvestment of dividends
and distributions 1,621 16,124 549 5,332
Shares repurchased (115,450) (1,148,044) (5,292) (50,931)
- ---------------------------------------------------------------------------------------------
23,728 234,412 38,782 376,634
- ---------------------------------------------------------------------------------------------
Class A shares
Shares sold -- -- -- --
Reinvestment of dividends
and distributions -- -- -- --
Shares repurchased -- -- -- --
- ---------------------------------------------------------------------------------------------
-- -- -- --
- ---------------------------------------------------------------------------------------------
Net increase (decrease) (2,353,527) $(23,268,224) 1,872,654 $18,451,740
=============================================================================================
</TABLE>
- -------------------------------------------------------------------------------
38
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ 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
--------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. $9.83 $0.2971/(a)/ $0.0216/(a)/ -- $0.3187 $(0.2887) --
1997-Administration
Shares .............. 9.83 0.2844/(a)/ 0.0221/(a)/ -- 0.3065 (0.2765) --
1997-Service
Shares/(m)/ ......... 9.84 0.0527/(a)/ 0.0200/(a)/ -- 0.0727 (0.0527) --
1997-Class A Shares ...... 9.83 0.2766/(a)/ 0.0300/(a)/ -- 0.3066 (0.2766) --
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 9.77 0.5759/(a)/ 0.0772/(a)/ -- 0.6531 (0.5725) --
1996-Administration
Shares .............. 9.77 0.5489/(a)/ 0.0797/(a)/ -- 0.6286 (0.5489) --
1996-Class A Shares ...... 9.77 0.5481/(a)/ 0.0806/(a)/ -- 0.6287 (0.5489) --
1995-Institutional
Shares .............. 9.74 0.5630/(a)/ 0.0717/(a)/ -- 0.6347 (0.5759) --
1995-Administration
Shares .............. 9.74 0.5366/(a)/ 0.0737/(a)/ -- 0.6103 (0.5528) --
1995-Class A
Shares/(c)/.......... 9.79 0.2721/(a)/ (0.0090)/(a) / -- 0.2631 (0.2697) --
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) --
1993-Administration
Shares/(e)/.......... 10.02 0.2146 (0.0173)/(d) / -- 0.1973 (0.2146) --
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) --
<CAPTION>
Distributions to shareholders
----------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. -- -- -- $(0.2887) $0.0300 $9.86 3.28%/(f)/
1997-Administration
Shares .............. -- -- -- (0.2765) 0.0300 9.86 3.16/(f)/
1997-Service
Shares/(m)/ ......... -- -- -- (0.0527) 0.0200 9.86 0.74/(f)/
1997-Class A Shares ...... -- -- -- (0.2766) 0.0300 9.86 3.16/(f)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. (0.0206) -- -- (0.5931) 0.0600 9.83 6.86
1996-Administration
Shares .............. (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1996-Class A Shares ...... (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1995-Institutional
Shares .............. (0.0287) -- -- (0.6046) 0.0301 9.77 6.75
1995-Administration
Shares .............. (0.0275) -- -- (0.5803) 0.0300 9.77 6.48
1995-Class A
Shares/(c)/.......... (0.0134) -- -- (0.2831) (0.0200) 9.77 2.74/(f)/
1994-Institutional
Shares .............. -- -- -- (0.4486) (0.2600) 9.74 1.88
1994-Administration
Shares .............. -- -- -- (0.4239) (0.2600) 9.74 1.63
1993-Institutional
Shares .............. (0.0024) -- -- (0.4421) (0.0400) 10.00 4.13
1993-Administration
Shares/(e)/.......... (0.0027) -- -- (0.2173) (0.0200) 10.00 2.01/(f)/
1992-Institutional
Shares .............. -- -- -- (0.5470) 0.0100 10.04 6.12
For the Period July 17, 1991/(g)/through October 31
- ------------------------------------------------------
1991-Institutional Shares. -- -- -- (0.1553) 0.0300 10.03 2.14/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
---------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. 0.45%/(b)/ 6.08%/(b)/ 25.64% $549,611 0.51%/(b)/ 6.02%/(b)/
1997-Administration
Shares .............. 0.70/(b)/ 5.83/(b)/ 25.64 4,182 0.76/(b)/ 5.77/(b)/
1997-Service
Shares/(m)/ ......... 0.95/(b)/ 5.64/(b)/ 25.64 22 1.01/(b)/ 5.58/(b)/
1997-Class A Shares ...... 0.70/(b)/ 5.61/(b)/ 25.64 39,063 1.01/(b)/ 5.30/(b)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 0.45 5.85 52.36 613,149 0.51 5.79
1996-Administration
Shares .............. 0.70 5.59 52.36 3,792 0.76 5.53
1996-Class A Shares ...... 0.70 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares .............. 0.46 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares .............. 0.71 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares/(c)/.......... 0.69/(b)/ 5.87/(b)/ 24.12 15,203 1.01/(b)/ 5.55/(b)/
1994-Institutional
Shares .............. 0.46 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares .............. 0.71 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares .............. 0.45 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares/(e)/.......... 0.70/(b)/ 3.81/(b)/ 103.74 5,326 0.73/(b)/ 3.78/(b)/
1992-Institutional
Shares .............. 0.42 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g)through October 31,
- ------------------------------------------------------
1991-Institutional
Shares .............. 0.20/(b)/ 7.31/(b)/ 145.67/(b)/ 239,642 1.02/(b)/ 6.49/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ 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
-------------------------------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. $9.83 $0.3287/(a)/ $(0.0700)/(a)/ -- $0.2587 $(0.3287) --
1997-Administration
Shares .............. 9.85 0.3175/(a)/ (0.0700)/(a)/ -- 0.2475 (0.3175) --
1997-Service Shares ...... 9.82 0.3043/(a)/ (0.0700)/(a)/ -- 0.2343 (0.3043) --
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>
Distributions to shareholders
-----------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. -- -- -- $(0.3287) $(0.0700) $9.76 2.67%/(f)/
1997-Administration
Shares .............. -- -- -- (0.3175) (0.0700) 9.78 2.55/(f)/
1997-Service Shares ...... -- -- -- (0.3043) (0.0700) 9.75 2.42/(f)/
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. -- -- -- (0.6326) 0.0100 9.83 6.75
1996-Administration
Shares/(h)/.......... -- -- -- (0.3940) (0.0100) 9.85 4.00/(f)/
1996-Service
Shares/(i)/.......... -- -- -- (0.3152) 0.1000 9.82 4.35/(f)/
1995-Institutional Shares. -- -- -- (0.6518) 0.1800 9.82 8.97
1995-Administration
Shares .............. -- -- -- (0.2051) (0.0100) 9.63/(h)/ 2.10
1994-Institutional Shares. -- -- -- (0.6036) (0.5000) 9.64 0.99
1994-Administration
Shares .............. -- -- -- (0.5790) (0.5000) 9.64 0.73
1993-Institutional Shares. (0.0065) -- -- (0.5692) (0.0200) 10.14 5.55
1993-Administration
Shares/(e)/.......... -- -- -- (0.2725) (0.0900) 10.14 1.74
1992-Institutional Shares. -- -- -- (0.6703) (0.0600) 10.16 6.24
1991-Institutional Shares. -- -- -- (0.8020) 0.2200 10.22 10.93
1990-Institutional Shares. -- -- -- (0.8300) (0.0700) 10.00 8.23
1989-Institutional Shares. -- -- (0.0300) (0.9100) (0.0300) 10.07 9.08
For the Period August 15, 1988/(g)/through October 31
- ---------------------------------------------------------------
1988-Institutional Shares. -- -- -- (0.1800) 0.1000 10.10 3.30/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
-----------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. 0.45%/(b)/ 6.44%/(b)/ 43.72% $99,824 0.73%/(b)/ 6.16%/(b)/
1997-Administration
Shares .............. 0.70/(b)/ 6.22/(b)/ 43.72 1,504 0.98/(b)/ 5.94/(b)/
1997-Service Shares ...... 0.95/(b)/ 5.94/(b)/ 43.72 2,522 1.23/(b)/ 5.66/(b)/
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. 0.45 6.44 115.45 99,944 0.71 6.18
1996-Administration
Shares/(h)/.......... 0.70/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/.......... 0.95/(b)/ 6.05/(b)/ 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional Shares. 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares .............. 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional Shares. 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares .............. 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional Shares. 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/.......... 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional Shares. 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional Shares. 0.45 8.25 155.44 158,848 0.79 7.91
1990-Institutional Shares. 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional Shares. 0.46 8.71 137.37 31,015 1.39 7.78+
For the Period August 15, 1988/(g)/through October 31
- ---------------------------------------------------------------
1988-Institutional Shares. 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ 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
-------------------------------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. $9.96 $0.2097/(a)/ $(0.0200)/(a)/ -- $0.1897 $(0.2097) --
1997-Administration
Shares ................ 9.96 0.1976/(a)/ (0.0200)/(a)/ -- 0.1776 (0.1976) --
1997-Service Shares....... 9.97 0.1852/(a)/ (0.0300)/(a)/ -- 0.1552 (0.1852) --
For the Year Ended October 31,
- ---------------------------------------------------------------
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) --
<CAPTION>
Distributions to shareholders
---------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------------------
1997-Institutional Shares. -- -- -- $(0.2097) $(0.0200) $9.94 1.91%/(f)/
1997-Administration
Shares ................ -- -- -- (0.1976) (0.0200) 9.94 1.79/(f)/
1997-Service Shares....... -- -- -- (0.1852) (0.0300) 9.94 1.56/(f)/
For the Year Ended October 31,
- -------------------------------------------------------------------
1996-Institutional Shares. -- -- -- (0.4192) 0.0300 9.96 4.50
1996-Administration
Shares ................ -- -- -- (0.3944) 0.0300 9.96 4.24
1996-Service Shares....... -- -- -- (0.3697) 0.0200 9.97 3.98
1995-Institutional Shares. -- -- -- (0.4235) 0.1500 9.94 5.98
1995-Administration
Shares ................ -- -- -- (0.3989) 0.1500 9.94 5.76
1995-Service Shares ...... -- -- -- (0.3744) 0.1600 9.95 5.59
1994-Institutional Shares. -- -- -- (0.4612) (0.4400) 9.79 0.17
1994-Administration
Shares ................ -- -- -- (0.4362) (0.4400) 9.79 (0.11)
1994-Service Shares/(j)/.. -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/
1993-Institutional Shares. -- -- -- (0.3834) 0.3000 10.23 7.03
1993-Administration
Shares/(j)/............ -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
-----------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------------------
1997-Institutional Shares. 0.45%/(b)/ 4.24%/(b)/ 99.59% $37,159 1.05%/(b)/ 3.64%/(b)/
1997-Administration
Shares ................ 0.70/(b)/ 4.03/(b)/ 99.59 113 1.30/(b)/ 3.43/(b)/
1997-Service Shares....... 0.95/(b)/ 3.77/(b)/ 99.59 1,045 1.55/(b)/ 3.17/(b)/
For the Year Ended October 31,
- -------------------------------------------------------------------
1996-Institutional Shares. 0.45 4.21 231.65 34,814 1.01 3.65
1996-Administration
Shares ................ 0.70 3.96 231.65 48 1.26 3.40
1996-Service Shares....... 0.95 3.74 231.65 695 1.51 3.18
1995-Institutional Shares. 0.45 4.31 259.52 58,389 0.77 3.99
1995-Administration
Shares ................ 0.70 4.14 259.52 46 1.02 3.82
1995-Service Shares ...... 0.95 3.87 259.52 454 1.27 3.55
1994-Institutional Shares. 0.45 3.74 354.00 83,704 0.61 3.58
1994-Administration
Shares ................ 0.70 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/.. 0.95/(b)/ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares. 0.41 3.70 404.60 115,803 1.06 3.05
1993-Administration
Shares/(j)/............ 0.70/(b)/ 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. 0.05/(b)/ 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ 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
-------------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. $9.85 $0.3236 $(0.1403) $(0.0003) $0.1830 $(0.3230) --
1997-Administrative
Shares .............. 9.84 0.3108 (0.1398) (0.0003) 0.1707 (0.3107) --
1997-Service Shares ..... 9.86 0.2991 (0.1399) (0.0003) 0.1589 (0.2989) --
For the Year Ended October 31,
- ------------------------------------------------------
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) --
<CAPTION>
Distributions to shareholders
-----------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(k)/
------------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------
1997-Institutional
Shares .............. -- -- -- $(0.3230) $(0.1400) $9.71 1.87%/(f)/
1997-Administrative
Shares .............. -- -- -- (0.3107) (0.1400) 9.70 1.75/(f)/
1997-Service Shares ..... -- -- -- (0.2989) (0.1400) 9.72 1.63/(f)/
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares .............. -- -- -- (0.7244) (0.1500) 9.85 5.98
1996-Administrative
Shares/(l)/ ......... -- -- -- (0.4080) (0.0700) 9.84 3.56/(f)/
1996-Service
Shares/(l)/ ......... -- -- -- (0.3754) 0.0900 9.86 4.90/(f)/
1995-Institutional
Shares .............. -- -- -- (0.6433) 0.7600 10.00 15.72
For the Period January 5, 1994/(g)/through October 31,
- -------------------------------------------------------
1994-Institutional Shares. -- -- -- (0.4648) (0.7617) 9.24 (3.00)
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. 0.45%/(b)/ 6.66%/(b)/ 174.52% $73,483 0.76%/(b)/ 6.35%/(b)/
1997-Administrative
Shares .............. 0.70/(b)/ 6.49/(b)/ 174.52 6,194 1.01/(b)/ 6.18/(b)/
1997-Service Shares ..... 0.95/(b)/ 6.22/(b)/ 174.52 1,108 1.26/(b)/ 5.91/(b)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 0.45 6.51 414.20 72,061 0.83 6.13
1996-Administrative
Shares/(l)/ ......... 0.70/(b)/ 6.41/(b)/ 414.20 702 1.08/(b)/ 6.03/(b)/
1996-Service
Shares/(l)/ ......... 0.95/(b)/ 6.37/(b)/ 414.20 381 1.33/(b)/ 5.99/(b)/
1995-Institutional
Shares .............. 0.45 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994/(g)/through October 31,
- ------------------------------------------------------
1994-Institutional
Shares .............. 0.45/(b)/ 6.48/(b)/ 288.25 24,508 1.46/(b)/ 5.47/(b)/
</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)/ 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 no
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.
/(m)/ Service share activity commenced on March 27, 1997.
/(n)/ Includes the balancing effect of calculating per share amounts.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
- -------------------------------------------------------------------------------
This Semiannual 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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
John P. McNulty
Mary P. McPherson
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
FISARINST
- ------------------------------------------------------------------------------
The Goldman Sachs
Fixed Income Funds
- ------------------------------------------------------------------------------
Semiannual Report
April 30, 1997
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
[LOGO OF GOLDMAN SACHS APPEARS HERE]
- ------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders
- -------------------------------------------------------------------------------
Dear Shareholders:
A return of robust economic growth during the period under review fueled
fears of higher inflation, which pushed Treasury yields higher across the
maturity spectrum. In this semiannual report, we will review the performance of
the Goldman Sachs Fixed Income Funds for the six-month period ended April 30,
1997, as well as provide a brief overview of the U.S. economy and the bond
market. We are pleased to note that during the period, the Goldman Sachs Fixed
Income Funds performed well compared with their peers.
Economic Activity Rebounded, Led by Consumer Spending
After a sluggish third quarter, the pace of economic growth strengthened
during the period. During November and December, consumer spending rebounded,
the trade deficit narrowed and industrial production climbed significantly. As a
result, fourth-quarter real Gross Domestic Product (GDP) growth was 3.8%
(annualized), up from 2.1% in the prior quarter.
Economic activity continued to gain momentum during the first quarter of
1997, with real GDP surging 5.8%, the largest jump in a decade. Signs of
strength were led by a sharp increase in consumer spending, which resulted in
solid sales gains for automobile manufacturers and retailers. In addition,
upbeat reports on factory orders and inventories, construction outlays and labor
market conditions all pointed towards economic acceleration. Despite the growth
spurt, reported inflation remained surprisingly mild during the period.
Furthermore, several economic reports for April came in at the low end of
consensus expectations, which suggested that the economy could moderate during
the second quarter.
The Bond Market Rallied, Then Fell as Inflation Fears Reemerged
The U.S. fixed income market came under pressure during the period under
review. In November, bonds performed well in anticipation of a continued
slowdown in U.S. economic growth. However, the market experienced a reversal in
December when better-than-expected economic data, in particular, robust
employment figures, triggered a sell-off and drove interest rates higher. In
early February, bond prices briefly rebounded, but later faltered as it became
increasingly likely that the U.S. Federal Reserve would raise short term
interest rates in March. By the end of March, the yield on the benchmark 30-year
Treasury bond rose above the psychologically important 7% threshold. Despite the
lackluster performance of the U.S. bond market for the period as a whole, a
sharp rebound at the end of April helped bonds recoup part of their earlier
losses.
The Fed Raised the Federal Funds Rate in March
In March 1997, the Fed raised the federal funds rate by 25 basis points to
5.50%. Though there were few signs of actual inflation, the Fed tightening was
prompted by the economy's pervasive strength. The Fed's action was its first
since a quarter-point cut in January 1996.
During the period under review, the yield curve shifted higher across all
maturities. The yield on six-month Treasury bills rose from 5.26% on October 31,
1996 to approximately 5.52% on April 30, 1997. For the same period, the yield on
the 30-year U.S. Treasury bond rose more dramatically, climbing from 6.64% to
6.95%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 18
Goldman Sachs Government Income Fund 3 Notes to Financial Statements 22
Goldman Sachs Global Income Fund 8 Financial Highlights 29
Goldman Sachs Municipal Income Fund 13
----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
1
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders (continued)
- -------------------------------------------------------------------------------
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
10/31/96 4/30/97
<S> <C> <C>
3-Month 5.14% 5.23%
6-Month 5.26% 5.52%
1 5.40% 5.89%
2 5.73% 6.27%
3 5.86% 6.40%
5 6.07% 6.57%
10 6.34% 6.71%
30 6.64% 6.95%
</TABLE>
Source: Bloomberg, L.P.
The yield curve shifted upward across all maturities and steepened sharply at
the short end.
Outlook: Strengthening Economic Growth May Trigger Further Preemptive Rate Hikes
Despite reports of economic moderation and minimal price acceleration, the
economy's broad-based fundamental strength and resilient equity market make
additional Fed rate increases likely this year. Goldman Sachs' economists
believe that the speed and extent of Fed tightening will depend in large part on
the emergence of conclusive signs that the economy is nearing maximum capacity,
rather than immediate evidence of increased inflationary pressures.
In conclusion, we thank you for your support of the Goldman Sachs Fixed
Income Funds and we look forward to continuing our relationship.
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
May 30, 1997
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Government Income Fund seeks to provide shareholders with
a high level of current income consistent with safety of principal. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
U.S. government securities and in repurchase agreements collateralized by 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 Continued to Perform Well
During the period under review, mortgage-backed securities (MBS) performed
very well, buoyed by a surge in investor demand and stable prepayment activity.
Investor interest in the MBS market was triggered primarily by the favorable
interest rate environment. Throughout the period, rates remained in a fairly
tight range, allowing prepayment anxieties to subside. In addition, with other
highly rated fixed income instruments yielding approximately the same as
similar-duration Treasuries, investors turned to the mortgage-backed sector for
yield enhancement. Finally, an increase in collateralized mortgage obligation
(CMO) creation led to steady demand for underlying pass-through securities. As a
result of all of these positive factors, mortgage-backed securities became
increasingly expensive during the period as their yield spreads relative to
Treasuries tightened.
Performance Review
For the six-month period ended April 30, 1997, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to strong results from its investments in mortgage-backed
securities, particularly CMOs. The fund's Class B shares, which have higher
expenses, also achieved positive returns. The net asset value (NAV) of both
classes declined due to rising interest rates during the period.
We are pleased to report that the fund's Class A shares ranked within the
top 10% of intermediate U.S. government income funds (seventh out of 122) based
on total return for the 12 months ended April 30, 1997, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they have been
in existence less than 12 months.)
- -----------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
Total Return (based on net asset value) 1.83% 1.43%
- --------------------------------------------------------------------
Return From Monthly Distributions 3.67% 3.28%
- --------------------------------------------------------------------
Return From Price Depreciation -1.84% -1.85%
- --------------------------------------------------------------------
Total Return of Lehman Brothers 1.81% 1.81%
Government/Mortgage Index
- --------------------------------------------------------------------
NAV (as of 4/30/97) $14.10 $14.11
- --------------------------------------------------------------------
NAV Change -$0.26 -$0.26
- --------------------------------------------------------------------
</TABLE>
Portfolio Composition and Investment Strategies
The primary changes to the portfolio's sector allocations during the period
were a reduction of fixed rate mortgage pass-through and asset-backed securities
in favor of U.S. Treasuries and agency debentures.
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
U.S. Treasuries 36.7%
Fixed Rate Mortgage Pass-Throughs 26.1%
CMO's 13.0%
Asset-Backed Securities 11.0%
Agency Debentures 10.2%
Repos/Cash Equivalents 3.0%
</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.
.. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio
held a 36.7% position in U.S. Treasuries, its single largest allocation as of
April 30. The fund's holdings in Treasuries more than doubled as we scaled back
exposure to the mortgage-backed and asset-backed sectors, both of which were
nearing full value.
.. Fixed Rate Mortgage Pass-Throughs. As of April 30, the fund's investment in
fixed rate mortgage pass-throughs accounted for 26.1% of the portfolio, down
from 40.4% six months earlier. The sector performed well during the period, as
many of the factors which supported MBS through 1996 remained in place: low
volatility, range-bound interest rates, tight yield spreads on alternative
sectors, and light issuance of corporate and asset-backed securities (ABS).
However, as the MBS market repriced to reflect the favorable environment, we
reduced the position.
We also used mortgage dollar rolls during the period, 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 liquid assets equal to the dollar
amount of the forward commitment in a segregated account with the fund's
custodian.
.. CMOs. The CMO market enjoyed strong demand from yield-seeking investors,
while the supply of CMOs, though rising, remained relatively low from a
historical perspective. As the sector became more expensive, we reduced the
fund's allocation to 13.0% from 22.0% last October. Specifically, we cut
sequential-pay/support CMOs to 7.2%, approximately half their weighting six
months ago, and planned amortization class (PAC) CMOs to 4.2% from 5.5%.
.. Asset-Backed Securities. As of April 30, the fund's ABS position was 11.0%,
down from 19.9% last October. During the period, the ABS sector experienced some
selling pressure, in part due to negative credit events among selected credit
card and sub-prime auto lenders. Overall, however, the sector performed well:
investor interest remained broad-based, ratings held firm and, relative to
similarly rated spread products, ABSs continued to offer attractive yield
enhancement opportunities.
.. Agency Debentures. Agency debentures represented 10.2% of the portfolio as
of the end of the period, constituting an overweighted position compared with
the benchmark's 8.0%. We added to the allocation during the period as
alternative sectors richened.
.. Issuer Composition. The portfolio composition of the fund's mortgage-backed
security holdings by issuer was 13.6% in Federal National Mortgage Association
(FNMA) issues and 13.2% in Government National Mortgage Association (GNMA)
issues.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
.. Credit Quality. As of April 30, 75.5% of the portfolio was invested in U.S.
government and agency securities, 21.5% of the portfolio was invested in triple-
A-rated securities and 3.0% of the portfolio was invested in cash equivalents.
.. Prudent Use of Derivatives. As discussed earlier, the fund held a 7.2%
position in sequential-pay/support CMOs and a 4.2% position in PAC CMOs,
securities that are generally considered to be lower risk derivative
instruments. In addition, the portfolio held small positions in inverse
floaters, interest-only (IO) CMOs and principal-only (PO) CMOs for their
potential to add incremental yield. The portfolio's combined position in these
higher risk derivatives was 1.6% as of the end of the period.
.. Duration. We seek excess return over the Index through sector weightings
and specific security selection rather than attempting to make interest rate
predictions. Therefore, we manage the fund's duration to approximate that of the
Index, partly through the use of futures. As of April 30, the fund's duration
was 4.4 years, in line with that of the Index.
Market Outlook
Despite some suggestion of economic moderation, we continue to believe that
interest rates are likely to move higher during the balance of the year. This
expectation is predicated on the economy's broad-based fundamental strength, as
well as the Fed's well-publicized commitment to monetary discipline.
Regarding specific fixed income sectors, investor demand for mortgage-
backed securities remains robust, but lower rates and rising volatility increase
the risk of refinancings and lead us to maintain a cautious outlook for mortgage
pass-throughs over the next few months. Similarly, while CMOs do not generally
offer significant value over mortgage pass-throughs, specific structures within
the CMO market present attractive investment opportunities. In the ABS sector,
anxiety regarding negative credit events during the first quarter appears to be
subsiding. However, we believe the market is now more alert to credit
distinctions among issuers, servicers and collateral types, and has begun
pricing securities accordingly. Consequently, it may become more challenging to
identify unrecognized value within the ABS sector, particularly among the higher
quality issues that we tend to emphasize.
Distribution Policy
The fund's Class A and Class B shares paid out monthly distributions of
approximately $0.52 and $0.47 per share, respectively, during the six-month
period ended April 30, 1997. 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.
/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
May 30, 1997
- --------------------------------------------------------------------------------
5
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--37.7%
Federal Home Loan Mortgage Corp. (FHLMC)--1.8%
$ 1,000,000 7.00% TBA 15-Yr /(a)/ $ 990,930
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--8.7%
$ 1,000,000/(h)/ 6.50% TBA 7-Yr /(a)/ $ 981,560
1,000,000 7.00 TBA 30-Yr /(a)/ 968,750
1,000,000 7.50 TBA 30-Yr /(a)/ 942,500
2,000,000/(h)/ 7.50 TBA 30-Yr /(a)/ 1,985,000
- --------------------------------------------------------------------------------
$ 4,877,810
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA) --13.0%
$ 238,209 9.00% 10/15/19 $ 253,098
97,383 9.00 12/15/19 103,470
315,821 7.50 04/15/23 314,933
610,646 7.50 07/15/23 608,930
368,845 7.00 08/15/23 359,162
695,669 7.00 10/15/23 677,408
61,762 7.00 11/15/23 60,141
877,541 7.00 12/15/23 854,506
1,005,084 8.00 12/15/26 1,018,690
2,000,000/(h)/ 7.50 TBA 30-Yr /(a)/ 1,982,500
1,000,000/(h)/ 8.00 TBA 30-Yr /(a)/ 1,013,430
- --------------------------------------------------------------------------------
$ 7,246,268
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--14.2%
Interest Only--0.4%
FNMA Interest-Only Stripped Security, Series 151, Class 2/(d)/
$ 643,343 11.30% 07/25/22 $ 213,024
- --------------------------------------------------------------------------------
$ 213,024
- --------------------------------------------------------------------------------
Inverse Floater--0.7%
FNMA Remic Trust, Series 1992-62, Class S
$ 404,038 9.27%/(c)/ 05/25/99 $ 405,941
- --------------------------------------------------------------------------------
$ 405,941
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC) CMOs--2.9%
FNMA Remic Trust, Series 1997-9, Class B
$ 1,000,000 6.50% 10/25/22 $ 962,510
GE Capital Mortgage Services, Inc., Series 1994-11, Class A1
644,342 6.50 03/25/24 644,941
- --------------------------------------------------------------------------------
$ 1,607,451
- --------------------------------------------------------------------------------
Principal Only--1.9%
FNMA Remic Trust, Series G-35, Class N/(d)/
$ 575,000 6.16% 10/25/21 $ 419,376
FNMA Remic Trust, Series 1993-205, Class C/(d)/
750,000 7.23% 09/25/23 625,545
- --------------------------------------------------------------------------------
$ 1,044,921
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--1.4%
Citicorp Mortgage Securities, Series 1993-11, Class A6
$ 818,108 6.25% 09/25/08 $ 788,362
- --------------------------------------------------------------------------------
$ 788,362
- --------------------------------------------------------------------------------
Support--7.0%
GE Capital Mortgage Services, Inc., Series 1994-10, Class A22
$ 996,703 6.50% 03/25/24 $ 865,497
Housing Securities, Inc., Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,329,852
Prudential Securities, Series 1995-2, Class A
797,338 5.77 11/15/15 799,578
Salomon Brothers Mortgage Securities VII, Series 1996-6H, Class A1
1,000,000 6.00 09/30/08 899,840
- --------------------------------------------------------------------------------
$ 3,894,767
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,954,466
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $21,101,884) $ 21,069,474
- --------------------------------------------------------------------------------
Asset-Backed Securities--11.6%
Asset Securitization Corp., Series 1996, Class A1
$ 300,000 6.88% 11/13/26 $ 295,699
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
720,000 6.23 06/15/03 710,546
CPS Auto Grantor Trust, Series 1993-3, Class A
855,634 6.30 08/15/02 850,107
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 589,263
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 622,980
JP Morgan Commercial Mortgage Finance Corp., Series 1997-C4
500,000 7.32 12/26/28 498,614
Morgan Stanley Capital Commercial Mortgage, Inc. Series 1997-C1
500,000 7.46 05/15/06 506,875
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
224,429 6.55 11/20/01 225,129
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset-Backed Securities(continued)
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
$ 420,638 6.85% 06/15/01 $ 424,099
Premier Auto Trust, Series 1993-6, Class A2
271,484 4.65 11/02/99 269,021
Premier Auto Trust, Series 1994-1, Class A3
176,500 4.75 02/02/00 175,672
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 473,368
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 860,533
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $6,623,680) $ 6,501,906
- --------------------------------------------------------------------------------
U.S. Government Agency Obligations--10.0%
Small Business Administration
$ 1,700,000 7.15% 03/01/17 $ 1,685,176
1,400,000 7.50 04/01/17 1,416,562
Sri Lanka Aid/(c)/
2,500,000 6.06 02/21/16 2,464,075
- --------------------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $5,562,500) $ 5,565,813
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--35.6%
United States Treasury Bonds
$ 140,000 8.75% 05/15/17 $ 165,484
270,000/(e)/ 8.88 08/15/17 322,988
3,450,000 8.75 05/15/20 4,109,813
180,000 8.75 08/15/20 214,565
690,000/(e)/ 7.63 02/15/25 740,025
United States Treasury Notes
1,460,000/(e)/ 7.38 11/15/97 1,471,636
700,000 5.88 04/30/98 699,342
5,650,000/(e)/ 6.88 08/31/99 5,712,659
3,700,000 6.13 07/31/00 3,664,739
1,100,000 5.63 11/30/00 1,070,091
1,200,000 7.50 02/15/05 1,256,436
United States Treasury Principal-Only Stripped Securities/(d)/
300,000 6.85 05/15/05 174,777
1,550,000 7.23 05/15/20 302,790
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $20,041,673) $ 19,905,345
- --------------------------------------------------------------------------------
Repurchase Agreement--19.9%
Joint Repurchase Agreement Account/(e)/
$ 11,100,000 5.49% 05/01/97 $ 11,100,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $11,100,000) $ 11,100,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $64,429,737/(f)/) $ 64,142,538
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long (Short)/(g)/ Month Gain (Loss)
- --------------------------- ------------------ -------------- -------------
<S> <C> <C> <C>
Euro Dollars 3 September 1997 $375
5 Year U.S. Treasury Notes 19 June 1997 4,312
U.S. Long Term Bond 3 June 1997 6,282
-------------
$10,969
- --------------------------------------------------------------------------------
</TABLE>
Federal Income Tax Information:
<TABLE>
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 118,460
Gross unrealized loss for investments in which cost
exceeds value (509,387)
- --------------------------------------------------------------------------------
Net unrealized loss $ (390,927)
- --------------------------------------------------------------------------------
</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
April 30, 1997.
/(d)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(e)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(f)/The aggregate cost for federal income tax purposes is $64,533,465.
/(g)/Each 5-Year U.S. Treasury Note and U.S. Long Term 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 at risk are $5,200,000 and $3,032,288, respectively. The
determination of notional amounts as presented here are indicative only of
volume of activity and not a measure of market risk.
/(h)/When-issued security.
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.
7
<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.
Special Event
To accommodate different clients' needs and preferences, on March 12, 1997,
the fund opened a new share class (Service).
Favorable Economic Factors Helped European Bonds While Rising Rates Impacted
Treasuries
Global bonds began the period under review on a strong note, but weakened
during the first quarter of 1997. European bonds were the best performers during
the period, while the United States lagged along with the dollar bloc markets.
The economic fundamentals that supported most European bonds throughout
1996 -- particularly weak economic growth and contained inflation -- remained
intact during the period. This favorable backdrop, plus yield convergence ahead
of European monetary union (EMU), helped the higher yielding bonds of Spain
achieve the best performance of all the major bond markets (hedged into U.S.
dollars). The "core" European markets such as Germany also fared well due to
increased expectations of tighter fiscal policies to help them meet EMU
criteria. In contrast, the U.K. gilt underperformed most European bonds as
sharply accelerating growth triggered fears of higher inflation. In Japan, the
performance of Japanese Government Bonds (JGBs) trailed nearly all of the major
European markets but still fared reasonably well (hedged into U.S. dollars). The
Japanese market strengthened following a sharp November sell-off when continued
weakness in the financial sector made near-term rate hikes by the Bank of Japan
unlikely.
In the United States, stronger than expected economic growth pushed yields
higher and prompted the Federal Reserve to raise the federal funds rate by a
quarter-percentage point in March. As a result, U.S. Treasuries posted the
poorest performance of all the major bond markets.
Performance Review: Country Allocations Contributed to Performance
During the period under review, the Goldman Sachs Global Income Fund's
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. The fund's
favorable results were primarily due to its overweighting in German bonds, one
of the strongest European markets during the period, and its underweighting in
the United States, the weakest market.
The fund's Class A and B shares, which have higher expenses than the
Institutional shares, lagged the benchmark. The fund's Service shares achieved
positive performance since their inception on March 12, 1997; however, a partial
period of approximately 1 1/2 months is obviously too brief a period to measure
performance meaningfully.
The fund's Institutional and Class A shares fared well compared with their
peers. For the 12-month period ended April 30, the Institutional and Class A
shares ranked 25th and 29th, respectively, out of 133 global income funds 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
- -------------------------------------------------------------------------------
8
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
performance is not a guarantee of future results. Class B and Service shares
were not ranked for this period because they were in existence less than 12
months.)
We are also pleased to announce that for the five-year period ended April
30, 1997, the fund's Class A shares were rated "four stars" (out of 641 taxable
bond funds) by Morningstar, Inc., an independent rating agency./1/
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
Institu-
Class A Class B tional Service*
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Total Return (based on net
asset value) 3.22% 2.94% 3.50% 0.21%
- ----------------------------------------------------------------------------------------------------------------------
Return From Monthly 2.80% 2.59% 3.08% 0.01%
Distributions
- ----------------------------------------------------------------------------------------------------------------------
Return From Price 0.42% 0.35% 0.42% 0.20%
Appreciation
- ----------------------------------------------------------------------------------------------------------------------
Total Return of J.P. 3.47% 3.47% 3.47% 0.50%
Morgan Global
Government Bond Index
- ----------------------------------------------------------------------------------------------------------------------
NAV (as of 4/30/97) $14.59 $14.58 $14.58 $14.59
- ----------------------------------------------------------------------------------------------------------------------
NAV Change +$0.06 +$0.05 +$0.06 -$0.10
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period. Performance and net asset value
(NAV) change are from its inception date on 3/12/97.
- ------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Class A shares received "four stars"
for both the three- and one-year periods and were rated among 1,193 and 1,709
taxable bond funds for the three- and one-year periods, respectively. The
Morningstar ratings apply only to the fund's Class A shares; the fund's Class B,
Institutional and Service shares have not been rated. Class B and Service shares
are subject to additional fees and expenses that may have the effect of lowering
performance and may affect any future Morningstar rating. Morningstar rates each
fund against its peers in the same category. In all, there are four Morningstar
categories (domestic equity, international equity, taxable bond and municipal).
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.
During the period, we successfully employed several currency strategies
relative to our neutral position, which is to be fully hedged into U.S. dollars.
The main contributors to the positive currency performance were the fund's long
U.S. dollar positions against the yen and long positions in the high-yielding
European currencies against the Deutschemark and Swiss franc. The U.S. dollar
was supported by strong growth and rising short-term rates while the high-
yielding European currencies benefited from the EMU process gaining momentum.
Portfolio Composition and Investment Strategies
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
U.S. 33.1%
Germany 11.0%
Cash 10.7%
Japan 10.4%
U.K. 10.1%
Australia 8.5%
Italy 6.3%
Sweden 4.3%
France 3.0%
Spain 2.6%
</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 April 30, 1997, the fund was slightly underweighted in
the dollar bloc countries (e.g., U.S., Canada and Australia) relative to the
Index, 41.6% versus 44.3%.
U.S. In the U.S., Treasury prices came under pressure when accelerating
economic growth drove bond yields
- -------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
higher and prompted a Fed rate hike. As noted, the fund was underweighted in
Treasuries, which significantly benefited its performance relative to the Index.
As of April 30, 33.1% of the portfolio was invested in U.S. Treasuries compared
with a 40.2% allocation for the benchmark.
Other Dollar Bloc. The fund was not invested in Australia when the period
began, but we took advantage of improving bond fundamentals and a widening of
the Australia/U.S. bond yield differential by reestablishing a position in
December 1996. As of April 30, Australian bonds accounted for 8.5% of the
portfolio, overweighted compared with the benchmark's 1.2%. The fund also
briefly held a position in Canada, which performed well and was sold at a
profit.
.. Europe. European bonds were the strongest performers and they contributed
to the fund's favorable results during the period. As of April 30, the region
accounted for 37.3% of the portfolio compared with a 41.4% weighting for the
Index.
Germany. Despite a pickup in growth in mid-1996, the period under review
was marked by a return of softening economic activity. The most dramatic
indication of Germany's continuing economic difficulties was a record increase
in unemployment in January to levels last seen in 1933. The belief that an end
of the Bundesbank's very easy monetary policy was not in sight continued to
support the bond market. The fund held an overweighted position in Germany
relative to the Index, 11.0% versus 8.9%.
Spain, Sweden and Italy. When the period began, increased optimism
regarding EMU particularly benefited the higher-yielding bonds of Spain and
Sweden. Though the prospects for EMU dimmed somewhat during the first quarter,
Spain, a 2.6% position as of April 30, continued to perform well due to
favorable economic fundamentals. Sweden's portfolio weighting was in line with
the Index for most of the period, then increased to 4.3% in April in
anticipation of further rate cuts on the back of favorable inflation reports.
Finally, as of April 30, the portfolio was overweighted in Italy, 6.3% versus
4.9% for the Index, because growth remains muted and we expect it to benefit
from further yield convergence.
U.K. The U.K.'s economy continued to grow at a pace well above that of the
rest of Europe. The prospect of higher rates, as well as concerns surrounding
the general election, raised investor uncertainty and impacted the performance
of the U.K. gilt. However, we increased the portfolio's U.K. position in January
in the belief that the forward interest rate curve reflected an overly
pessimistic view of potential monetary tightening. By April 30, the U.K. was
10.1% of the portfolio, overweighted compared with the benchmark (6.4%).
France. Though the fund was not invested in France during most of the
period, we established a 3.0% position in April, as we believed that the
underperformance of shorter term bonds in that market presented an attractive
investment opportunity relative to Germany.
Ireland, Denmark and the Netherlands. During the period, we sold the
portfolio's small positions in Ireland, Denmark and the Netherlands after they
performed well and fulfilled our return expectations.
.. Japan. The fund significantly underweighted Japan relative to the Index
(10.4% versus 14.3%) because economic growth, though muted, continued to point
towards economic recovery. To a significant extent, the Japanese bond market
shrugged off signs of strengthening growth as being "front loading" ahead of the
consumption tax hike on April 1. Instead, the market focused on the need for a
continuation of low rates to assist the troubled financial sector.
.. Cash Equivalents. We reduced the fund's cash equivalent position to 10.7%,
down from 15.5% six months ago, in favor of attractive investment opportunities.
.. Credit Quality. Throughout the period, the portfolio was 100% invested in
triple-A-rated securities.
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
.. Duration. As of the end of the period, the fund's duration was shorter
than that of the Index, 4.7 years compared with 5.1 years, primarily due to its
underweighting in Japan and its cash equivalent position. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's NAV should move in relation to interest rate
fluctuations.)
Distribution Policy
During the six-month period under review, the fund's Class A, B and
Institutional shares paid out distributions of $0.40, $0.37 and $0.44 per share,
respectively. From their inception on March 12 through April 30, the fund's
Service shares paid out $0.13 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.
Fund Outlook
The rapid pace of U.S. economic growth during the past two quarters leads
us to expect further Fed tightening. Despite early signs of a possible slowdown
in the second quarter, we continue to believe that bond yields will need to rise
from current levels to ensure that inflationary pressures remain in check.
European growth remains modest, but even more importantly, inflation
appears to be set for further declines (excluding the U.K.). Provided EMU
remains on track, short rates across Europe appear likely to stay at current
levels for a sustained period. Consequently, we expect European bonds to provide
reasonable returns, outperforming the weaker U.S. bond market. In the U.K., a
25-basis-point rate hike and greater independence for the Bank of England has
established the new Labor government's anti-inflation credentials. Any policy
that moves towards a closer relationship with continental Europe will further
highlight the fundamentally cheap levels for U.K. gilts relative to other
European bonds.
In Japan, a rate hike in the near future remains unlikely but JGBs are
vulnerable to the threat of a change in government policy or an asset allocation
shift. For example, the weakness of the life insurance companies may force the
authorities to consider the cost of maintaining historically low short-term
rates. Furthermore, the strong performance of the equity market at the end of
the period may prompt an asset allocation shift away from bonds into equities,
putting further upward pressure on Japanese yields.
/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, May 30, 1997
- -------------------------------------------------------------------------------
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount(a) Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--87.7%
Australian Dollar--8.4%
Commonwealth of Australia
AUD 21,700,000 10.00% 02/15/06 $ 19,262,621
- --------------------------------------------------------------------------------
British Pound Sterling--9.8%
United Kingdom Treasury
BPS 8,000,000 8.50% 12/07/05 $ 13,833,063
5,300,000 7.50 12/07/06 8,528,207
- --------------------------------------------------------------------------------
$ 22,361,270
- --------------------------------------------------------------------------------
Deutschemark--10.8%
Federal Republic of Germany
DEM 28,000,000 7.50% 11/11/04 $ 18,101,859
2,000,000 6.50 10/14/05 1,216,538
9,000,000 6.25 04/26/06 5,383,994
- --------------------------------------------------------------------------------
$ 24,702,391
- --------------------------------------------------------------------------------
French Franc--3.0%
Government of France
FRF 40,000,000 4.75% 03/12/02 $ 6,851,366
- --------------------------------------------------------------------------------
Italian Lira--6.1%
Republic of Italy
ITL 22,000,000,000 9.50% 05/01/01 $ 13,922,058
- --------------------------------------------------------------------------------
Japanese Yen--10.2%
International Bank for Reconstruction & Development
JPY 1,400,000,000 4.50% 06/20/00 $ 12,132,194
700,000,000 6.75 06/18/01 6,665,813
500,000,000 4.50 03/20/03 4,497,873
- --------------------------------------------------------------------------------
$ 23,295,880
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 700,000,000 10.15% 01/31/06 $ 5,841,114
- --------------------------------------------------------------------------------
Swedish Krona--4.2%
Kingdom of Sweden
SEK 50,000,000 5.50% 04/12/02 $ 6,157,023
30,000,000 6.00 02/09/05 3,586,638
- --------------------------------------------------------------------------------
$ 9,743,661
- --------------------------------------------------------------------------------
United States Dollar--32.7%
United States Treasury Notes
USD 15,000,000 5.25% 01/31/01 $ 14,392,950
17,000,000 6.38 03/31/01 16,909,730
8,200,000 6.25 02/15/03 8,059,042
10,000,000 7.88 11/15/04 10,684,400
4,000,000 6.50 08/15/05 3,940,640
14,700,000 7.00 07/15/06 14,947,989
6,200,000 6.50 10/15/06 6,098,258
- --------------------------------------------------------------------------------
$ 75,033,009
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $204,539,209) $ 201,013,370
- --------------------------------------------------------------------------------
Short-Term Obligations--13.6%
State Street Bank & Trust Euro-Time Deposit
USD 31,090,625 5.66% 05/01/97 31,090,625
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $31,090,625) $ 31,090,625
- --------------------------------------------------------------------------------
<CAPTION>
Contracts Description Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Options--0.0%
FRF 60,000,000 Government of France 4.75% Call, $ 71,961
exp 7/97, Strike yield 4.85%
FRF 40,000,000 Government of France 4.75% Put, $ 39,750
exp 7/97, Strike yield 4.85%
- --------------------------------------------------------------------------------
Total Options
(Cost $124,428) $ 111,711
- --------------------------------------------------------------------------------
Total Investments
(Cost $235,754,262(b)) $ 232,215,706
- --------------------------------------------------------------------------------
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value $ 1,972,384
exceeds cost
Gross unrealized loss for investments in which cost (5,579,488)
exceeds value
- --------------------------------------------------------------------------------
Net unrealized loss $ (3,607,104)
- --------------------------------------------------------------------------------
</TABLE>
(a)The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
AUD = Australian Dollar JPY = Japanese Yen
BPS = British Pound Sterling ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
FRF = French Franc USD = United States Dollar
ITL = Italian Lira
/(b)/The aggregate cost for federal income tax purposes is $235,822,810.
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.
12
<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, securities 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.
A Stable Municipal Bond Market
The municipal market has remained at relatively rich levels compared with
the taxable market since the end of 1996, as light primary and secondary supply
has been consumed easily by stable demand. The average price of a 15-year
municipal bond (as calculated from data provided by Municipal Market Data, an
independent municipal market information provider) declined approximately 1.07%,
while yields rose from 5.30% on October 31, 1996 to 5.40% on April 30, 1997.
Supply increased throughout most of the period, though it remained light
compared with historical averages. In November, municipal bond issuance was up
30% versus the prior three-month average. As is typical, increased supply
continued in early December due to the approaching year-end. The 1997 new issue
supply has followed historical early-month patterns, with January and February
supply well below annual averages (slightly more than $10 billion each month)
and March and April supply closer to normal levels ($13 to $14 billion).
Demand from individual investors (who control approximately two-thirds of
municipal bond ownership either through mutual funds or direct investment)
remained stable, but not strong, as long-term municipal yields were below the
psychologically significant 6% level. While yields have not yet cracked that
barrier, President Clinton's reelection and the loss of Republican momentum have
put talk of tax reform and talk of significant changes in the tax-exempt status
of municipal bonds on the back burner, comforting some of the investors
concerned about the market. In addition, the emergence of "nontraditional"
buyers during April has helped support the long end of the market.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Yield
Year of Maturity 4/30/97 10/31/96
<S> <C> <C>
1998 3.85% 3.90%
1999 4.40% 4.15%
2000 4.60% 4.30%
2001 4.70% 4.40%
2002 4.80% 4.50%
2003 4.85% 4.60%
2004 4.90% 4.70%
2005 4.95% 4.80%
2006 5.00% 4.90%
2007 5.05% 5.00%
2008 5.10% 5.10%
2009 5.20% 5.20%
2010 5.30% 5.25%
2011 5.35% 5.30%
2012 5.40% 5.35%
2013 5.45% 5.40%
2014 5.50% 5.40%
2015 5.50% 5.45%
2016 5.55% 5.45%
2017 5.55% 5.45%
2018 5.55% 5.50%
2019 5.55% 5.50%
2020 5.60% 5.50%
2021 5.60% 5.50%
2022 5.60% 5.50%
2023 5.60% 5.50%
2024 5.60% 5.50%
2025 5.60% 5.50%
2026 5.60% 5.50%
2027 5.60% 5.50%
</TABLE>
The yield curve steepened and shifted upward at the short end, remained nearly
the same in the mid-range, and shifted marginally upward at the longer end, in
contrast to six months ago.
Performance Review: The Fund's Positive Performance Reflects Active Management
of Term Structure, Sector Weightings and Security Selection
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 also performed well, although slightly below the
Index.
We are pleased to report that the fund's Class A shares outperformed most
of their peers. For the one-year period ended April 30, 1997, Class A shares
ranked in the top 10% of general municipal debt funds (20 out of 231) based on
total return, according to Lipper Analytical Services, Inc. The fund's Class B
shares were not in existence for the entire one-year period and were not
included in the ranking. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.)
- -------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
Class A Class B
------- -------
<S> <C> <C>
Total Return (based on net asset 2.57% 2.18%
value (NAV))
- --------------------------------------------------------------------------------
Return From Monthly Distributions 2.36% 1.97%
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.21% 0.21%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal 2.49% 2.49%
Bond Index
- --------------------------------------------------------------------------------
NAV (as of 4/30/97) $14.40 $14.40
- --------------------------------------------------------------------------------
NAV Change +$0.03 +$0.03
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
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
municipal and Treasury futures contracts to manage sector allocation and
duration.
.. The portfolio's 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 10-year maturities on the short end of the
curve. This strategy allows us to extract extra yield from the shorter end of
the market while maintaining higher quality on the more interest-rate-sensitive
long end of the market. However, during the period, we regularly adjusted the
credit and term structure to take advantage of changing market conditions.
.. During the period, we employed several strategies using municipal and/or
treasury futures contracts. These trades are designed to exploit relative
pricing discrepancies between different markets, and are not designed to incur
additional interest rate risk. The fund stood at a 100% municipal bond weighting
(no Treasury or municipal contracts) at the end of the reporting period,
indicating attractive opportunities across the length of the municipal yield
curve.
.. 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:
Emphasis on Revenue Bonds
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Revenue Bonds 44.1%
Insured Revenue Bonds 35.4%
Insured General Obligations 20.5%
</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.
.. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of April 30, the fund held a 79.5% 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 April 30, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 20.5% versus 45.6%. Though the fund's total
GO allocation of 20.5% was down from 29.8% six months ago, the GO category is
now exclusively
- -------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- -------------------------------------------------------------------------------
weighted in insured GOs. Security-specific investment opportunities and the
relative cheapness of bond insurance for issuers enable the fund to purchase
higher yielding insured GOs without sacrificing quality.
.. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. VRDNs fell
from 7.6% to 4.4% of the portfolio. The 4.4% VRDN allocation consists of 3.0%
GOs and 1.4% Revenue-Backed VRDNs.
.. Credit Quality. During the period, the fund's average credit quality has
remained double-A. The fund's credit quality maintained a "barbell" structure,
with higher quality securities at the long end of the yield curve and lower
quality securities (but still investment grade) at the short end, though there
have been slight increases in the double-A and single-A categories. As of April
30, 59.8% of the fund was invested in triple-A-rated securities, down from 70.5%
six months ago, while double-A- and single-A-rated securities were increased to
14.4% and 9.8% from 9.3% and 1.8%, respectively. We continued to maintain a
position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 16.0% of the portfolio, down
slightly from 18.4%. 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
Our long-term outlook for municipal bond supply is essentially neutral, as
rates are at high levels compared with one year ago. As a result, the current
rate environment encourages neither supply (low rates bring refinancing) nor
demand (high rates attract buyers). At this point, the municipal market does not
perceive any real threats from the federal budget accord. Without any
fundamental problems in view for tax-exempts, we are left with technical forces
as the key driver in relative market performance.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the period
under review, the fund's Class A and B shares paid out distributions of $0.34
and $0.32 per share, respectively. The fund intends to distribute substantially
all of its investment company tax-exempt and taxable income, as required by tax
law.
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
May 30, 1997
- -------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--95.6%
Arizona--7.6%
Maricopa County MFH IDA (A)
$1,795,000 5.85% 01/01/08 $1,824,546
Maricopa County Unified School District No. 41 GO (FSA)
(AAA/Aaa)
2,500,000 6.25 07/01/15 2,618,500
- --------------------------------------------------------------------
$4,443,046
- --------------------------------------------------------------------
California--3.4%
Contra Costa Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $2,014,700
- --------------------------------------------------------------------
Colorado--4.3%
Englewood MFH RB (BBB)/(d)/
$2,500,000 6.65% 12/01/26 $2,495,575
- --------------------------------------------------------------------
Connecticut--3.6%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $2,107,780
- --------------------------------------------------------------------
Florida--6.7%
Escambia County Housing Authority, Single Family
Multi-County (FNMA/GNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $1,460,070
Santa Rosa Bay Bridge Authority RB (BBB-)
2,500,000 6.25 07/01/28 2,472,900
- --------------------------------------------------------------------
$3,932,970
- --------------------------------------------------------------------
Illinois--14.6%
Chicago Midway Airport RB (MBIA)(AAA/Aaa)
$2,500,000 5.50% 01/01/10 $2,498,800
Lake County Unified School District No. 116 GO (FSA)
(AAA/Aaa)
2,000,000 7.60 02/01/14 2,423,180
1,525,000 6.10 02/01/16 1,555,988
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,104,080
- --------------------------------------------------------------------
$8,582,048
- --------------------------------------------------------------------
Indiana--7.0%
Indiana Bond Bank for Hendricks County RB (AA-)/(b)/
$1,420,000 6.00% 02/01/12 $1,472,540
Indiana Transportation Airport Series A RB (AAA/Aaa)
2,500,000 6.00 11/01/11 2,618,025
- --------------------------------------------------------------------
$4,090,565
- --------------------------------------------------------------------
Kentucky--1.8%
Nelson County Industrial Building RB for Mabex
Universal Corp. Project (A3)
$1,000,000 6.50% 04/01/05 $1,060,850
- --------------------------------------------------------------------
Louisiana--4.3%
South Louisiana Port RB for Cargill Corp. (Aa3)
$2,500,000 5.85% 04/01/17 $2,499,950
- --------------------------------------------------------------------
Maine--1.2%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 675,000 6.80% 12/01/07 $ 721,177
- --------------------------------------------------------------------
Missouri--3.6%
St. Louis Municipal Finance Leasehold RB (A/Aa3)
$2,100,000 5.30% 07/15/02 $2,128,854
- --------------------------------------------------------------------
Nevada--3.1%
Washoe County GO (MBIA)(AAA/Aaa)
$2,000,000 5.00% 06/01/17 $1,822,080
- --------------------------------------------------------------------
New York--3.4%
Syracuse IDA RB (AA)
$2,000,000 5.13% 10/15/02 $1,992,580
- --------------------------------------------------------------------
North Dakota--3.5%
Mercer County PCRB for Basin Electric & Power 2nd
Series (AMBAC) (AAA/Aaa)/(d)/
$2,000,000 6.05% 01/01/19 $2,051,720
- --------------------------------------------------------------------
Ohio--1.0%
Cuyahoga County for Rock & Roll Hall of Fame RB (BBB)
$ 600,000 5.45% 12/01/05 $ 594,018
- --------------------------------------------------------------------
Oklahoma--4.0%
Holdenville IDA RB (BBB/Baa)
$1,245,000 5.95% 07/01/02 $1,279,001
Tulsa County Public Facilities RB (A-)
1,000,000 6.60 11/01/08 1,070,250
- --------------------------------------------------------------------
$2,349,251
- --------------------------------------------------------------------
Pennsylvania--3.5%
Bethlehem School District GO Bond (MBIA)(AAA/Aaa)
$2,000,000 6.00% 03/01/16 $2,035,940
- --------------------------------------------------------------------
South Carolina--2.5%
Piedmont Municipal Power Agency RB (MBIA)(AAA/Aaa)
$1,465,000 5.50% 01/01/10 $1,461,718
- --------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations(continued)
Tennessee--2.6%
McMinnville Housing Authority RB (A2)
$1,550,000 6.00% 10/01/09 $ 1,551,240
- --------------------------------------------------------------------
Texas--5.2%
Denison Water & Sewer RB (AMBAC)(AAA/Aaa)
$1,000,000 5.50% 09/01/09 $ 1,014,700
East Texas Criminal Justice Facilities Financing Corp.
RB (AMBAC) (AAA/Aaa)
2,000,000 5.75 11/01/09 2,035,100
- --------------------------------------------------------------------
$ 3,049,800
- --------------------------------------------------------------------
Washington--8.7%
Chelan County Public Utility RB (MBIA)(AAA/Aaa)
$2,500,000 6.35% 07/01/28 $ 2,586,650
Washington State Public Power Supply System Series A RB
(AMBAC)(AAA/Aaa)
2,500,000 5.70 07/01/11 2,491,850
- --------------------------------------------------------------------
$ 5,078,500
- --------------------------------------------------------------------
Total Debt Obligations
(Cost $55,481,930) $ 56,064,362
- --------------------------------------------------------------------
Short-Term Obligations--5.0%
Alabama--0.7%
Phenix City IDA RB (Toronto Dominion LOC)(AA)/(a)/
$ 400,000 5.05% 05/01/97 $ 400,000
- --------------------------------------------------------------------
New York--3.4%
New York GO (Kredietbank LOC)(AA-)/(a)/
$2,000,000 4.45% 05/01/97 $ 2,000,000
- --------------------------------------------------------------------
Texas--0.9%
Sabine River PCRB (Union Bank of Switzerland
LOC)(AA+)/(a)/
$ 500,000 5.55% 05/01/97 $ 500,000
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $2,900,000) $ 2,900,000
- --------------------------------------------------------------------
Total Investments
(Cost $58,381,930/(c)/) $58,964,362
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value $739,962
exceeds cost
Gross unrealized loss for investments in which cost (157,530)
exceeds value
- --------------------------------------------------------------------
Net unrealized gain $582,432
- --------------------------------------------------------------------
</TABLE>
/(a)/ Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/(b)/ When-issued security.
/(c)/ The amount stated also represents aggregate cost for federal income
tax purposes.
/(d)/ 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.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Abbreviations:
<S> <C>
AMBAC --Insured by American Municipal
Bond Assurance Corp.
FNMA --Insured by Federal National
Mortgage Association
FSA --Financial Security Assurance Co.
GNMA --Insured by Government National
Mortgage Association
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $64,429,737, $235,754,262 and $58,381,930) $64,142,538 $232,215,706 $58,964,362
Cash, at value 94,169 324,863 90,406
Receivables:
Investment securities sold 1,004,854 -- --
Interest 587,522 3,982,620 1,009,894
Forward foreign currency exchange contracts -- 2,735,490 --
Fund shares sold 664,318 373,902 93,800
Variation margin 6,413 -- --
Foreign tax withheld -- 87,755 --
Deferred organization expenses, net 14,677 -- 21,390
Other assets 63,375 3,239 9,208
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 66,577,866 239,723,575 60,189,060
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 10,549,108 8,691,808 1,387,075
Forward foreign currency exchange contracts -- 1,125,990 --
Fund shares repurchased 23,074 332,497 10,350
Income distribution 81,478 7,496 92,940
Investment adviser fees 10,999 82,520 19,312
Administration fees -- 28,132 7,242
Authorized dealer service fees 10,285 38,021 9,984
Distribution fees 1,290 30,045 169
Accrued expenses and other liabilities 19,056 98,644 12,103
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,695,290 10,435,153 1,539,175
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 56,393,312 222,342,678 58,551,259
Accumulated undistributed net investment income 53,331 6,196,133 60,331
Accumulated net realized loss on investment transactions (287,837) (989,524) (544,137)
Accumulated net realized foreign currency gain -- 3,713,328 --
Net unrealized gain (loss) on investments and futures (276,230) 682,535 582,432
Net unrealized loss on translation of assets and liabilities denominated
in foreign currencies -- (2,656,728) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $55,882,576 $229,288,422 $58,649,885
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:/(a)/
Class A $14.10 $14.59 $14.40
Class B $14.11 $14.58 $14.40
Institutional -- $14.58 --
Service -- $14.59 --
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Class A 3,754,506 11,765,253 4,031,092
Class B 208,089 75,162 42,867
Institutional -- 3,870,161 --
Service -- 6,466 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 3,962,595 15,717,042 4,073,959
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $14.76, $15.28 and $15.08 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.
18
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Operations
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $ 1,346,191 $ 7,675,570 $1,514,540
- ----------------------------------------------------------------------------------------------------------------------------------
Total income 1,346,191 7,675,570 1,514,540
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 98,534 915,292 109,080
Administration fees 29,560 183,102 40,904
Authorized dealer service fees 49,266 235,877 68,174
Distribution fees 51,745 237,238 69,406
Custodian fees 31,954 76,892 20,721
Transfer agent fees 42,728 53,004 44,706
Professional fees 30,344 40,805 29,494
Registration fees 13,207 28,146 14,522
Amortization of deferred organization expenses 9,321 -- 8,700
Trustee fees 332 2,324 553
Other 6,659 23,235 6,641
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 363,650 1,795,915 412,901
Less--expenses reimbursable and fees waived by Goldman Sachs (261,399) (513,953) (179,441)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 102,251 1,281,962 233,460
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income 1,243,940 6,393,608 1,281,080
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions (102,548) 3,647,163 384,465
Futures transactions 19,662 -- 96,288
Foreign currency related transactions -- 3,669,694 --
Net change in unrealized gain (loss) on:
Investments (363,801) (4,182,327) (408,697)
Futures (63,631) -- --
Translation of assets and liabilities denominated in foreign currencies -- (1,445,970) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, futures and foreign
currency transactions (510,318) 1,688,560 72,056
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 733,622 $ 8,082,168 $1,353,136
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Net of $94,607 in foreign withholding tax for the Global Income Fund.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
-------------------------------------------
<S> <C> <C> <C>
From operations:
Net investment income $ 1,243,940 $ 6,393,608 $1,281,080
Net realized gain (loss) from investment transactions (82,886) 3,647,163 480,753
Net realized gain from foreign currency related transactions -- 3,669,694 --
Net change in unrealized gain (loss) on investments and futures (427,432) (4,182,327) (408,697)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- (1,445,970) --
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 733,622 8,082,168 1,353,136
- -------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,217,324) (5,196,561) (1,272,366)
Class B (26,616) (15,612) (8,714)
Institutional Class -- (1,688,968) --
Service Class -- (559) --
Net realized gain on investment transactions
Class A (157,412) -- --
Class B (1,780) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,403,132) (6,901,700) (1,281,080)
- -------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 32,392,263 19,707,735 10,342,628
Reinvestment of dividends and distributions 1,137,480 4,631,079 756,256
Cost of shares repurchased (7,815,079) (49,406,305) (5,043,455)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 25,714,664 (25,067,491) 6,055,429
- -------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 25,045,154 (23,887,023) 6,127,485
Net assets:
Beginning of period 30,837,422 253,175,445 52,522,400
- -------------------------------------------------------------------------------------------------------------------------------
End of period $ 55,882,576 $ 229,288,422 $58,649,885
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income $ 53,331 $ 6,196,133 $ 60,331
- -------------------------------------------------------------------------------------------------------------------------------
Summary of share transactions:
Shares sold 2,285,678 1,345,225 716,106
Reinvestment of dividends and distributions 80,099 316,808 52,251
Shares repurchased (550,966) (3,368,115) (349,613)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 1,814,811 (1,706,082) 418,744
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<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 and futures (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.
21
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
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 April 30, 1997, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. Effective May 1, 1997, the Trust was reorganized from a
Massachusetts business trust to a Delaware business trust and various
operational changes were approved, including updating certain investment
restrictions and amending the management contracts.
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. 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 the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account principal prepayment
experience and estimates of future principal prepayments. Certain mortgage
security paydown gains and losses are taxable as ordinary income. Such paydown
gains and losses increase or decrease taxable ordinary income available 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
- -------------------------------------------------------------------------------
22
<PAGE>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
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.
F. Option Accounting Principles
- -------------------------------
The Funds may purchase or write call and put options to hedge against changes in
security prices. When call or put options are written, an amount equal to the
premium received is recorded as a liability in the Statement of Assets and
Liabilities which is subsequently marked-to-market to reflect the current value
of the written option. 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 a closing
transaction has been entered into, a gain or loss may be realized on the written
or purchased option. When options expire, the premium received from a written
option is treated as a realized gain while the cost of a purchased option is
treated as a realized loss. If an option is exercised, the premium paid or
received will be offset against the proceeds on the sale or the purchase cost of
the underlying security to determine realized gains or losses. Gains and losses
are reported in the Statement of Operations.
Certain risks arise upon entering into options contracts. The risk in
writing a call option is that the Fund gives up the opportunity to profit if the
underlying security's market value increases beyond the exercise price and the
option is exercised. The risk in writing a put option is that the Fund may
realize a loss if the market price of an underlying security declines and the
option is exercised. A premium must be paid for purchased options regardless of
whether or not the option is exercised. The Fund also has the risk of not being
able to enter into a closing transaction if a liquid secondary market does not
exist.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices,
- -------------------------------------------------------------------------------
23
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
currency exchange rates (in the case of Global Income) or to seek to increase
total return.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Payments for futures contracts ("variation margin") are paid or received by the
Funds daily, dependent on the daily fluctuations in the value of the contracts,
and are recorded for financial reporting purposes, as unrealized gains or
losses. When contracts are closed, the Funds realize a gain or loss equal to the
difference between the value of the futures contract to sell and the value of
the futures contract to buy. Gains and losses are reported in the Statement of
Operations.
The use of futures contracts involve, to varying degrees, elements of
market and counterparty risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities. Changes in the value of the futures
contract may not directly correlate with changes in the value of the underlying
securities decreasing the effectiveness of the Funds' hedging strategies
potentially resulting in a loss.
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
substantially all investment company tax-exempt and taxable income to its
shareholders each year. 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.
The Funds, at their most recent tax year-ends (October 31, 1996 for Global
Income and December 31, 1996 for Government Income and Municipal Income) had
approximately the following amounts of capital loss carryforwards for U.S.
federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ---------------- --------------
<S> <C> <C>
Global Income $4,471,734 2004
Municipal Income $ 702,691 2004
</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 generally 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. Shareholders of
Service shares bear all expenses and fees paid to service organizations for
their services with respect to such shares as well as other expenses (subject to
expense limitations) which are directly attributable to such shares.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as 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
- -------------------------------------------------------------------------------
24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 period ended April 30, 1997,
Goldman Sachs retained approximately $134,700, $46,600 and $40,300 of sales
loads related to sales of 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. 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 six months ended April 30, 1997, 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 $49 $30 $48 $134 $24
Global
Income 378 -- 38 98 --
Municipal
Income --- -- 68 111 9
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such
waivers and limitations in the future at their discretion.
For the six months ended April 30, 1997, Government Income and Municipal
Income incurred commissions expense of approximately $877 and $500 respectively,
in connection with futures contracts entered into with Goldman Sachs. At April
30, 1997, Goldman Sachs owes approximately $6,400 to Government Income related
to variation margin on futures contracts.
As of May 1, 1997 each Fund's advisory and administration agreements were
combined into a single management agreement encompassing the same services and
fee structure. The investment adviser for Global Income changed from GSAM to
GSAM International.
4. Line of Credit Facility
The Funds participate in a $250,000,000 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
- -------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
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 period ended April 30, 1997, 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
six months ended April 30, 1997, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and agency
obligations $89,868,153 $31,460,469 $ --
- --------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 2,626,912 251,582,253 52,647,833
- --------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 66,314,796 46,245,813 --
- --------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and agency
obligations) 2,926,850 234,275,222 50,202,452
- --------------------------------------------------------------------
</TABLE>
At April 30, 1997, Global Income had outstanding forward foreign currency
exchange contracts, both to purchase and sell foreign currencies as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Value on
Foreign Currency Settlement Current Unrealized
Purchase Contracts Date Value (Loss)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Finnish Markka
Expiring 7/10/97 $ 5,769,651 $ 5,743,713 $ (25,938)
Norwegian Krone
Expiring 7/18/97 6,967,220 6,931,393 (35,827)
- ----------------------------------------------------------------------------
Total Foreign Currency
Purchase Contracts $12,736,871 $12,675,106 $ (61,765)
- ----------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
Expiring 6/16/97 $ 19,731,038 $ 19,370,358 $ 360,680
British Pound Sterling
Expiring 5/15/97 22,990,248 22,842,002 148,246
Deutschemark
Expiring 5/23/97 9,189,539 9,098,874 90,665
Expiring 7/10/97 5,769,651 5,746,603 23,048
French Franc
Expiring 7/22/97 19,223,491 18,986,663 236,828
Italian Lira
Expiring 5/23/97 14,576,014 14,452,635 123,379
Japanese Yen
Expiring 7/24/97 46,975,472 46,670,841 304,631
Spanish Peseta
Expiring 6/11/97 5,856,184 5,819,307 36,877
Swedish Krona
Expiring 6/12/97 10,186,641 9,919,416 267,225
Swiss Franc
Expiring 5/23/97 240,202 240,493 (291)
Expiring 5/23/97 11,211,600 11,103,780 107,820
- ----------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $165,950,080 $164,250,972 $1,699,108
- ----------------------------------------------------------------------------
</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 April 30, 1997, 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 $2,735,490 and $1,125,990 respectively, in the
accompanying Statement of Assets and Liabilities. Included in the "Receivable
and Payable for forward foreign currency exchange contracts" are $1,036,091 and
$1,063,934 respectively, related to forward contracts closed but not settled as
of April 30, 1997.
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the six months ended April 30, 1997 is as follows:
<TABLE>
<CAPTION>
Government Income Global Income Municipal Income
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 2,087,525 $29,588,339 1,091,068 $15,982,653 687,045 $9,922,452
Reinvestment of dividends and
distributions 78,520 1,115,153 240,916 3,522,418 51,831 750,177
Shares repurchased (543,006) (7,702,748) (3,237,001) (47,484,511) (345,221) (4,979,641)
--------------------------------------------------------------------------------------
1,623,039 23,000,744 (1,905,017) (27,979,440) 393,655 5,692,988
--------------------------------------------------------------------------------------
Class B shares
Shares sold 198,153 2,803,924 65,331 958,124 29,061 420,176
Reinvestment of dividends and
distributions 1,579 22,327 715 10,428 420 6,079
Shares repurchased (7,960) (112,331) (8,487) (124,059) (4,392) (63,814)
--------------------------------------------------------------------------------------
191,772 2,713,920 57,559 844,493 25,089 362,441
--------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 182,398 2,673,084 -- --
Reinvestment of dividends and
distributions -- -- 75,139 1,097,674 -- --
Shares repurchased -- -- (122,627) (1,797,735) -- --
--------------------------------------------------------------------------------------
-- -- 134,910 1,973,023 -- --
--------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 6,428 93,874 -- --
Reinvestment of dividends and
distributions -- -- 38 559 -- --
Shares repurchased -- -- -- -- -- --
--------------------------------------------------------------------------------------
-- -- 6,466 94,433 -- --
--------------------------------------------------------------------------------------
Net increase (decrease) 1,814,811 $25,714,664 (1,706,082)$(25,067,491) 418,744 $6,055,429
=====================================================================================-
</TABLE>
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Global Income Municipal Income
- --------------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 607,156 $8,675,868 1,089,521 $15,545,777 431,736 $6,139,212
Reinvestment of dividends and
distributions 112,752 1,611,387 947,846 13,419,614 104,074 1,482,976
Shares repurchased (626,797) (8,971,389) (5,376,065) (76,216,894) (694,685) (9,874,431)
--------------------------------------------------------------------------------------
93,111 1,315,866 (3,338,698) (47,251,503) (158,875) (2,252,243)
--------------------------------------------------------------------------------------
Class B shares
Shares sold 17,470 246,680 18,628 265,053 17,760 250,553
Reinvestment of dividends and
distributions 225 3,200 119 1,708 127 1,802
Shares repurchased (1,378) (19,531) (1,144) (16,373) (109) (1,551)
--------------------------------------------------------------------------------------
16,317 230,349 17,603 250,388 17,778 250,804
--------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 1,703,165 23,936,542 -- --
Reinvestment of dividends and
distributions -- -- 250,603 3,546,724 -- --
Shares repurchased -- -- (406,888) (5,786,481) -- --
--------------------------------------------------------------------------------------
-- -- 1,546,880 21,696,785 -- --
--------------------------------------------------------------------------------------
Net increase (decrease) 109,428 $1,546,215 (1,774,215)$(25,304,330) (141,097) $(2,001,439)
======================================================================================
</TABLE>
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
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 at the Funds' custodian.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSAM, transfer uninvested cash balances into joint accounts, the
daily aggregate balance of which is invested in one or more repurchase
agreements. The underlying securities for the repurchase agreements are U.S.
Treasury and agency obligations. At April 30, 1997, Government Income had an
undivided interest in the repurchase agreement in the following joint account
which equaled $11,100,000 in principal amount. At April 30, the repurchase
agreements held in this joint account, along with the corresponding underlying
securities (including the type of security, market value, interest rate and
maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns & Co., dated 4/30/97, repurchase price
$680,103,889 (GNMA: $59,497,211, 7.50%-9.00%,
12/15/21-12/15/26; FNMA: $267,568,394, 5.50%,
02/01/09-04/01/27; FHLMC: $373,405,594, 5.50%-7.50%,
2/01/98-4/01/27)
$680,000,000 5.50% 5/01/97 $680,000,000
Nomura Securities International, Inc. dated 4/30/97,
repurchase price $300,045,833 (FNMA: $182,812,268,
5.94%-8.01%, 7/22/97-5/11/05; FHLMC: $38,631,543,
6.02%-6.75%, 1/28/00-12/04/01, FCSB: $49,581,430,
6.05%-6.25%, 5/10/99-12/03/99, SLMA: $29,222,430,
6.00%, 1/16/01)
300,000,000 5.50 5/01/97 300,000,000
Credit Suisse First Boston, dated 4/30/97, repurchase
price $52,307,845 (U.S. Treasury Bill: $53,475,803,
2/05/98)
52,300,000 5.40 5/01/97 52,300,000
- --------------------------------------------------------------------
Total Joint Repurchase Agreement Account $1,032,300,000
- --------------------------------------------------------------------
</TABLE>
9. Other
As of April 30, 1997, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 16% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
28
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions/(a)/ transactions operations income transactions
--------------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997-Class A shares $14.36 $0.46 $(0.20) -- $0.26 $(0.45) $(0.07)
1997-Class B shares 14.37 0.40 (0.19) -- 0.21 (0.40) (0.07)
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)
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 Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares $14.53 $0.25 $(0.07) $0.28 $0.46 $(0.40) --
1997-Class B shares 14.53 0.36 (0.02) 0.08 0.42 (0.37) --
1997-Institutional shares 14.52 0.42 (0.02) 0.10 0.50 (0.44) --
1997-Service shares/(i)/ 14.69 0.10 0.02 (0.09) 0.03 (0.13) --
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>
Distributions to shareholders
-----------------------------------------------------------
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 Total
income transactions capital shareholders value period return/(b)/
-----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997-Class A shares -- -- -- $(0.52) $(0.26) $14.10 1.83%/(g)/
1997-Class B shares -- -- -- (0.47) (0.26) 14.11 1.43/(g)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares -- -- -- (0.92) (0.11) 14.36 5.80
1996-Class B shares/(c)/ -- -- -- (0.41) 0.26 14.37 4.85/(g)/
1995-Class A shares -- -- -- (0.94) 1.00 14.47 14.90
1994-Class A shares (0.02) (0.01) -- (1.00) (1.43) 13.47 (2.98)
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares -- -- -- (0.56) 0.58 14.90 8.03/(g)/
GLOBAL INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares -- -- -- $(0.40) $0.06 $14.59 3.22%/(g)/
1997-Class B shares -- -- -- (0.37) 0.05 14.58 2.94/(g)/
1997-Institutional shares -- -- -- (0.44) 0.06 14.58 3.50/(g)/
1997-Service shares/(i)/ -- -- -- (0.13) (0.10) 14.59 0.21/(g)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares -- -- -- (1.43) 0.08 14.53 11.05
1996-Class B shares/(c)/ -- -- -- (0.36) 0.50 14.53 6.24/(g)/
1996-Institutional shares -- -- -- (1.50) 0.07 14.52 11.55
1995-Class A shares -- -- -- (0.94) 1.02 14.45 15.08
1995-Institutional shares/(f)/ -- -- -- (0.26) 0.36 14.45 4.42/(g)/
1994-Class A shares -- -- (0.61) (0.99) (1.64) 13.43 (4.49)
1993-Class A shares -- -- -- (1.12) 0.38 15.07 10.75
1992-Class A shares -- -- -- (1.14) 0.09 14.69 8.77
For the Period August 2, 1991/(d)/through October 31,
- ---------------------------------------------------------------------
1991-Class A shares -- -- -- (0.24) 0.05 14.60 2.00
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Net Ratio of
Ratio of net assets net
net investment at end Ratio of investment
expenses income Portfolio of expenses income
to average to average turnover period to average to average
net assets net assets rate/(h)/ (in 000s) net assets net assets
--------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997-Class A shares 0.50%/(e)/ 6.34%/(e)/ 182.25%/(g)/ $52,946 1.83%/(e)/ 5.01%/(e)/
1997-Class B shares 1.25/(e)/ 5.37/(e)/ 182.25/(g)/ 2,937 2.33/(e)/ 4.29/(e)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 0.50 6.42 485.09 30,603 1.89 5.03
1996-Class B shares/(c)/ 1.25/(e)/ 5.65/(e)/ 485.09 234 2.39/(e)/ 4.51/(e)/
1995-Class A shares 0.47 6.67 449.53 29,503 2.34 4.80
1994-Class A shares 0.11 6.06 654.90 14,452 2.86 3.31
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares 0.00/(e)/ 4.87/(e)/ 725.41/(g)/ 12,860 4.00/(e)/ 0.87/(e)/
GLOBAL INCOME FUND
- ---------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares 1.17%/(e)/ 5.12%/(e)/ 136.72%/(g)/ $171,668 1.60%/(e)/ 4.69%/(e)/
1997-Class B shares 1.71/(e)/ 4.73/(e)/ 136.72/(g)/ 1,095 2.10/(e)/ 4.34/(e)/
1997-Institutional shares 0.65/(e)/ 5.64/(e)/ 136.72/(g)/ 56,431 1.04/(e)/ 5.25/(e)/
1997-Service shares/(i)/ 1.15/(e)/ 5.85/(e)/ 136.72/(g)/ 94 1.54/(e)/ 5.46/(e)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 1.16 5.81 232.15 198,665 1.64 5.33
1996-Class B shares/(c)/ 1.70/(e)/ 5.16/(e)/ 232.15 256 2.14/(e)/ 4.72/(e)/
1996-Institutional shares 0.65 6.35 232.15 54,254 1.11 5.89
1995-Class A shares 1.29 6.23 265.86 245,835 1.58 5.94
1995-Institutional shares/(f)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.28 5.73 343.74 396,584 1.53 5.48
1993-Class A shares 1.30 5.78 313.88 675,662 1.55 5.53
1992-Class A shares 1.37 7.85 270.75 588,893 1.62 7.60
For the Period August 2, 1991/(d)/through October 31,
- -----------------------------------------------------------------
1991-Class A shares 0.38/(g)/ 1.72/(g)/ 34.22/(g)/ 388,744 0.44/(g)/ 1.66/(g)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
29
<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,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions/a/ transactions operations income transactions
---------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares $14.37 $0.34 $0.03 -- $0.37 $(0.34) --
1997-Class B shares 14.37 0.28 0.03 -- 0.31 (0.28) --
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
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 Total
income transactions capital shareholders value period return/(b)/
------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares -- -- -- $(0.34) $0.03 $14.40 2.57%/(g)/
1997-Class B shares -- -- -- (0.28) 0.03 14.40 2.18/(g)/
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares -- -- -- (0.65) 0.20 14.37 6.13
1996-Class B shares/(c)/ -- -- -- (0.27) 0.34 14.37 4.40/(g)/
1995-Class A shares -- -- -- (0.67) 1.09 14.17 13.79
1994-Class A shares -- -- -- (0.78) (1.56) 13.08 (5.51)
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares -- -- -- (0.22) 0.32 14.64 3.73/(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Net Ratio of
Ratio of net assets net
net investment at end Ratio of investment
expenses income Portfolio of expenses income
to average to average turnover period to average to average
net assets net assets rate/(h)/ (in 000s) net assets net assets
------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares 0.85%/(e)/ 4.70%/(e)/ 90.46%/(g)/ $58,033 1.51%/(e)/ 4.04%/(e)/
1997-Class B shares 1.60/(e)/ 3.92/(e)/ 90.46/(g)/ 617 2.01/(e)/ 3.51/(e)/
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares 0.85 4.58 344.13 52,267 1.55 3.88
1996-Class B shares/(c)/ 1.60/(e)/ 3.55/(e)/ 344.13 255 2.05/(e)/ 3.10/(e)/
1995-Class A shares 0.76 4.93 335.55 53,797 1.49 4.20
1994-Class A shares 0.45 5.28 357.54 47,373 1.55 4.18
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares 0.00/(e)/ 5.15/(e)/ 99.99/(g)/ 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.
/(i)/ Service Class shares commenced operations on March 12, 1997.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Semiannual 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
John P. McNulty
Mary P. McPherson
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
FISARRET
The Goldman Sachs
Fixed Income Funds
- --------------------------------------------------------------------------------
Semiannual Report
April 30, 1997
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
- -------------------------------------------------------------------------------
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/1/
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
- ----------
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings indicated do not
necessarily represent ratings which will be given to these securities on the
date of a Fund's fiscal year end.
1-A
<PAGE>
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-1
have a superior capacity for repayment. Notes bearing the designation P-2 have
a strong capacity for repayment.
2-A
<PAGE>
Description of Ratings of State and Municipal
Commercial Paper
---------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an original
maturity in excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
3-A
<PAGE>
AA: Bonds and debt rated AA have a very strong capacity to pay interest
and repay principal and differ from the higher rated issues only in small
degree.
A: Bonds and debt rated A have a very strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB: Bonds and debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB-rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
4-A
<PAGE>
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC-debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A plus sign (+) is added for those issues determined to possess
overwhelming safety characteristics. An SP-2 designation indicates a
satisfactory capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by Standard & Poor's is described as having a strong
degree of safety regarding timely payment.
5-A
<PAGE>
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issued carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable t the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity
for timely payment.
C: This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
FITCH INVESTORS SERVICE, L.P.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories
6-A
<PAGE>
are not significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated F-1+.
A: Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
PLUS (+) AND MINUS (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA, DDD, DD, or D Categories.
7-A
<PAGE>
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
8-A
<PAGE>
DUFF & PHELPS
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
BBB+, BBB, BBB-: Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
9-A
<PAGE>
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
DUFF 3: Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
DUFF 4: Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DUFF 5: Issuer failed to meet scheduled principal and/or interest
payments.
Notes: Bonds which are unrated may expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to
the risks of lower-rated bonds. The Fund is dependent on the
Investment Adviser's judgment, analysis and experience in the
evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
10-A
<PAGE>
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- - Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- - Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
11-A
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of
the interests of the firm and its clients.
INTEGRITY AND HONESTY ARE THE HEART OF OUR BUSINESS. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
.. Privately owned and ranked among Wall Street's best capitalized firms, with
partners' capital of approximately $5.3 billion as of November 29, 1996.
.. Thirty-four offices worldwide where professionals focus on identifying
financial opportunities.
.. The number one underwriter of all international equity issues for 1993,
1994 and 1995.*
.. Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
.. The number one lead manager of U.S. common stock offerings from (1989-
1995).*
* Source: Securities Data Corporation. Ranking excludes REITS, Trusts and
-----------------------------------
Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the
first talking film
1956 Goldman Sachs co-manages Ford's public offering, the
largest to date
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
3-B
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial Statements
Included in the Prospectus:
Financial Highlights for the GS Adjustable Rate Government Fund, GS
Short Duration Government Fund, GS Short Duration Tax-Free Fund, GS
Core Fixed Income Fund and Goldman Sachs Global Income Fund for the
period ended April 30, 1997 (unaudited);
Financial Highlights for the GS Adjustable Rate Government Fund,
Goldman Sachs Municipal Income Fund, Goldman Sachs Government Income
Fund and Goldman Sachs Global Income Fund for the period ended April
30, 1997 (unaudited);
Incorporated by Reference into the Additional Statement:
Report of Independent Public Accountants.
Statement of Investments for the GS Adjustable Rate Government Fund, GS
Short Duration Government Fund, GS Short Duration Tax-Free Fund, GS Core
Fixed Income Fund and Goldman Sachs Global Income Fund as of April 30, 1997
(unaudited).
Statement of Investments for the GS Adjustable Rate Government Fund,
Goldman Sachs Municipal Income Fund, Goldman Sachs Government Income Fund
and Goldman Sachs Global Income Fund as of April 30, 1997 (unaudited).
Statement of Assets and Liabilities for the GS Adjustable Rate Government
Fund, GS Short Duration Government Fund, GS Short Duration Tax-Free Fund,
GS Core Fixed Income Fund and Goldman Sachs Global Income Fund as of April
30, 1997 (unaudited).
Statement of Assets and Liabilities for the GS Adjustable Rate Government
Fund, Goldman Sachs Municipal Income Fund, Goldman Sachs Government Income
Fund and Goldman Sachs Global Income Fund as of April 30, 1997 (unaudited).
Statement of Operations for the GS Adjustable Rate Government Fund, GS
Short Duration Government Fund, GS Short
<PAGE>
Duration Tax-Free Fund, GS Core Fixed Income Fund and Goldman Sachs Global
Income Fund for the fiscal year ended April 30, 1997 (unaudited).
Statement of Operations for the GS Adjustable Rate Government Fund, Goldman
Sachs Municipal Income Fund, Goldman Sachs Government Income Fund and
Goldman Sachs Global Income Fund for the fiscal year ended April 30, 1997
(unaudited).
Statement of Changes in Net Assets for the GS Adjustable Rate Government
Fund, GS Short Duration Government Fund, GS Short Duration Tax-Free Fund,
GS Core Fixed Income Fund and Goldman Sachs Global Income Fund for the
fiscal year ended April 30, 1997 (unaudited).
Statement of Changes in Net Assets for the GS Adjustable Rate Government
Fund, Goldman Sachs Municipal Income Fund, Goldman Sachs Government Income
Fund and Goldman Sachs Global Income Fund for the fiscal year ended April
30, 1997 (unaudited).
Financial Highlights for the GS Adjustable Rate Government Fund, GS Short
Duration Government Fund, GS Short Duration Tax-Free Fund, GS Core Fixed
Income Fund and Goldman Sachs Global Income Fund for the period ended April
30, 1997 (unaudited).
Financial Highlights for the GS Adjustable Rate Government Fund, Goldman
Sachs Municipal Income Fund, Goldman Sachs Government Income Fund and
Goldman Sachs Global Income Fund for the period ended April 30, 1997
(unaudited).
Notes to Financial Statements.
(b) Exhibits
The following exhibits are incorporated herein by reference to Registrant's
Registration Statement on form N-1A as initially filed (Reference A), to Pre-
Effective Amendment No. 1 to such Registration Statement (Reference B), or to
Post-Effective Amendment No. 1 to such Registration Statement (Reference C), or
to Post-Effective Amendment No. 2 to such Registration Statement (Reference D),
or to Post-Effective Amendment No. 4 to such Registration Statement (Reference
F), or to Post-Effective Amendment No. 12 to such Registration Statement
(Reference M), or to Post-Effective Amendment No. 16 to such Registration
Statement (Reference Q) or to Post-Effective Amendment No. 17 to such
Registration Statement (Reference R), or to Post-Effective Amendment No. 19 to
such Registration Statement
2
<PAGE>
(Reference T), or to Post-Effective Amendment No. 20 to such Registration
Statement (Reference U), or to Post-Effective Amendment No. 21 to such
Registration Statement (Reference V), or to Post-Effective Amendment No. 24 to
such Registration Statement (Reference Y), or to Post-Effective Amendment No. 25
to such Registration Statement (Reference Z), to Post-Effective Amendment No. 26
to such Registration Statement (Accession No. 0000950130-95-002856), to Post-
Effective Amendment No. 27 to such Registration Statement (Accession No.
0000950130-96-004931), to Post-Effective Amendment No. 29 to such Registration
Statement (Accession No.0000950130-97-000573), to Post-Effective Amendment No.
31 to such Registration Statement (Accession No. 0000950130-97-000805), to Post-
Effective Amendment No. 33 to such Registration Statement (Accession No.
0000950130-97-0001867) and to Post-Effective Amendment No. 35 to such
Registration Statement (Accession No. 0000950130-97-002797).
1. Agreement and Declaration of Trust. (Accession No. 0000950130-97-
000573)
1(h). Amendment to Declaration of Trust. (Accession No. 0000950130-97-
002797)
2. By-laws of the Delaware business trust. (Accession No.
0000950130-97-000573)
5(a). Advisory Agreement between Registrant on behalf of GS Short-Term
Government Agency Fund and Goldman, Sachs & Co. (Reference P)
5(b). Advisory Agreement between Registrant on behalf of GS Adjustable
Rate Government Agency Fund and Goldman Sachs Asset Management.
(Reference P)
5(c). Advisory Agreement between Registrant on behalf of GS Short Duration
Tax-Free Fund and Goldman, Sachs & Co. (Reference P)
5(d). Advisory Agreement between Registrant on behalf of GS Core Fixed
Income Fund and Goldman Sachs Asset Management. (Reference T)
5(e). Management Agreements on behalf of Delaware business trust
(Accession No. 0000950130-97-002797)
5(f). Form of Amendment to Schedule A of the Management Agreement to
include Goldman Sachs CORE Small Cap Equity Fund and Goldman
Sachs CORE International Equity Fund. (Accession No. 0000950130-
97-002797)
6(a). Distribution Agreement between Registrant and Goldman, Sachs & Co.
(Reference P)
3
<PAGE>
6(b). Class C Plan of Distribution Pursuant to Rule 12b-1 between
Registrant and Goldman, Sachs & Co. (Accession No. 0000950130-97-
002797)
8(a). Custodian Agreement between Registrant and State Street Bank and Trust
Company. (Reference P)
8(b). Form of Wiring Agreement among State Street Bank and Trust Company,
Goldman, Sachs & Co. and The Northern Trust Company. (Reference
B)
8(c). Fee schedule relating to the Custodian Agreement between Registrant
and State Street Bank and Trust Company. (Reference C)
8(d). Form of Letter Agreement between Registrant and State Street Bank
and Trust pertaining to the latter's designation of Security
Pacific National Bank as its sub-custodian and certain other
matters. (Reference C)
8(g). Form of Amendment dated August, 1989 to the Wiring Agreement among
State Street Bank and Trust Company, Goldman, Sachs & Co. and The
Northern Trust Company relating to the indemnification of The
Northern Trust Company. (Reference D)
9(a). Transfer Agency Agreement between Registrant and
Goldman, Sachs & Co. (Reference P)
9(b). Fee schedule relating to the Transfer Agency Agreement between
Registrant and Goldman, Sachs & Co. (Reference B)
10. Opinion of Delaware Counsel (Accession No. 0000950130-97-0001867)
13. Subscription Agreement with Goldman, Sachs & Co. (Reference B)
15(a). Distribution Plan pursuant to Rule 12b-1 for Goldman Sachs
Municipal Income Fund. (Reference P)
15(c). Distribution Plan pursuant to Rule 12b-1 for Goldman Sachs
Government Income Fund (Reference O)
15(d). Distribution Plan pursuant to Rule 12b-1 for Goldman Sachs Global
Income Fund. (Reference O)
4
<PAGE>
15(f). Distribution Plan Pursuant to Rule 12b-1 for GS Adjustable Rate
Government Agency Fund-Class A Shares. (Reference Y)
15(h). Administration Plan and Service Plan of the Trust. (Reference X)
15(i). Class C Authorized Dealer Service Plan. (Accession No.
0000950130-97-002797)
18. Form of Plan entered into by Registrant pursuant to Rule 18f-3
(Reference Z).
19. Powers of Attorney of Messrs. Bakhru, Ford, Grip, Shuch, Smart,
Springer, Strubel, Mosior, Gilman, Perlowski, Richman, Surloff,
Mmes. MacPherson, Mucker and Taylor (Accession No. 0000950130-97-
000805)
27. Financial Data Schedules (Accession No. 0000950130-97-0001867)
The following exhibits relating to Goldman Sachs Trust are filed herewith
electronically pursuant to EDGAR rules:
11. Consent of Arthur Andersen LLP.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
-------------------------------------------------------------
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
-------------------------------
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
- -------------- --------------
<S> <C>
Treasury Obligations Portfolio
ILA Units 741
ILA Administration Units 72
ILA Service Units 5
Treasury Instruments Portfolio
ILA Units 314
ILA Administration Units 40
ILA Service Units 10
Federal Portfolio
ILA Units 2,420
ILA Administration Units 638
ILA Service Units 104
Government Portfolio
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
- -------------- --------------
<S> <C>
ILA Units 1,323
ILA Administration Units 63
ILA Service Units 10
Prime Obligations Portfolio
ILA Units 775
ILA Class B Units 0
ILA Administration Units 71
ILA Service Units 17
Money Market Portfolio
ILA Units 1,530
ILA Administration Units 935
ILA Service Units 3
Tax-Exempt Diversified Portfolio
ILA Units 2,112
ILA Administration Units 22
ILA Service Units 17
Tax-Exempt California Portfolio
ILA Units 845
ILA Administration Units 2
ILA Service Units 0
Tax-Exempt New York Portfolio
ILA Units 205
ILA Administration Units 66
ILA Service Units 0
Financial Square Treasury Obligations Fund
FST Shares 348
FST Administration Shares 88
FST Service Shares 636
FST Preferred Shares 6
Financial Square Prime Obligations Fund
FST Shares 402
FST Administration Shares 118
FST Service Shares 373
FST Preferred Shares 9
Financial Square Government Fund
FST Shares 216
FST Administration Shares 173
FST Service Shares 84
FST Preferred Shares 6
Financial Square Money Market Fund
FST Shares 450
FST Administration Shares 214
FST Service Shares 134
FST Preferred Shares 15
Financial Square Tax-Free Money Market Fund
FST Shares 228
FST Administration Shares 44
FST Service Shares 73
FST Preferred Shares 3
Financial Square Treasury Instruments Fund
FST Shares 146
FST Administration Shares 2
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
- -------------- --------------
<S> <C>
FST Service Shares 5
FST Preferred Shares 1
Financial Square Federal Fund
FST Shares 156
FST Administration Shares 90
FST Service Shares 109
FST Preferred Shares 1
Financial Square Municipal Money Market Fund
FST Shares 0
FST Administration Shares 0
FST Service Shares 0
FST Preferred Shares 0
Financial Square Money Market Plus Fund
FST Shares 0
FST Administration Shares 0
FST Service Shares 0
FST Preferred Shares 0
GS Short Duration Government Fund
Institutional Shares 346
Administration Shares 29
Service Shares 3
Class A 13
Class B 13
GS Adjustable Rate Government Fund
Institutional Shares 446
Administration Shares 20
Service Shares 2
Class A Shares 369
GS Short Duration Tax-Free Fund
Institutional Shares 136
Administration Shares 5
Service Shares 0
Class A 48
Class B 9
GS Core Fixed Income Fund
Institutional Shares 169
Administration Shares 38
Service Shares 2
Class A 39
Class B 14
Goldman Sachs Global Income Fund
Institutional Shares 35
Service Shares 5
Class A Shares 2,692
Class B Shares 171
Goldman Sachs Government Income Fund
Class A Shares 956
Class B Shares 224
Goldman Sachs Municipal Income Fund
Class A Shares 1,529
Class B Shares 35
Goldman Sachs Capital Growth Fund Shares
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
- -------------- --------------
<S> <C>
Class A 31,994
Class B 1,030
Class C 0
Goldman Sachs CORE U.S. Equity Fund Shares
Class A 13,105
Class B 1,938
Class C 0
Institutional Class 19
Service Class 7
Goldman Sachs Small Cap Equity Fund Shares
Class A 17,447
Class B 1,426
Class C 0
Goldman Sachs International Equity Fund Shares
Class A 25,356
Class B 3,654
Class C 0
Institutional Class 40
Service Class 9
Goldman Sachs Growth and Income Fund Shares
Class A 40,903
Class B 7,931
Class C 0
Institutional Class 17
Service Class 8
Goldman Sachs Asia Growth Fund Shares
Class A 10,718
Class B 581
Class C 0
Institutional Class 11
Service Class 3
Goldman Sachs Balanced Fund Shares
Class A 4,367
Class B 534
Class C 0
Goldman Sachs Mid-Cap Equity Fund
Institutional Shares 25
Service Shares 3
Goldman Sachs CORE Large Cap Growth Fund
Class A 236
Class B 78
Class C 0
Institutional 7
Service 6
Goldman Sachs Emerging Markets Equity Fund
Class A 0
Class B 0
Class C 0
Institutional 0
Service 0
Goldman Sachs CORE Small Cap Equity Fund
Class A 0
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
- -------------- --------------
<S> <C>
Class B 0
Class C 0
Institutional 0
Service 0
Goldman Sachs CORE International Fund
Class A 0
Class B 0
Class C 0
Institutional 0
Service 0
Goldman Sachs Real Estate Securities Fund
Class A 0
Class B 0
Class C 0
Institutional 0
Service 0
</TABLE>
(Information supplied as of June 30, 1997)
ITEM 27. INDEMNIFICATION
---------------
Article III of the Declaration of Trust of Goldman Sachs Trust, the Delaware
business trust, provides for indemnification of the Trustees, offices and agents
of the Trust, subject to certain limitations. The Declaration of Trust was
filed as Exhibit 1(g).
The Management Agreement with each of the Funds (other than the ILA Portfolios)
provides that the applicable Investment Adviser will not be liable for any error
of judgment or mistake of law or for any loss suffered by a Fund, except a loss
resulting from wilful misfeasance, bad faith or gross negligence on the party of
the Investment Adviser or from reckless disregard by the Investment Adviser of
its obligations or duties under the Management Agreement. Section 7 of the
Advisory Agreement with respect to the ILA Portfolios provides that the ILA
Portfolios will indemnify the Adviser against certain liabilities; provided,
however, that such indemnification does not apply to any loss by reason of its
wilful misfeasance, bad faith or gross negligence or the Adviser's reckless
disregard of its obligation under the Advisory Agreement. The Management
Agreements were filed as Exhibit 5(o).
Section XI of the Distribution Agreement and Section 7 of the Transfer Agency
Agreement between the Registrant and Goldman, Sachs & Co. dated July 15, 1991
each provides that the Registrant will indemnify Goldman, Sachs & Co. against
certain liabilities. A copy of such Agreements were filed as Exhibits 6(a) and
17(a), respectively, to the Registrant's Registration Statement.
Mutual fund and Trustees and officers liability policies purchased jointly by
the Registrant, Goldman Sachs Money Market Trust, Goldman Sachs Equity
Portfolios, Inc., Trust for Credit Unions, The Benchmark Funds and The Commerce
Funds and Goldman,
9
<PAGE>
Sachs & Co. insure such persons and their respective trustees, partners,
officers and employees, subject to the policies' coverage limits and exclusions
and varying deductibles, against loss resulting from claims by reason of any
act, error, omission, misstatement, misleading statement, neglect or breach of
duty.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
----------------------------------------------------
The business and other connections of the officers and Managing Directors of
Goldman, Sachs & Co., Goldman Sachs Funds Management, L.P., and Goldman Sachs
Asset Management International are listed on their respective Forms ADV as
currently filed with the Commission (File Nos. 801-16048, 801-37591 and 801-
38157, respectively) the text of which are hereby incorporated by reference.
ITEM 29. PRINCIPAL UNDERWRITERS.
----------------------
(a). Goldman, Sachs & Co. or an affiliate or a division thereof currently
serves as investment adviser and distributor of the units of Trust for Credit
Unions and for shares of Goldman Sachs Trust. Goldman, Sachs & Co., or a
division thereof currently serves as administrator and distributor of the units
or shares of The Benchmark Funds and The Commerce Funds.
(b). Set forth below is certain information pertaining to the Managing
Directors of Goldman, Sachs & Co., the Registrant's principal underwriter, who
are members of Goldman, Sachs & Co.'s Executive Committee. None of the members
of the executive committee holds a position or office with the Registrant.
GOLDMAN SACHS EXECUTIVE COMMITTEE
Name and Principal
Business Address Position
---------------- --------
Jon S. Corzine (1) Chief Executive Officer
Robert J. Hurst (1) Managing Director
Henry M. Paulson, Jr. (1) Chief Operating Officer
John A. Thain (1)(3) Chief Financial Officer
John L. Thornton (3) Managing Director
Roy J. Zuckerberg (2) Managing Director
_______________________
(1) 85 Broad Street, New York, NY 10004
(2) One New York Plaza, New York, NY 10004
(3) Peterborough Court, 133 Fleet Street, London EC4A 2BB, England
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
--------------------------------
10
<PAGE>
The Declaration of Trust, By-laws and minute books of the Registrant are in the
physical possession of Goldman Sachs Asset Management, One New York Plaza, New
York, New York 10004. All other accounts, books and other documents required
to be maintained under Section 31(a) of the Investment Company Act of 1940 and
the Rule promulgated thereunder are in the physical possession of State Street
Bank and Trust Company, P.O. Box 1713, Boston, Massachusetts 02105 except for
certain transfer agency records which are maintained by Goldman, Sachs & Co.,
4900 Sears Tower, Chicago, Illinois 60606.
ITEM 31. MANAGEMENT SERVICES
-------------------
The Custodian Agreement between State Street Bank and Trust Company and
Registrant provides for State Street Bank and Trust Company to act as custodian
and to maintain certain accounting records for Registrant. Remuneration is
based on a minimum fixed dollar charge per annum and the Funds' average daily
net assets (such remuneration being subject to adjustment on the basis of the
amount of the Funds' uninvested cash) and on the number of portfolio
transactions. Such Agreement together with the related letter and other
agreements and amendments pertaining thereto, referred to under Item 24(b) are
hereby incorporated by reference.
ITEM 32. UNDERTAKINGS
------------
(a) The Funds Annual Reports contain performance information and are available
to any recipient of the Prospectuses upon request and without charge by writing
to Goldman, Sachs & Co., 4900 Sears Tower, Chicago, Illinois 60606.
(b) With respects to Goldman Sachs CORE Small Cap Equity Fund, Goldman Sachs
CORE International Fund and Goldman Sachs Real Estate Securities Fund, the
Registrant undertakes to file a post-effective amendment, using financial
statements which need not be certified, within four to six months from the
effective date of the Post-Effective Amendment to the Registration Statement
relating to shares of such Funds.
11
<PAGE>
SIGNATURES
-----------
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, Goldman Sachs Trust, a Delaware business trust (the
"Delaware Trust") has duly caused this Post-Effective Amendment No. 36 to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City and State of New York on the 11th day of July,
1997.
GOLDMAN SACHS TRUST
(A Delaware business trust)
By: /s/ Michael J. Richman
--------------------------
Michael J. Richman
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 36 to the Registration Statement of the Delaware Trust
has been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
*Douglas C. Grip President July 11, 1997
- ---------------------------
Douglas C. Grip
*Scott M. Gilman Principal Accounting July 11, 1997
- --------------------------- Officer And Principal
Scott M. Gilman Financial Officer
*David B. Ford Trustee July 11, 1997
- ---------------------------
David B. Ford
*Mary Patterson McPherson Trustee July 11, 1997
- ---------------------------
Mary Patterson McPherson
*Ashok N. Bakhru Trustee July 11, 1997
- ---------------------------
Ashok N. Bakhru
*Alan A. Shuch Trustee July 11, 1997
- ---------------------------
Alan A. Shuch
*Jackson W. Smart Trustee July 11, 1997
- ---------------------------
Jackson W. Smart, Jr.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
*John P. McNulty Trustee July 11, 1997
- ----------------------
John P. McNulty
<S> <C> <C>
*William H. Springer Trustee July 11, 1997
- ----------------------
William H. Springer
*Richard P. Strubel Trustee July 11, 1997
- ----------------------
Richard P. Strubel
</TABLE>
*By: /s/ Michael J. Richman
_______________________ July 11, 1997
Michael J. Richman,
Attorney-In-Fact
* Pursuant to a power of attorney previously filed.
13
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibits
- --------
11A Consent of Arthur Andersen LLP.
11B Consent of Hale and Dorr LLP.
14
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED INCOME
FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 013
<NAME> GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND-INST. CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 102,639,463
<INVESTMENTS-AT-VALUE> 102,672,119
<RECEIVABLES> 1,245,769
<ASSETS-OTHER> 50,879
<OTHER-ITEMS-ASSETS> 89,184
<TOTAL-ASSETS> 104,057,951
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 207,711
<TOTAL-LIABILITIES> 207,711
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 117,737,007
<SHARES-COMMON-STOCK> 10,231,208
<SHARES-COMMON-PRIOR> 10,168,881
<ACCUMULATED-NII-CURRENT> 599,277
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (14,542,059)
<ACCUM-APPREC-OR-DEPREC> 56,015
<NET-ASSETS> 103,850,240
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,571,901
<OTHER-INCOME> 0
<EXPENSES-NET> (239,713)
<NET-INVESTMENT-INCOME> 3,332,188
<REALIZED-GAINS-CURRENT> (248)
<APPREC-INCREASE-CURRENT> (604,062)
<NET-CHANGE-FROM-OPS> 2,727,878
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,409,055)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,584,839
<NUMBER-OF-SHARES-REDEEMED> (1,756,576)
<SHARES-REINVESTED> 234,064
<NET-CHANGE-IN-ASSETS> 1,832,679
<ACCUMULATED-NII-PRIOR> 770,624
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (14,541,811)
<GROSS-ADVISORY-FEES> 259,279
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 385,432
<AVERAGE-NET-ASSETS> 104,570,913
<PER-SHARE-NAV-BEGIN> 9.83
<PER-SHARE-NII> 0.329
<PER-SHARE-GAIN-APPREC> (0.070)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.329)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.76
<EXPENSE-RATIO> 0.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED INCOME
FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 015
<NAME> GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND-ADMIN. CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 102,639,463
<INVESTMENTS-AT-VALUE> 102,672,119
<RECEIVABLES> 1,245,769
<ASSETS-OTHER> 50,879
<OTHER-ITEMS-ASSETS> 89,184
<TOTAL-ASSETS> 104,057,951
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 207,711
<TOTAL-LIABILITIES> 207,711
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 117,737,007
<SHARES-COMMON-STOCK> 153,792
<SHARES-COMMON-PRIOR> 25,537
<ACCUMULATED-NII-CURRENT> 599,277
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (14,542,059)
<ACCUM-APPREC-OR-DEPREC> 56,015
<NET-ASSETS> 103,850,240
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,571,901
<OTHER-INCOME> 0
<EXPENSES-NET> (239,713)
<NET-INVESTMENT-INCOME> 3,332,188
<REALIZED-GAINS-CURRENT> (248)
<APPREC-INCREASE-CURRENT> (604,062)
<NET-CHANGE-FROM-OPS> 2,727,878
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (29,022)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 136,265
<NUMBER-OF-SHARES-REDEEMED> (10,477)
<SHARES-REINVESTED> 2,467
<NET-CHANGE-IN-ASSETS> 1,832,679
<ACCUMULATED-NII-PRIOR> 770,624
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (14,541,811)
<GROSS-ADVISORY-FEES> 259,279
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 385,432
<AVERAGE-NET-ASSETS> 104,570,913
<PER-SHARE-NAV-BEGIN> 9.85
<PER-SHARE-NII> 0.318
<PER-SHARE-GAIN-APPREC> (0.070)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.318)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.78
<EXPENSE-RATIO> 0.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED INCOME
FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 016
<NAME> GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND-SERVICE CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 102,639,463
<INVESTMENTS-AT-VALUE> 102,672,119
<RECEIVABLES> 1,245,769
<ASSETS-OTHER> 50,879
<OTHER-ITEMS-ASSETS> 89,184
<TOTAL-ASSETS> 104,057,951
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 207,711
<TOTAL-LIABILITIES> 207,711
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 117,737,007
<SHARES-COMMON-STOCK> 258,644
<SHARES-COMMON-PRIOR> 185,492
<ACCUMULATED-NII-CURRENT> 599,277
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (14,542,059)
<ACCUM-APPREC-OR-DEPREC> 56,015
<NET-ASSETS> 103,850,240
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,571,901
<OTHER-INCOME> 0
<EXPENSES-NET> (239,713)
<NET-INVESTMENT-INCOME> 3,332,188
<REALIZED-GAINS-CURRENT> (248)
<APPREC-INCREASE-CURRENT> (604,062)
<NET-CHANGE-FROM-OPS> 2,727,878
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (65,458)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 92,780
<NUMBER-OF-SHARES-REDEEMED> (26,330)
<SHARES-REINVESTED> 6,702
<NET-CHANGE-IN-ASSETS> 1,832,679
<ACCUMULATED-NII-PRIOR> 770,624
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (14,541,811)
<GROSS-ADVISORY-FEES> 259,279
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 385,432
<AVERAGE-NET-ASSETS> 104,570,913
<PER-SHARE-NAV-BEGIN> 9.82
<PER-SHARE-NII> 0.304
<PER-SHARE-GAIN-APPREC> (0.070)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.304)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.75
<EXPENSE-RATIO> 0.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED INCOME
FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> GOLDMAN SACHS GLOBAL INCOME FUND-CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 235,754,262
<INVESTMENTS-AT-VALUE> 232,215,706
<RECEIVABLES> 7,092,012
<ASSETS-OTHER> 3,239
<OTHER-ITEMS-ASSETS> 324,863
<TOTAL-ASSETS> 239,723,575
<PAYABLE-FOR-SECURITIES> 8,691,808
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,743,345
<TOTAL-LIABILITIES> 10,435,153
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 222,342,678
<SHARES-COMMON-STOCK> 11,765,253
<SHARES-COMMON-PRIOR> 13,670,270
<ACCUMULATED-NII-CURRENT> 6,196,133
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,723,804
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,974,193)
<NET-ASSETS> 229,288,422
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,675,570
<OTHER-INCOME> 0
<EXPENSES-NET> (1,281,962)
<NET-INVESTMENT-INCOME> 6,393,608
<REALIZED-GAINS-CURRENT> 7,316,857
<APPREC-INCREASE-CURRENT> (5,628,297)
<NET-CHANGE-FROM-OPS> 8,082,168
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,196,561)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,091,068
<NUMBER-OF-SHARES-REDEEMED> (3,237,001)
<SHARES-REINVESTED> 240,916
<NET-CHANGE-IN-ASSETS> (23,887,023)
<ACCUMULATED-NII-PRIOR> 6,704,225
<ACCUMULATED-GAINS-PRIOR> (4,593,053)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (915,292)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,281,962)
<AVERAGE-NET-ASSETS> 246,160,133
<PER-SHARE-NAV-BEGIN> 14.53
<PER-SHARE-NII> 0.25
<PER-SHARE-GAIN-APPREC> 0.21
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.59
<EXPENSE-RATIO> 1.17
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED INCOME
FUNDS DATED APRIL 30,1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 022
<NAME> GOLDMAN SACHS GLOBAL INCOME FUND-CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 235,754,262
<INVESTMENTS-AT-VALUE> 232,215,706
<RECEIVABLES> 7,092,012
<ASSETS-OTHER> 3,239
<OTHER-ITEMS-ASSETS> 324,863
<TOTAL-ASSETS> 239,723,575
<PAYABLE-FOR-SECURITIES> 8,691,808
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,743,345
<TOTAL-LIABILITIES> 10,435,153
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 222,342,678
<SHARES-COMMON-STOCK> 75,162
<SHARES-COMMON-PRIOR> 17,603
<ACCUMULATED-NII-CURRENT> 6,196,133
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,723,804
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,974,193)
<NET-ASSETS> 229,288,422
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,675,570
<OTHER-INCOME> 0
<EXPENSES-NET> (1,281,962)
<NET-INVESTMENT-INCOME> 6,393,608
<REALIZED-GAINS-CURRENT> 7,316,857
<APPREC-INCREASE-CURRENT> (5,628,297)
<NET-CHANGE-FROM-OPS> 8,082,168
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (15,612)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 65,331
<NUMBER-OF-SHARES-REDEEMED> (8,487)
<SHARES-REINVESTED> 715
<NET-CHANGE-IN-ASSETS> (23,887,023)
<ACCUMULATED-NII-PRIOR> 6,704,225
<ACCUMULATED-GAINS-PRIOR> (4,593,053)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (915,292)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,281,962)
<AVERAGE-NET-ASSETS> 246,160,133
<PER-SHARE-NAV-BEGIN> 14.53
<PER-SHARE-NII> 0.36
<PER-SHARE-GAIN-APPREC> 0.06
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.58
<EXPENSE-RATIO> 1.71
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 023
<NAME> GOLDMAN SACHS GLOBAL INCOME FUND-INST. CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 235,754,262
<INVESTMENTS-AT-VALUE> 232,215,706
<RECEIVABLES> 7,092,012
<ASSETS-OTHER> 3,239
<OTHER-ITEMS-ASSETS> 324,863
<TOTAL-ASSETS> 239,723,575
<PAYABLE-FOR-SECURITIES> 8,691,808
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,743,345
<TOTAL-LIABILITIES> 10,435,153
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 222,342,678
<SHARES-COMMON-STOCK> 3,870,161
<SHARES-COMMON-PRIOR> 3,735,251
<ACCUMULATED-NII-CURRENT> 6,196,133
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,723,804
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,974,193)
<NET-ASSETS> 229,288,422
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,675,570
<OTHER-INCOME> 0
<EXPENSES-NET> (1,281,962)
<NET-INVESTMENT-INCOME> 6,393,608
<REALIZED-GAINS-CURRENT> 7,316,857
<APPREC-INCREASE-CURRENT> (5,628,297)
<NET-CHANGE-FROM-OPS> 8,082,168
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,688,968)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 182,398
<NUMBER-OF-SHARES-REDEEMED> (122,627)
<SHARES-REINVESTED> 75,139
<NET-CHANGE-IN-ASSETS> (23,887,023)
<ACCUMULATED-NII-PRIOR> 6,704,225
<ACCUMULATED-GAINS-PRIOR> (4,593,053)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (915,292)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,281,962)
<AVERAGE-NET-ASSETS> 246,160,133
<PER-SHARE-NAV-BEGIN> 14.52
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> 0.08
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.58
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 026
<NAME> GOLDMAN SACHS GLOBAL INCOME FUND-SERVICE CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 235,754,262
<INVESTMENTS-AT-VALUE> 232,215,706
<RECEIVABLES> 7,092,012
<ASSETS-OTHER> 3,239
<OTHER-ITEMS-ASSETS> 324,863
<TOTAL-ASSETS> 239,723,575
<PAYABLE-FOR-SECURITIES> 8,691,808
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,743,345
<TOTAL-LIABILITIES> 10,435,153
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 222,342,678
<SHARES-COMMON-STOCK> 6,466
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 6,196,133
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,723,804
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,974,193)
<NET-ASSETS> 229,288,422
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,675,570
<OTHER-INCOME> 0
<EXPENSES-NET> (1,281,962)
<NET-INVESTMENT-INCOME> 6,393,608
<REALIZED-GAINS-CURRENT> 7,316,857
<APPREC-INCREASE-CURRENT> (5,628,297)
<NET-CHANGE-FROM-OPS> 8,082,168
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (559)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,428
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 38
<NET-CHANGE-IN-ASSETS> (23,887,023)
<ACCUMULATED-NII-PRIOR> 6,704,225
<ACCUMULATED-GAINS-PRIOR> (4,593,053)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (915,292)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,281,962)
<AVERAGE-NET-ASSETS> 246,160,133
<PER-SHARE-NAV-BEGIN> 14.69
<PER-SHARE-NII> 0.10
<PER-SHARE-GAIN-APPREC> (0.07)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.59
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND-CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 594,120,929
<INVESTMENTS-AT-VALUE> 596,596,552
<RECEIVABLES> 9,515,503
<ASSETS-OTHER> 64,048
<OTHER-ITEMS-ASSETS> 57,183
<TOTAL-ASSETS> 606,233,286
<PAYABLE-FOR-SECURITIES> 1,331,393
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,024,177
<TOTAL-LIABILITIES> 13,355,570
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 643,684,171
<SHARES-COMMON-STOCK> 3,960,437
<SHARES-COMMON-PRIOR> 1,091,335
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2,943,415)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (49,959,507)
<ACCUM-APPREC-OR-DEPREC> 2,096,467
<NET-ASSETS> 592,877,716
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 19,521,515
<OTHER-INCOME> 0
<EXPENSES-NET> (1,375,611)
<NET-INVESTMENT-INCOME> 18,145,904
<REALIZED-GAINS-CURRENT> (877,337)
<APPREC-INCREASE-CURRENT> 2,714,349
<NET-CHANGE-FROM-OPS> 19,982,916
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (531,120)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,131,161
<NUMBER-OF-SHARES-REDEEMED> (1,320,999)
<SHARES-REINVESTED> 58,940
<NET-CHANGE-IN-ASSETS> (34,791,162)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (3,441,783)
<OVERDIST-NET-GAINS-PRIOR> (49,082,170)
<GROSS-ADVISORY-FEES> 1,196,772
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,591,333
<AVERAGE-NET-ASSETS> 603,344,967
<PER-SHARE-NAV-BEGIN> 9.83
<PER-SHARE-NII> 0.277
<PER-SHARE-GAIN-APPREC> 0.030
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.277)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.86
<EXPENSE-RATIO> 0.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 033
<NAME> GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND-INST. CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 594,120,929
<INVESTMENTS-AT-VALUE> 596,596,552
<RECEIVABLES> 9,515,503
<ASSETS-OTHER> 64,048
<OTHER-ITEMS-ASSETS> 57,183
<TOTAL-ASSETS> 606,233,286
<PAYABLE-FOR-SECURITIES> 1,331,393
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,024,177
<TOTAL-LIABILITIES> 13,355,570
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 643,684,171
<SHARES-COMMON-STOCK> 55,732,381
<SHARES-COMMON-PRIOR> 62,407,407
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2,943,415)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (49,959,507)
<ACCUM-APPREC-OR-DEPREC> 2,096,467
<NET-ASSETS> 592,877,716
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 19,521,515
<OTHER-INCOME> 0
<EXPENSES-NET> (1,375,611)
<NET-INVESTMENT-INCOME> 18,145,904
<REALIZED-GAINS-CURRENT> (877,337)
<APPREC-INCREASE-CURRENT> 2,714,349
<NET-CHANGE-FROM-OPS> 19,982,916
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (16,997,708)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,594,775
<NUMBER-OF-SHARES-REDEEMED> (26,271,346)
<SHARES-REINVESTED> 1,001,545
<NET-CHANGE-IN-ASSETS> (34,791,162)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (3,441,783)
<OVERDIST-NET-GAINS-PRIOR> (49,082,170)
<GROSS-ADVISORY-FEES> 1,196,772
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,591,333
<AVERAGE-NET-ASSETS> 603,344,967
<PER-SHARE-NAV-BEGIN> 9.83
<PER-SHARE-NII> 0.297
<PER-SHARE-GAIN-APPREC> 0.022
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.289)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.86
<EXPENSE-RATIO> 0.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 035
<NAME> GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND-ADMIN. CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 594,120,929
<INVESTMENTS-AT-VALUE> 596,596,552
<RECEIVABLES> 9,515,503
<ASSETS-OTHER> 64,048
<OTHER-ITEMS-ASSETS> 57,183
<TOTAL-ASSETS> 606,233,286
<PAYABLE-FOR-SECURITIES> 1,331,393
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,024,177
<TOTAL-LIABILITIES> 13,355,570
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 643,684,171
<SHARES-COMMON-STOCK> 424,079
<SHARES-COMMON-PRIOR> 385,738
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2,943,415)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (49,959,507)
<ACCUM-APPREC-OR-DEPREC> 2,096,467
<NET-ASSETS> 592,877,716
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 19,521,515
<OTHER-INCOME> 0
<EXPENSES-NET> (1,375,611)
<NET-INVESTMENT-INCOME> 18,145,904
<REALIZED-GAINS-CURRENT> (877,337)
<APPREC-INCREASE-CURRENT> 2,714,349
<NET-CHANGE-FROM-OPS> 19,982,916
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (118,601)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 105,099
<NUMBER-OF-SHARES-REDEEMED> (72,390)
<SHARES-REINVESTED> 5,632
<NET-CHANGE-IN-ASSETS> (34,791,162)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (3,441,783)
<OVERDIST-NET-GAINS-PRIOR> (49,082,170)
<GROSS-ADVISORY-FEES> 1,196,772
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,591,333
<AVERAGE-NET-ASSETS> 603,344,967
<PER-SHARE-NAV-BEGIN> 9.83
<PER-SHARE-NII> 0.284
<PER-SHARE-GAIN-APPREC> 0.022
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.277)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.86
<EXPENSE-RATIO> 0.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 036
<NAME> GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND-SERVICE CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 594,120,929
<INVESTMENTS-AT-VALUE> 596,596,552
<RECEIVABLES> 9,515,503
<ASSETS-OTHER> 64,048
<OTHER-ITEMS-ASSETS> 57,183
<TOTAL-ASSETS> 606,233,286
<PAYABLE-FOR-SECURITIES> 1,331,393
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,024,177
<TOTAL-LIABILITIES> 13,355,570
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 643,684,171
<SHARES-COMMON-STOCK> 2,171
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2,943,415)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (49,959,507)
<ACCUM-APPREC-OR-DEPREC> 2,096,467
<NET-ASSETS> 592,877,716
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 19,521,515
<OTHER-INCOME> 0
<EXPENSES-NET> (1,375,611)
<NET-INVESTMENT-INCOME> 18,145,904
<REALIZED-GAINS-CURRENT> (877,337)
<APPREC-INCREASE-CURRENT> 2,714,349
<NET-CHANGE-FROM-OPS> 19,982,916
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (107)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,161
<NUMBER-OF-SHARES-REDEEMED> (1)
<SHARES-REINVESTED> 11
<NET-CHANGE-IN-ASSETS> (34,791,162)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (3,441,783)
<OVERDIST-NET-GAINS-PRIOR> (49,082,170)
<GROSS-ADVISORY-FEES> 1,196,772
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,591,333
<AVERAGE-NET-ASSETS> 603,344,967
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0.053
<PER-SHARE-GAIN-APPREC> 0.020
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.053)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.86
<EXPENSE-RATIO> 0.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 043
<NAME> GOLDMAN SACHS SHORT DURATION TAX-FREE FUND-INST. CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 39,615,334
<INVESTMENTS-AT-VALUE> 39,692,726
<RECEIVABLES> 699,548
<ASSETS-OTHER> 51,608
<OTHER-ITEMS-ASSETS> 101,969
<TOTAL-ASSETS> 40,545,851
<PAYABLE-FOR-SECURITIES> 2,144,574
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 84,265
<TOTAL-LIABILITIES> 2,228,839
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42,243,143
<SHARES-COMMON-STOCK> 3,738,166
<SHARES-COMMON-PRIOR> 3,494,408
<ACCUMULATED-NII-CURRENT> 90,133
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (4,093,656)
<ACCUM-APPREC-OR-DEPREC> 77,392
<NET-ASSETS> 38,317,012
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 846,820
<OTHER-INCOME> 0
<EXPENSES-NET> (83,688)
<NET-INVESTMENT-INCOME> 763,132
<REALIZED-GAINS-CURRENT> 46,213
<APPREC-INCREASE-CURRENT> (125,032)
<NET-CHANGE-FROM-OPS> 684,313
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (743,379)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,341,295
<NUMBER-OF-SHARES-REDEEMED> (1,159,405)
<SHARES-REINVESTED> 61,868
<NET-CHANGE-IN-ASSETS> 2,760,360
<ACCUMULATED-NII-PRIOR> 90,133
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (4,139,869)
<GROSS-ADVISORY-FEES> 72,141
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 192,610
<AVERAGE-NET-ASSETS> 36,369,525
<PER-SHARE-NAV-BEGIN> 9.96
<PER-SHARE-NII> 0.210
<PER-SHARE-GAIN-APPREC> (0.020)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.210)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.94
<EXPENSE-RATIO> 0.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN IT ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 045
<NAME> GOLDMAN SACHS SHORT DURATION TAX-FREE FUND-ADMIN. CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 39,615,334
<INVESTMENTS-AT-VALUE> 39,692,726
<RECEIVABLES> 699,548
<ASSETS-OTHER> 51,608
<OTHER-ITEMS-ASSETS> 101,969
<TOTAL-ASSETS> 40,545,851
<PAYABLE-FOR-SECURITIES> 2,144,574
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 84,265
<TOTAL-LIABILITIES> 2,228,839
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42,243,143
<SHARES-COMMON-STOCK> 11,363
<SHARES-COMMON-PRIOR> 4,845
<ACCUMULATED-NII-CURRENT> 90,133
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (4,093,656)
<ACCUM-APPREC-OR-DEPREC> 77,392
<NET-ASSETS> 38,317,012
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 846,820
<OTHER-INCOME> 0
<EXPENSES-NET> (83,688)
<NET-INVESTMENT-INCOME> 763,132
<REALIZED-GAINS-CURRENT> 46,213
<APPREC-INCREASE-CURRENT> (125,032)
<NET-CHANGE-FROM-OPS> 684,313
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,285)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,402
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 116
<NET-CHANGE-IN-ASSETS> 2,760,360
<ACCUMULATED-NII-PRIOR> 90,133
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (4,139,869)
<GROSS-ADVISORY-FEES> 72,141
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 192,610
<AVERAGE-NET-ASSETS> 36,369,525
<PER-SHARE-NAV-BEGIN> 9.96
<PER-SHARE-NII> 0.198
<PER-SHARE-GAIN-APPREC> (0.020)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.198)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.94
<EXPENSE-RATIO> 0.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 046
<NAME> GOLDMAN SACHS SHORT DURATION TAX-FREE FUND-SERVICE CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 39,615,334
<INVESTMENTS-AT-VALUE> 39,692,726
<RECEIVABLES> 699,548
<ASSETS-OTHER> 51,608
<OTHER-ITEMS-ASSETS> 101,969
<TOTAL-ASSETS> 40,545,851
<PAYABLE-FOR-SECURITIES> 2,144,574
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 84,265
<TOTAL-LIABILITIES> 2,228,839
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42,243,143
<SHARES-COMMON-STOCK> 105,100
<SHARES-COMMON-PRIOR> 69,696
<ACCUMULATED-NII-CURRENT> 90,133
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (4,093,656)
<ACCUM-APPREC-OR-DEPREC> 77,392
<NET-ASSETS> 38,317,012
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 846,820
<OTHER-INCOME> 0
<EXPENSES-NET> (83,688)
<NET-INVESTMENT-INCOME> 763,132
<REALIZED-GAINS-CURRENT> 46,213
<APPREC-INCREASE-CURRENT> (125,032)
<NET-CHANGE-FROM-OPS> 684,313
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (18,468)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 171,797
<NUMBER-OF-SHARES-REDEEMED> (137,880)
<SHARES-REINVESTED> 1,487
<NET-CHANGE-IN-ASSETS> 2,760,360
<ACCUMULATED-NII-PRIOR> 90,133
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (4,139,869)
<GROSS-ADVISORY-FEES> 72,141
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 192,610
<AVERAGE-NET-ASSETS> 36,369,525
<PER-SHARE-NAV-BEGIN> 9.97
<PER-SHARE-NII> 0.185
<PER-SHARE-GAIN-APPREC> (0.030)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.185)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.94
<EXPENSE-RATIO> 0.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 071
<NAME> GOLDMAN SACHS GOVERNMENT INCOME FUND-CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 64,429,737
<INVESTMENTS-AT-VALUE> 64,142,538
<RECEIVABLES> 2,263,107
<ASSETS-OTHER> 63,375
<OTHER-ITEMS-ASSETS> 108,846
<TOTAL-ASSETS> 66,577,866
<PAYABLE-FOR-SECURITIES> 10,549,108
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 146,182
<TOTAL-LIABILITIES> 10,695,290
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 56,393,312
<SHARES-COMMON-STOCK> 3,754,506
<SHARES-COMMON-PRIOR> 2,131,467
<ACCUMULATED-NII-CURRENT> 53,331
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (287,837)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (276,837)
<NET-ASSETS> 55,882,576
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,346,191
<OTHER-INCOME> 0
<EXPENSES-NET> (102,251)
<NET-INVESTMENT-INCOME> 1,243,940
<REALIZED-GAINS-CURRENT> (82,886)
<APPREC-INCREASE-CURRENT> (427,432)
<NET-CHANGE-FROM-OPS> 733,622
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,217,324)
<DISTRIBUTIONS-OF-GAINS> (157,412)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,087,525
<NUMBER-OF-SHARES-REDEEMED> (543,006)
<SHARES-REINVESTED> 78,520
<NET-CHANGE-IN-ASSETS> 25,045,154
<ACCUMULATED-NII-PRIOR> 53,331
<ACCUMULATED-GAINS-PRIOR> (45,759)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 98,534
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 363,650
<AVERAGE-NET-ASSETS> 39,739,845
<PER-SHARE-NAV-BEGIN> 14.36
<PER-SHARE-NII> 0.46
<PER-SHARE-GAIN-APPREC> (0.20)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.52)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.10
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 072
<NAME> GOLDMAN SACHS GOVERNMENT INCOME FUND-CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 64,429,737
<INVESTMENTS-AT-VALUE> 64,142,538
<RECEIVABLES> 2,263,107
<ASSETS-OTHER> 63,375
<OTHER-ITEMS-ASSETS> 108,846
<TOTAL-ASSETS> 66,577,866
<PAYABLE-FOR-SECURITIES> 10,549,108
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 146,182
<TOTAL-LIABILITIES> 10,695,290
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 56,393,312
<SHARES-COMMON-STOCK> 208,089
<SHARES-COMMON-PRIOR> 16,317
<ACCUMULATED-NII-CURRENT> 53,331
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (287,837)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (276,837)
<NET-ASSETS> 55,882,576
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,346,191
<OTHER-INCOME> 0
<EXPENSES-NET> (102,251)
<NET-INVESTMENT-INCOME> 1,243,940
<REALIZED-GAINS-CURRENT> (82,886)
<APPREC-INCREASE-CURRENT> (427,432)
<NET-CHANGE-FROM-OPS> 733,622
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (26,616)
<DISTRIBUTIONS-OF-GAINS> (1,780)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 198,153
<NUMBER-OF-SHARES-REDEEMED> (7,960)
<SHARES-REINVESTED> 1,579
<NET-CHANGE-IN-ASSETS> 25,045,154
<ACCUMULATED-NII-PRIOR> 53,331
<ACCUMULATED-GAINS-PRIOR> (45,759)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 98,534
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 363,650
<AVERAGE-NET-ASSETS> 39,739,845
<PER-SHARE-NAV-BEGIN> 14.37
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> (0.19)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.47)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.11
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 081
<NAME> GOLDMAN SACHS MUNICIPAL INCOME FUND-CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 58,381,930
<INVESTMENTS-AT-VALUE> 58,964,362
<RECEIVABLES> 1,103,694
<ASSETS-OTHER> 9,208
<OTHER-ITEMS-ASSETS> 111,796
<TOTAL-ASSETS> 60,189,060
<PAYABLE-FOR-SECURITIES> 1,387,075
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 152,100
<TOTAL-LIABILITIES> 1,539,175
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58,551,259
<SHARES-COMMON-STOCK> 4,031,092
<SHARES-COMMON-PRIOR> 3,637,437
<ACCUMULATED-NII-CURRENT> 60,331
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (544,137)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 582,432
<NET-ASSETS> 58,649,885
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,514,540
<OTHER-INCOME> 0
<EXPENSES-NET> (233,460)
<NET-INVESTMENT-INCOME> 1,281,080
<REALIZED-GAINS-CURRENT> 480,753
<APPREC-INCREASE-CURRENT> (408,697)
<NET-CHANGE-FROM-OPS> 1,353,136
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,272,366)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 687,045
<NUMBER-OF-SHARES-REDEEMED> (345,221)
<SHARES-REINVESTED> 51,831
<NET-CHANGE-IN-ASSETS> 6,127,485
<ACCUMULATED-NII-PRIOR> 60,331
<ACCUMULATED-GAINS-PRIOR> (1,024,890)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 109,080
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 412,901
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 14.37
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> 0.03
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.34)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.40
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 082
<NAME> GOLDMAN SACHS MUNICIPAL INCOME FUND-CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 58,381,930
<INVESTMENTS-AT-VALUE> 58,964,362
<RECEIVABLES> 1,103,694
<ASSETS-OTHER> 9,208
<OTHER-ITEMS-ASSETS> 111,796
<TOTAL-ASSETS> 60,189,060
<PAYABLE-FOR-SECURITIES> 1,387,075
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 152,100
<TOTAL-LIABILITIES> 1,539,175
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58,551,259
<SHARES-COMMON-STOCK> 42,867
<SHARES-COMMON-PRIOR> 17,778
<ACCUMULATED-NII-CURRENT> 60,331
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (544,137)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 582,432
<NET-ASSETS> 58,649,885
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,514,540
<OTHER-INCOME> 0
<EXPENSES-NET> (233,460)
<NET-INVESTMENT-INCOME> 1,281,080
<REALIZED-GAINS-CURRENT> 480,753
<APPREC-INCREASE-CURRENT> (408,697)
<NET-CHANGE-FROM-OPS> 1,353,136
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,714)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 29,061
<NUMBER-OF-SHARES-REDEEMED> (4,392)
<SHARES-REINVESTED> 420
<NET-CHANGE-IN-ASSETS> 6,127,485
<ACCUMULATED-NII-PRIOR> 60,331
<ACCUMULATED-GAINS-PRIOR> (1,024,890)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 109,080
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 412,901
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 14.37
<PER-SHARE-NII> 0.28
<PER-SHARE-GAIN-APPREC> 0.03
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.28)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.40
<EXPENSE-RATIO> 1.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 093
<NAME> GOLDMAN SACHS CORE FIXED INCOME FUND-INSTIT. CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 94,385,195
<INVESTMENTS-AT-VALUE> 94,178,465
<RECEIVABLES> 2,478,647
<ASSETS-OTHER> 29,277
<OTHER-ITEMS-ASSETS> 136,195
<TOTAL-ASSETS> 96,822,584
<PAYABLE-FOR-SECURITIES> 15,935,315
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 102,479
<TOTAL-LIABILITIES> 16,037,794
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 81,193,439
<SHARES-COMMON-STOCK> 7,565,340
<SHARES-COMMON-PRIOR> 7,312,322
<ACCUMULATED-NII-CURRENT> 36,949
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (299,442)
<ACCUM-APPREC-OR-DEPREC> (146,156)
<NET-ASSETS> 80,784,790
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,713,928
<OTHER-INCOME> 0
<EXPENSES-NET> (178,569)
<NET-INVESTMENT-INCOME> 2,535,359
<REALIZED-GAINS-CURRENT> (58,810)
<APPREC-INCREASE-CURRENT> (1,075,767)
<NET-CHANGE-FROM-OPS> 1,400,782
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,380,508)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 212,032
<NUMBER-OF-SHARES-REDEEMED> (186,679)
<SHARES-REINVESTED> 227,665
<NET-CHANGE-IN-ASSETS> 7,640,371
<ACCUMULATED-NII-PRIOR> 33,551
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (240,632)
<GROSS-ADVISORY-FEES> 152,651
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 298,503
<AVERAGE-NET-ASSETS> 76,958,264
<PER-SHARE-NAV-BEGIN> 9.85
<PER-SHARE-NII> 0.324
<PER-SHARE-GAIN-APPREC> (0.141)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.323)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.71
<EXPENSE-RATIO> 0.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 095
<NAME> GOLDMAN SACHS CORE FIXED INCOME FUND-ADMINISTRATION CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 94,385,195
<INVESTMENTS-AT-VALUE> 94,178,465
<RECEIVABLES> 2,478,647
<ASSETS-OTHER> 29,277
<OTHER-ITEMS-ASSETS> 136,195
<TOTAL-ASSETS> 96,822,584
<PAYABLE-FOR-SECURITIES> 15,935,315
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 102,479
<TOTAL-LIABILITIES> 16,037,794
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 81,193,439
<SHARES-COMMON-STOCK> 638,323
<SHARES-COMMON-PRIOR> 71,240
<ACCUMULATED-NII-CURRENT> 36,949
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (299,442)
<ACCUM-APPREC-OR-DEPREC> (146,156)
<NET-ASSETS> 80,784,790
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,713,928
<OTHER-INCOME> 0
<EXPENSES-NET> (178,569)
<NET-INVESTMENT-INCOME> 2,535,359
<REALIZED-GAINS-CURRENT> (58,810)
<APPREC-INCREASE-CURRENT> (1,075,767)
<NET-CHANGE-FROM-OPS> 1,400,782
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (127,789)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 579,102
<NUMBER-OF-SHARES-REDEEMED> (17,694)
<SHARES-REINVESTED> 5,675
<NET-CHANGE-IN-ASSETS> 7,640,371
<ACCUMULATED-NII-PRIOR> 33,551
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (240,632)
<GROSS-ADVISORY-FEES> 152,651
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 298,503
<AVERAGE-NET-ASSETS> 76,958,264
<PER-SHARE-NAV-BEGIN> 9.84
<PER-SHARE-NII> 0.311
<PER-SHARE-GAIN-APPREC> (0.140)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.311)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.70
<EXPENSE-RATIO> 0.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GOLDMAN SACHS TRUST'S SEMI-ANNUAL REPORT ON BEHALF OF THE FIXED
INCOME FUNDS DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 096
<NAME> GOLDMAN SACHS CORE FIXED INCOME FUND-SERVICE CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 94,385,195
<INVESTMENTS-AT-VALUE> 94,178,465
<RECEIVABLES> 2,478,647
<ASSETS-OTHER> 29,277
<OTHER-ITEMS-ASSETS> 136,195
<TOTAL-ASSETS> 96,822,584
<PAYABLE-FOR-SECURITIES> 15,935,315
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 102,479
<TOTAL-LIABILITIES> 16,037,794
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 81,193,439
<SHARES-COMMON-STOCK> 114,034
<SHARES-COMMON-PRIOR> 38,782
<ACCUMULATED-NII-CURRENT> 36,949
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (299,442)
<ACCUM-APPREC-OR-DEPREC> (146,156)
<NET-ASSETS> 80,784,790
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,713,928
<OTHER-INCOME> 0
<EXPENSES-NET> (178,569)
<NET-INVESTMENT-INCOME> 2,535,359
<REALIZED-GAINS-CURRENT> (58,810)
<APPREC-INCREASE-CURRENT> (1,075,767)
<NET-CHANGE-FROM-OPS> 1,400,782
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (23,664)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 88,974
<NUMBER-OF-SHARES-REDEEMED> (16,145)
<SHARES-REINVESTED> 2,423
<NET-CHANGE-IN-ASSETS> 7,640,371
<ACCUMULATED-NII-PRIOR> 33,551
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (240,632)
<GROSS-ADVISORY-FEES> 152,651
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 298,503
<AVERAGE-NET-ASSETS> 76,958,264
<PER-SHARE-NAV-BEGIN> 9.86
<PER-SHARE-NII> 0.299
<PER-SHARE-GAIN-APPREC> (0.140)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.299)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.72
<EXPENSE-RATIO> 0.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 11
ARTHUR ANDERSEN LLP
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our name (and
to all references to our firm) included in or made a part of Post-Effective
Amendment No. 36 and Amendment No. 38 to Registration Statement File Nos. 33-
17619 and 811-5349, respectively.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
July 11, 1997
<PAGE>
EXHIBIT 99.11(b)
HALE AND DORR LLP
60 State Street
Boston, MA 02109
July 15, 1997
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
Re: Post-Effective Amendment No. 36 to Goldman Sachs Trust's Registration
-------------
Statement on Form N-1A; File Nos. 33-17619; 811-5349
- ----------------------------------------------------
Ladies and Gentlemen:
As counsel to Goldman Sachs Trust (the "Company"), we have reviewed the
above-captioned post-effective amendment to the Company's Registration Statement
on Form N-1A for filing with the Securities and Exchange Commission. We hereby
represent, pursuant to Rule 485(b)(4) under the Securities Act of 1933, as
amended, that said post-effective amendment does not, in our view, contain
disclosures that would make it ineligible to become effective pursuant to
paragraph (b) of said Rule 485.
We hereby consent to your filing this letter with the Securities and
Exchange Commission together with the above-captioned post-effective amendment
to the Company's Registration Statement on Form N-1A. Except as provided in
this paragraph, this letter may not be relied upon by, or filed with, any other
parties or used for any other purpose.
Very truly yours,
Hale and Dorr LLP
