<PAGE>
As filed with the Securities and Exchange Commission on
January 3, 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. 28 ( X )
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 ( X )
Amendment No. 30 ( X )
(Check appropriate box or boxes)
__________
GOLDMAN SACHS TRUST
(Exact name of registrant as specified in charter)
4900 Sears Tower
Chicago, Illinois 60606-6303
(Address of principal executive offices)
Registrant's Telephone Number,
including Area Code 312-993-4400
____________
Michael J. Richman, Esq. Copies to:
Goldman, Sachs & Co. Pamela J. Wilson, Esq.
85 Broad Street - 12th Floor Hale and Dorr
New York, New York 10004 60 State Street
Boston, MA 02109
(Name and address of agent for service)
It is proposed that this filing will become effective (check appropriate box)
<PAGE>
( ) immediately upon filing pursuant to paragraph (b)
( ) on (date) pursuant to paragraph (b)
( ) 60 days after filing pursuant to paragraph (a)(1)
( ) On (date)pursuant to paragraph (a)(1)
(X) 75 days after filing pursuant to paragraph (a)(2)
- ---
( ) On (date) pursuant to paragraph (a)(2) of rule 485.
Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2. On December 20, 1996, Registrant
filed a Rule 24f-2 notice for its fiscal year ended October 31, 1996.
================================================================================
<PAGE>
GOLDMAN SACHS TRUST
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
<TABLE>
<CAPTION>
Part A CAPTION
- ------ -------
<S> <C>
Goldman Sachs High Yield Fund - Institutional Shares
1. Cover Page Cover Page
2. Synopsis Fund Highlights
3. Condensed Financial
Information Not Applicable
4. General Description Cover Page; Fund Highlights;
of Registrant Investment Objective and Policies;
Description of Securities; Risk
Factors; Investment Techniques;
Investment Restrictions; Portfolio
Turnover; Reports to Shareholders;
Shares of the Trust; Additional
Information
5. Management of the Fund Management
6. Capital Stock and Dividends; Shares of Securities
Other the Trust; Taxation; Additional
Information
7. Purchase of Securities Purchase of Institutional Shares;
Being Offered Net Asset Value; Additional
Information
8. Redemption or Redemption of Institutional Shares;
Repurchase Additional Information
9. Pending Legal Not Applicable
Proceedings
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Goldman Sachs High Yield Fund - Service Shares
1. Cover Page Cover Page
2. Synopsis Fund Highlights
3. Condensed Financial Not Applicable
Information
4. General Description Cover Page; Fund Highlights;
of Registrant Investment Objective and Policies;
Description of Securities; Risk
Factors; Investment Techniques;
Investment Restrictions; Portfolio;
Turnover; Reports to Shareholders;
Shares of the Trust; Additional
Information
5. Management of the Management
Fund
6. Capital Stock and Dividends; Shares of the Trust;
Other Securities Taxation; Additional Information
7. Purchase of Securities Purchase of Service Shares; Net
Being Offered Asset Value; Additional Information
8. Redemption or Redemption of Service Shares;
Repurchase Additional Information
9. Pending Legal Not Applicable
Proceedings
Goldman Sachs High Yield Fund - Class A Shares and Class B Shares
1. Cover Page Cover Page
2. Synopsis Summary
3. Condensed Financial Not Applicable
Information
4. General Description Cover Page; Summary; Investment
of Registrant Objective and Policies; Municipal
Securities and Other Investments;
Other Investments and Practices;
Reports to Shareholders; Shares of
the Trust; Additional Information
</TABLE>
<PAGE>
5. Management of the Investment Adviser; Management
Fund
6. Capital Stock and Dividends; Taxation; Share of
Other Securities the Trust; Additional Information
7. Purchase of Securities Purchase of Shares; Net Asset
Being Offered Value; Additional Information
8. Redemption or Redemption of Shares;
Repurchase Additional Information
9. Pending Legal Not Applicable
Proceedings
Part B
Goldman Sachs High Yield Fund - Institutional Shares
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Not Applicable
and History
13. Investment Objectives Investment Objective and Policies;
and Policies Investment Restrictions
14. Management of the Management
Fund
15. Control Persons and Shares of the Trust
Principal Holders of
Securities
16. Investment Advisory Management
and Other Practices
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
<PAGE>
22. Calculation of Performance Information
Performance Data
23. Financial Statements Not Applicable
Goldman Sachs High Yield Fund - Service Shares
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Not Applicable
and History
13. Investment Objectives Investment Objective and Policies;
and Policies Investment Restrictions
14. Management of the Management
Fund
15. Control Persons and Shares of the Trust
Principal Holders of
Securities
16. Investment Advisory Management
and Other Practices
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; Service Plan
22. Calculation of Performance Information
Performance Data
23. Financial Statements Not Applicable
Goldman Sachs High Yield Fund - Class A Shares and Class B Shares
10. Cover Page Cover Page
11. Table of Contents Table of Contents
<PAGE>
12. General Information Not Applicable
and History
13. Investment Objectives Investment Objective and Policies;
and Policies Investment Restrictions
14. Management of the Management
Fund
15. Control Persons and Shares of the Trust
Principal Holders of
Securities
16. Investment Advisory Management
and Other Practices
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 Not Applicable
Part C
- ------
Information required to be included in Part C is set forth under the appropriate
Item so numbered in Part C to this Registration Statement.
<PAGE>
SUBJECT TO COMPLETION--DATED JANUARY 3, 1997
PROSPECTUS
[ ], 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Goldman Sachs High Yield Fund
-----------------------------
Institutional Shares
_____________________
Goldman Sachs High Yield Fund (the "Fund") seeks a high level of current
income and secondarily, capital growth. The Fund invests primarily in fixed
income securities rated below investment grade.
THE 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. THE FUND IS INTENDED FOR
INVESTORS WHO CAN ACCEPT THE RISKS ASSOCIATED WITH THE FUND'S INVESTMENTS AND
MAY NOT BE SUITABLE FOR ALL INVESTORS. SEE "DESCRIPTION OF SECURITIES."
Goldman Sachs Asset Management (the "Investment Manager"), New York, New
York, a separate operating division of Goldman, Sachs & Co. ("Goldman Sachs"),
serves as the Fund's investment adviser and administrator. Goldman Sachs serves
as the Fund's distributor and transfer agent.
This Prospectus provides information about Goldman Sachs Trust (the
"Trust") and the Fund that a prospective investor should understand before
investing. This Prospectus should be retained for future reference. A
Statement of Additional Information (the "Additional Statement"), dated [ ]
1997, containing further information about the Trust and the Fund which may be
of interest to investors, has been filed with the Securities and Exchange
Commission, 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.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following highlights certain information contained in this Prospectus
and is qualified in its entirety by the more detailed information contained
herein.
WHAT IS THE GOLDMAN SACHS TRUST?
Goldman Sachs Trust is an open-end management investment company that
offers its shares in several investment funds (mutual funds), one of which is
described in this Prospectus. The 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 the Fund's stated investment objective.
WHAT IS THE INVESTMENT OBJECTIVE AND POLICIES OF THE FUND?
The Fund's investment objective and key facts are summarized in the table
below. There can be no assurance that the Fund's objective will be achieved.
For a complete description of the Fund's investment objective and policies, see
"Investment Objective and Policies," "Description of Securities" and "Investment
Techniques."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
GOLDMAN SACHS HIGH YIELD FUND
- ------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT OBJECTIVE A high level of current income and secondarily, capital
growth.
- ------------------------------------------------------------------------------------------
DURATION Target = [Lehman High Yield Bond Index] plus or minus
[2.5] years
Maximum = 7.5 years
- ------------------------------------------------------------------------------------------
APPROXIMATE INTEREST RATE 6-year bond
SENSITIVITY
- ------------------------------------------------------------------------------------------
INVESTMENT SECTOR At least 65% of assets in fixed income securities rated
below investment grade, including U.S. and non-U.S. dollar
corporate debt, foreign government securities, convertible
securities and preferred stock.
- ------------------------------------------------------------------------------------------
CREDIT QUALITY At least 65% = BB/Ba or below.
- ------------------------------------------------------------------------------------------
OTHER INVESTMENTS Mortgage-backed and asset-backed securities, U.S.
Government securities, investment grade corporate fixed
income securities, structured securities, foreign currencies
and repurchase agreements collateralized by U.S.
Government securities.
- ------------------------------------------------------------------------------------------
BENCHMARK [LEHMAN HIGH YIELD BOND INDEX]
- ------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
The Fund's share price will fluctuate with market, economic and foreign
exchange conditions, so that an investment in the Fund may be worth more or less
when redeemed than when purchased. The Fund should not be relied upon as a
complete investment program. There can be no assurance that the Fund's
investment objective will be achieved. See "Risk Factors."
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 less liquidity 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 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.
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.
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 the
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 the 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.
Foreign Risks. Investments in securities of foreign issuers and currencies
involve risks that are different from those associated with investment in
domestic securities. The risks of foreign investments and currencies include
changes in relative currency exchange rates, political and economic
developments, the imposition of exchange controls, confiscation of property and
other governmental restrictions. In addition, the securities markets of foreign
countries are generally less liquid and subject to greater price volatility.
Other. The 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.
3
<PAGE>
WHO MANAGES THE FUND?
Goldman Sachs Asset Management serves as the Investment Manager to the
Fund. As of January 31, 1997, the Investment Manager, together with its
affiliates, acted as investment adviser, administrator or distributor for assets
in excess of $[ ] billion.
WHO DISTRIBUTES THE FUND'S SHARES?
Goldman Sachs acts as distributor of the Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000,000 in Institutional Shares of the
Fund alone or in combination with Institutional Shares (or the corresponding
class) of any other mutual fund sponsored by Goldman Sachs and designated as an
eligible fund for this purpose.
HOW DO I PURCHASE INSTITUTIONAL SHARES?
You may purchase Institutional Shares of the Fund through Goldman Sachs.
Institutional Shares are purchased at the current net asset value without any
sales load. See "Purchase of Institutional Shares."
HOW DO I SELL MY INSTITUTIONAL SHARES?
You may redeem Institutional Shares upon request on any Business Day, as
defined under "Additional Information," at the net asset value next determined
after receipt of such request in proper form. See "Redemption of Institutional
Shares."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
The Fund declares investment income dividends daily and pays those
dividends monthly. The Fund declares and pays capital gains dividends at least
annually. You may receive dividends in additional shares of the same class of
the Fund in which you have invested or you may elect to receive cash, shares of
the same class of other mutual funds sponsored by Goldman Sachs or the
corresponding class of any portfolio of Goldman Sachs Money Market Trust. For
further information concerning dividends, see "Dividends."
4
<PAGE>
FEES AND EXPENSES
(INSTITUTIONAL SHARES)
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed On Purchases................... none
Maximum Sales Charge Imposed on Reinvested Dividends........ none
Redemption Fees............................................. none
Exchange Fees............................................... none
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average daily net assets)
Management Fees............................................. 0.50%
Distribution (Rule 12b-1) Fees.............................. none
Other Expenses (after expense limitation)................... 0.35%*
------
TOTAL FUND OPERATING EXPENSES
(after expense limitation).................................... 0.85%*
======
</TABLE>
EXAMPLE:
1 Year 3 Years
------ -------
You would pay the following expenses on a hypothetical $9 $27
$1,000 investment assuming (i) a 5% annual return and
(ii) redemption at the end of each time period.
______________________________
* Based upon estimated amounts for the current fiscal year. The Investment
Manager has voluntarily agreed to reduce or limit certain "Other Expenses"
of the Fund (excluding management fees, transfer agent fees, taxes,
interest and brokerage fees and litigation, indemnification and other
extraordinary expenses) to the extent such expenses exceed 0.31% of the
Fund's average daily net assets. The Investment Manager has no current
intention of modifying or discontinuing any such limitation but may do so
in the future at its discretion. Without such limitation, "Other Expenses"
and "Total Fund Operating Expenses" attributable to Institutional Shares
are estimated to be 0.60% and 1.10%, respectively.
The information set forth in the foregoing table and hypothetical example
relates only to Institutional Shares of the Fund. The Fund also offers Service,
Class A and Class B Shares which are subject to different fees and expenses
(which affect performance), have different minimum investment requirements and
are entitled to different services. Information regarding any other class of the
Fund may be obtained from your sales representative or from Goldman Sachs by
calling the number on the back cover of this Prospectus.
5
<PAGE>
The purpose of the foregoing table is to assist investors in understanding
the various costs and expenses of the Fund that an investor will bear directly
or indirectly. Since the Fund does not yet have an operating history, the
information on fees and expenses included in the table and the hypothetical
example above are based on estimated fees and expenses for the current fiscal
year and should not be considered as representative of past or future expenses.
Actual fees and expenses may be greater or less than those indicated. Moreover,
while the example assumes a 5% annual return, the Fund's actual performance will
vary and may result in an actual return greater or less than 5%. See
"Management-Investment Manager."
6
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective and principal investment policies are
described below. Other investment practices and management techniques, which
involve certain risks, are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that the Fund's
investment objective will be achieved.
The Investment Manager 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.
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 growth. The Fund is intended
for investors who can accept the risks associated with the Fund's investments in
non-investment grade securities and may not be suitable for all investors.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the [Lehman High Yield
Bond Index], plus or minus [2.5] years (currently ___ 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 Standard & Poor's Ratings Group ("S&P"), Ba or
below by Moody's Investors Service, Inc. ("Moody's"), an equivalent rating by
another rating organization, or if unrated by a rating organization, determined
by the Investment Manager 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 in the securities of foreign issuers,
including securities of issuers located in countries with emerging economies or
securities markets, and may invest up to 25% of its total assets in debt
securities of domestic and foreign issuers 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 will
be 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 Manager 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 know 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.
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;
7
<PAGE>
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
transactions to seek to hedge its exposure to foreign currencies. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities, repurchase agreements and other investment
practices described under "Investment Techniques."
DESCRIPTION OF SECURITIES
CORPORATE DEBT OBLIGATIONS
The Fund 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 Fund may invest in convertible securities, which include corporate
notes and preferred stock but are ordinarily long-term debt obligations of an
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 FUND INVESTS ARE SUBJECT TO
THE SAME RATING CRITERIA AS ITS OTHER INVESTMENTS IN FIXED INCOME SECURITIES.]
FOREIGN INVESTMENTS
Foreign Securities. The Fund may invest in fixed income securities of
foreign issuers, including securities of issuers located in countries with
emerging economies or securities markets. The Fund may also invest up to 25% of
its total assets in fixed income securities of domestic and foreign issuers
which are denominated in currencies other than the U.S. dollar. Investments in
foreign and non-U.S. dollar denominated securities 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 U.S. dollar-denominated securities of
domestic issuers. 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 exchange rate for the currency in which the Fund receives
interest payments declines against the U.S. dollar before such income is
distributed as dividends to shareholders, the Fund may have to sell portfolio
securities to obtain sufficient cash to pay such
8
<PAGE>
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 Fund may invest in an issuer domiciled in one country yet issuing the
security in the currency of another country. The Fund 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
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 Fund 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. Most foreign securities markets may experience substantially less
trading 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 taxes on dividend or interest payments, limitations on
the removal of funds or other assets of the Fund, political or social
instability or diplomatic developments which could affect investments in those
countries.
Emerging Markets. Subject to the Fund's limitation regarding investments
in non-U.S. dollar denominated securities, the Fund may invest in securities of
issuers that are 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 the
Fund's investments in emerging markets.
Foreign Currency Transactions. Because investment in foreign issuers will
usually involve currencies of foreign countries, the value of the assets of the
Fund as measured in U.S. dollars will be affected by changes in foreign currency
exchange rates. The Fund may 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. If the Fund enters into a
forward foreign currency exchange contract to buy foreign currency for any
purpose, the Fund will be required to place and maintain cash or liquid debt
securities in a segregated account with the Fund's custodian in an amount equal
to the value of the Fund's total assets committed to the consummation of the
forward contract. The Fund will incur costs in connection with conversions
between various currencies.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, the 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
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complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by the intervention of U.S. or foreign
governments or central banks, or the failure to intervene, or by currency
controls or political developments in the United States or abroad. To the extent
that a substantial portion of the Fund's total assets, adjusted to reflect the
Fund's net position after giving effect to currency transactions, is denominated
or quoted in the currencies of foreign countries, the Fund will be more
susceptible to the risk of adverse economic and political developments within
those countries.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments authorized for use by the
Fund 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 the Fund of
unrealized profits, transaction costs or the benefits of a currency hedge or
force the Fund to cover its purchase or sale commitments, if any, at the current
market price. The Fund will not enter into forward foreign currency exchange
contracts 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 Manager.
STRUCTURED SECURITIES
The Fund may invest in structured securities. The value of the principal
of and/or interest on such securities is determined by reference to changes in
the value of specific currencies, interest rates, commodities, indices or other
financial indicators (the "Reference") or the relative change in two or more
References. The interest rate or the principal amount payable upon maturity or
redemption may be increased or decreased depending upon changes in the
applicable Reference. The terms of the structured securities may provide that
in certain circumstances no principal is due at maturity and, therefore, may
result in the loss of the Fund's investment. Structured securities may be
positively or negatively indexed, so that appreciation of the Reference may
produce an increase or decrease in the interest rate or value of the security at
maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the value of the Reference.
Consequently, structured securities may entail a greater degree of market risk
than other types of fixed income securities. Structured securities may also be
more volatile, less liquid and more difficult to accurately price than less
complex securities.
ZERO COUPON, DEFERRED INTEREST, CAPITAL APPRECIATION AND PAY-IN-KIND BONDS
The 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. The Fund
may also invest in pay-in-kind securities which are securities that have
interest payable by the delivery of additional securities. The market prices of
zero coupon, deferred interest, capital appreciation and pay-in-kind 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. The Fund's investments in zero coupon, deferred interest, capital
appreciation and pay-in-kind bonds may require it to sell certain of its
portfolio securities to generate sufficient cash to satisfy certain income
distribution requirements. See "Taxation" in the Additional Statement.
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PREFERRED STOCK AND 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.
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. Government securities. Generally, these
securities include U.S. Treasury obligations and obligations issued or
guaranteed by U.S. Government agencies, instrumentalities or sponsored
enterprises 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. The Fund may invest in
mortgage-backed ("Mortgage-Backed Securities"), which 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 the 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 the 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
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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 Fund 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 the 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
the 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 the 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 Fund 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 issued) 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 Fund 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 or 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 Fund does not
intend to purchase residual interests in REMICS.
Stripped Mortgage-Backed Securities. The Fund 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
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mortgage loans experience different than anticipated prepayments of principal,
the Fund may fail to fully recoup its initial investment in these securities.
Although the market for SMBS is increasingly liquid, certain SMBS may not be
readily marketable and will be considered illiquid for purposes of the Fund's
limitation on investments in illiquid securities. The market value of the class
consisting entirely of principal payments generally is unusually volatile in
response to changes in interest rates. The yields on a class of SMBS that
receives all or most of the interest from mortgage 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 Fund may invest in asset-backed securities ("Asset-Backed Securities").
The principal and interest payments on Asset-Backed Securities are
collateralized by pools of assets such as auto loans, credit card receivables,
leases, installment contracts and personal property. Such asset pools are
securitized through the use of special purpose trusts or corporations.
Principal and interest payments may be credit enhanced by a letter of credit, a
pool insurance policy or a senior/subordinated structure.
RISK FACTORS
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 rated
below investment grade 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 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, the Fund's ability to achieve its
investment objectives may depend to a greater extent on the Investment Manager'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
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the issuers of such securities. Investment by the 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 the 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 the Fund's ability to dispose
of particular portfolio investments. A less liquid secondary market also may
make it more difficult for the Fund to obtain precise valuations of the high
yield securities in its portfolio.
Changes in federal and state laws and industry initiatives could adversely
affect the secondary market for non-investment grade fixed income securities and
the financial condition of issuers of these securities. Such legislation may
also significantly depress the value of outstanding non-investment grade fixed
income securities.
Non-investment grade fixed income securities also present risks based on
payment expectations. Such securities frequently contain call or redemption
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 Fund may have to replace the security with a lower yielding security,
resulting in a decreased return for investors. Similarly, if the Fund
experiences unexpected net redemptions of the Fund's shares, it may be forced to
sell its higher rated more liquid securities, resulting in a decline in the
overall credit quality of the Fund's portfolio and increasing the exposure of
the Fund to the risks of non-investment grade fixed income securities.
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
Manager's credit analysis than would be the case with investments in investment-
grade debt obligations. The Investment Manager 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 Manager continually monitors the investments in the 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.
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.
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Default Risk/Credit Risk. Investments in fixed income securities are
subject to the risk that the issuer could default on its obligations and the
Fund could sustain losses on such investments. A default could impact both
interest and principal payments.
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 the 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 the Fund will suffer from the inability to invest in higher
yielding securities. Certain types of U.S. Government, Asset-Backed, corporate,
foreign and Mortgage-Backed 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 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. 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.
Foreign Risks. See "Foreign Securities" for a description of the risks of
investing in foreign securities and currencies.
INVESTMENT TECHNIQUES
Options on Securities and Securities Indices. The 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 Manager 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 Manager to manage future
price fluctuations and the degree of correlation between the options and
securities markets. If the Investment Manager is incorrect in its expectation
of changes in securities prices or determination of the correlation between the
securities indices on which options are written and purchased and the securities
in the Fund's investment portfolio, the investment performance of the Fund will
be less favorable than it would have been in the
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absence of such options transactions. The writing of options could increase the
Fund's portfolio turnover rate and, therefore, associated brokerage commissions
or spreads.
Options on Foreign Currencies. The Fund may, to the extent it invests 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. 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 the 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 the Fund's position, the Fund may forfeit the
entire amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by the Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
Futures Contacts and Options on Futures Contracts. To seek to increase
total return or to hedge against changes in interest rates, security prices, or
currency exchange rates, the Fund may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on any of such futures
contracts. The Fund may also enter into closing purchase and sale transactions
with respect to any such contracts and options. The futures contracts may be
based on various securities (such as U.S. Government securities), foreign
currencies, securities indices and other financial instruments and indices. The
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. The Fund may not purchase or sell futures contracts or purchase or
sell related options to seek to increase total return, except for closing
purchase or sale transactions, if immediately thereafter the sum of the amount
of initial margin deposits and premiums paid on the Fund's outstanding positions
in futures and related options entered into for the purpose of seeking to
increase total return would exceed 5% of the market value of the Fund's net
assets. These transactions involve brokerage costs, require margin deposits
and, in the case of contracts and options obligating the Fund to purchase
securities or currencies, require the Fund to segregate and maintain cash or
liquid securities 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 the 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 the Fund may be exposed
to risk of loss. The loss incurred by the Fund in entering into futures
contracts and in writing call options on futures is potentially unlimited and
may exceed the amount of the premium received. Futures markets are highly
volatile and the use of futures may increase the volatility of the Fund's net
asset value. The profitability of the Fund's transactions in futures to seek to
increase total return depends upon the ability of the Investment Manager to
correctly analyze the futures markets. In addition, because of the low margin
deposits normally required in futures trading, a relatively small price movement
in a futures contract may result in substantial losses to the Fund. Further,
futures contracts and options on futures may be illiquid, and exchanges may
limit fluctuations in futures contract prices during a single day.
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Risks of Derivative Transactions. The Fund's transactions, if any, in
options, futures, options on futures, swap transactions, interest rate caps,
floors and collars, structured securities and currency forward contracts involve
certain risks, including a possible lack of correlation between changes in the
value of hedging instruments and the portfolio assets being hedged, the
potential illiquidity of the markets for derivative instruments, the risks
arising from the margin requirements and related leverage factors associated
with such transactions. The use of these management techniques to seek to
increase total return may be regarded as a speculative practice and involves the
risk of loss if the Investment Manager is incorrect in its expectation of
fluctuations in securities prices, interest rates or currency prices. The
Fund's transactions in certain derivative instruments may be limited by the
requirements of the Code.
When-Issued Securities and Forward Commitments. The Fund may purchase
when-issued securities. When-issued transactions arise when securities are
purchased by the Fund with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous price and yield to the
Fund at the time of entering into the transaction. The Fund may also purchase
securities on a forward commitment basis; that is, make contracts to purchase
securities for a fixed price at a future date beyond the customary 3-day
settlement. The Fund is required to hold and maintain in a segregated account
with the Fund's custodian until 3 days prior to settlement date, cash or liquid
securities in an amount sufficient to meet the purchase price. Alternatively,
the Fund may enter into offsetting contracts for the forward sale of other
securities that it owns. The purchase of securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Although the Fund would
generally purchase securities on a when-issued or forward commitment basis with
the intention of acquiring securities for its portfolio, the Fund may dispose of
when-issued securities or forward commitments prior to settlement if the
Investment Manager deems it appropriate to do so.
Illiquid Securities. The Fund may not invest more than 15% of its net
assets in illiquid investments. The Board of Trustees has adopted guidelines
and delegated to the Investment Manager the daily function of determining and
monitoring the liquidity of portfolio securities. The Board of Trustees,
however, retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for each
determination. The purchase price and subsequent valuation of illiquid
securities normally reflect a discount, which may be significant, from the
market price of comparable securities for which a liquid market exists.
Repurchase Agreements. The Fund may enter into repurchase agreements with
dealers in U.S. Government securities and member banks of the Federal Reserve
System which furnish collateral at least equal in value or market price to the
amount of their repurchase obligation. If the other party or "seller" defaults,
the Fund might suffer a loss to the extent that the proceeds from the sale of
the underlying securities and other collateral held by the Fund in connection
with the related repurchase agreement are less than the repurchase price. In
addition, in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, the Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with delay
and enforcement of the repurchase agreement. The Trustees of the Trust have
reviewed and approved certain counterparties whom they believe to be
creditworthy and have authorized the Fund to enter into repurchase agreements
with such counterparties. In addition, the Fund, together with other registered
investment companies having advisory agreements with the Investment Manager, 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. The Fund may, for temporary defensive purposes,
invest up to 100% of its total assets in (a) U.S. Government securities, (b)
repurchase agreements collateralized by U.S. Government securities and (c)
investment grade rated securities.
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MISCELLANEOUS TECHNIQUES
In addition to the techniques described above, the Fund may, with respect
to no more than 5% of its total assets, engage in the following techniques: (i)
portfolio securities lending, (ii) interest rate, currency and mortgage swaps
and interest rate caps, floors and collars, (iii) yield curve options, (vi)
investments in other investment companies, (vi) custodial receipts and (vi)
inverse floating rate securities. For more information see the Additional
Statement.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions that are described
in detail under "Investment Restrictions" in the Additional Statement. The
fundamental investment restrictions of the Fund can not be changed without
approval of a majority of the outstanding shares of the Fund. The investment
objective and all policies not specifically designated as fundamental are non-
fundamental and may be changed without shareholder approval. If there is a
change in the Fund's investment objective, shareholders should consider whether
the Fund still remains an appropriate investment in light of their then current
financial positions and needs.
PORTFOLIO TURNOVER
The 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 annual
portfolio turnover rate of the Fund will not exceed [200%]. 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 the Fund were sold and replaced within
one year. The Investment Manager will not consider the portfolio turnover rate
a limiting factor in making investment decisions for the Fund consistent with
the Fund's investment objective and portfolio management policies. A high rate
of portfolio turnover results in increased transaction costs to the Fund.
MANAGEMENT
TRUSTEES AND OFFICERS
The Trust's Board of Trustees is responsible for deciding matters of
general policy and reviewing the actions of the Investment Manager, distributor
and transfer agent. The officers of the Trust conduct and supervise the Fund's
daily business operations. The Additional Statement contains information as to
the identity of, and other information about, the Trustees and officers of the
Trust.
INVESTMENT MANAGER
Goldman Sachs Asset Management, One New York Plaza, New York, New York
10004, a separate operating division of Goldman Sachs, serves as the investment
adviser to the Fund. As of January 31, 1997, the Investment Manager and
affiliates acted as investment adviser, administrator or distributor for assets
in excess of $[ ] billion.
Under an Investment Management Agreement with the Fund, the Investment
Manager, subject to the general supervision of the Board of Trustees, provides
day-to-day advice as to the Fund's portfolio transactions. The Investment
Manager also provides personnel for supervisory, administrative, and clerical
functions; oversees the performance of administrative and professional
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services to the Fund by others; provides office facilities; and prepares, but
does not pay for, reports to shareholders, the SEC and other regulatory
authorities. Goldman Sachs has agreed to permit the Trust to use the name
"Goldman Sachs" or a derivative thereof as part of the Fund's name for as long
as the Fund's Investment Management Agreement is in effect.
In performing its investment management services, the Investment Manager,
while remaining ultimately responsible for the management of the Fund, is able
to draw upon the research and expertise of its affiliate offices for portfolio
decisions and management with respect to certain portfolio securities. [INSERT
DESCRIPTION OF PORTFOLIO MANAGER]
It is the responsibility of the Investment Manager to make investment
decisions for the Fund and to place the purchase and sale orders for the Fund's
portfolio transactions in U.S. and foreign securities and currency markets.
Such orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Goldman Sachs or its affiliates.
As compensation for its services rendered and assumption of certain
expenses pursuant to the Investment Management Agreement, the Investment Manager
is entitled to a fee from the Fund, computed daily and payable monthly, at the
annual rate of 0.50% of average daily net assets.
The Investment Manager has voluntarily agreed to reduce or limit certain
"Other Expenses" of the Fund (excluding any applicable fees payable by the Fund
to service organizations, management fees, transfer agent fees, taxes, interest
and brokerage fees and litigation, indemnification and other extraordinary
expenses) to the extent such expenses exceed 0.31% of the Fund's average daily
net assets. Such reductions or limits, if any, are calculated monthly on a
cumulative basis and may be discontinued or modified by the Investment Manager
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 Manager, Goldman Sachs and
its affiliates in the management of, or their interest in, other accounts and
other activities of Goldman Sachs may present conflicts of interest with respect
to the Fund or limit the Fund's investment activities. Goldman Sachs and its
affiliates engage in proprietary trading and advise accounts and funds which
have investment objectives similar to that of the Fund and/or which engage in
and compete for transactions in the same types of securities, currencies and
instruments as the Fund. Goldman Sachs and its affiliates will not have any
obligation to make available any information regarding their proprietary
activities or strategies, or the activities or strategies used for other
accounts managed by them, for the benefit of the management of the Fund, and in
general it is not anticipated that the Investment Manager will have access to
proprietary information for the purpose of managing the Fund. The results of
the Fund's investment activities, therefore, may differ from those of Goldman
Sachs and its affiliates and it is possible that the Fund could sustain losses
during periods in which Goldman Sachs and its affiliates and other accounts and
funds achieve significant profits on their trading for proprietary or other
accounts. From time to time, the Fund's activities may be limited because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. See
"Management-Activities of Goldman Sachs and its Affiliates and Other Accounts
Managed by Goldman Sachs" in the Additional Statement for further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor of the Fund's shares. Goldman Sachs, 4900 Sears Tower,
Chicago, Illinois 60606, also serves as the Fund's transfer agent (the "Transfer
Agent") and as such performs various shareholder servicing
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functions. Shareholders with inquiries regarding the Fund should contact Goldman
Sachs (as Transfer Agent) at the address or the telephone number set forth on
the inside back cover page of this Prospectus. [INSERT DESCRIPTION OF TRANSFER
AGENCY FEE].
DIVIDENDS
The 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.
Over the course of the fiscal year, dividends accrued and paid will constitute
all or substantially all of the Fund's net investment income. From time to time
a portion of such dividends may constitute a return of capital. The Fund also
intends 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. 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 Fund's net investment income is determined on a daily basis. On days
on which net asset value is calculated, such determination is made immediately
prior to the calculation of the 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 from net investment income will be made on the last
calendar day of each month in additional shares of the 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. 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 the Fund, a portion of
the net asset value per share may be represented by realized or unrealized
appreciation of the Fund's portfolio securities. Therefore, subsequent
distributions on such shares from such income or realized appreciation may be
taxable to the investor even if the net asset value of the 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 the Fund is calculated by
the Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time) on each
Business Day (as such term is defined under "Additional Information")
immediately after the determination, if any, of the income to be declared as a
dividend. 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.
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The 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
Trust's Board of 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 the Fund may publish yield, distribution rate and average
annual total return information in advertisements and communications to
shareholders and prospective investors. Average annual total return is
determined by computing the average annual percentage change in value of $1,000
invested at the maximum public offering price for specified periods ending with
the most recent calendar quarter, assuming reinvestment of all dividends and
distributions at net asset value. The total return calculation assumes a
complete redemption of the investment at the end of the relevant period. The
Fund may also from time to time advertise total return on a cumulative, average,
year-by-year or other basis for various specified periods by means of
quotations, charts, graphs or schedules. In addition to the above, the Fund may
from time to time advertise its performance relative to certain performance
rankings and indices.
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.
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.
The Fund's yield, total return and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, 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" below.
The investment results of the Fund will fluctuate over time and any
presentation of investment results for any prior period should not be considered
a representation of what an investment may earn or what the Fund's performance
may be in any future period. In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of its
holdings available to investors upon request.
SHARES OF THE TRUST
The Fund is a series of the Goldman Sachs Trust, which was organized under
the laws of The Commonwealth of Massachusetts on September 24, 1987 as a
Massachusetts business trust under an
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Agreement and Declaration of Trust, as amended (the "Trust Agreement"). Under
the Trust Agreement, the Trustees are authorized to issue an unlimited number of
shares of beneficial interest, $.001 par value per share. The Trustees of the
Trust are responsible for the overall management and supervision of its affairs.
The Trustees of the Trust have authority to create and classify shares of
beneficial interest in separate series, without further action by shareholders.
Additional series may be added in the future. The Trustees have authorization to
classify or reclassify any series or portfolio of shares into one or more
classes. The Fund offers Institutional, Service, Class A and Class B shares.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the 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.
Unless otherwise required by the Investment Company Act of 1940, ordinarily
it will not be necessary for the Trust to hold annual meetings of shareholders.
As a result, shareholders may not consider each year the election of Trustees or
the appointment of independent accountants. Shareholders may remove a Trustee by
the affirmative vote of at least two-thirds of the Trust's outstanding shares
and the Trustees must promptly call a meeting for such purpose when requested to
do so in writing by the record holders of not less than 10% of the outstanding
shares of the Trust. Shareholders may, under certain circumstances, communicate
with other shareholders in connection with requesting a special meeting of
shareholders. The Board of Trustees, however, 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 Fund's shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Fund are reflected in
account statements from the Transfer Agent.
Under Massachusetts law, there exists a remote possibility that
shareholders of a business trust could, under certain circumstances, be held
personally liable as partners for the obligations of such trust. The Trust
Agreement contains provisions intended to limit such liability and to provide
indemnification out of Trust property of any shareholder charged or held
personally liable for obligations or liabilities of the Trust solely by reason
of being or having been a shareholder of the Trust and not because of such
shareholder's acts or omissions or for some other reason. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
It is anticipated that each series of the Trust, including the Fund, will
be reorganized on April 30, 1997, or as soon thereafter as practicable, into
newly established series of a Delaware business trust (the "Delaware Trust").
The above description regarding shares of the Trust applies equally to shares of
the Delaware Trust except that, under Delaware law, shareholders of the Delaware
Trust are not personally liable as partners for the obligations of such Trust.
The Trustees of the Trust will also serve as trustees of the Delaware Trust, the
Investment Manager will also serve as the investment adviser to the Delaware
Trust's series corresponding to the Fund, and such series' investment objective,
policies and restrictions will be identical to those of the Fund. The initial
shareholder of the Fund has approved the reorganization of the Trust into the
Delaware Trust and any and all matters incidental thereto, including the
election of trustees of the Delaware Trust, the approval of an investment
advisory agreement between the Investment Manager and the Delaware Trust on
behalf of such Trust's series corresponding to the Fund, and the ratification of
the selection of the Delaware Trust's independent public accountants. In the
event that the shareholders of the other series of the Trust do
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<PAGE>
not approve the reorganization, the Fund may not be reorganized into the
Delaware Trust. See the Additional Statement for further information.
TAXATION
FEDERAL TAXES
The Fund is treated as a separate entity for tax purposes and intends to
elect to be treated as a regulated investment company and to qualify for such
treatment for each taxable year under Subchapter M of the Code. To qualify as
such, the Fund must satisfy certain requirements relating to the sources of its
income, diversification of its assets and distribution of its income to
shareholders. As a regulated investment company, the Fund will not be subject
to federal income or excise tax on any net investment income and net realized
capital gains that are distributed to its shareholders in accordance with
certain timing requirements of the Code.
Dividends paid by the Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net long-
term capital loss and original issue discount or market discount income will be
taxable to shareholders as ordinary income. Dividends paid by the Fund from the
excess of net long-term capital gain over net short-term capital loss will be
taxable as long-term capital gains regardless of how long the shareholders have
held their shares. These tax consequences will apply regardless of whether
distributions are received in cash or reinvested in shares. Certain
distributions paid by the Fund in January of a given year may be taxable to
shareholders as if received the prior December 31. Shareholders will be
informed annually about the amount and character of distributions received from
the Fund for federal income tax purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution 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 on which a
shareholder may recognize a gain or loss.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications required by the Internal Revenue Service or if they
are otherwise subject to backup withholding. Individuals, corporations and
other shareholders that are not U.S. persons under the Code are subject to
different tax rules and may be subject to nonresident alien withholding at the
rate of 30% (or a lower rate provided by an applicable tax treaty) on amounts
treated as ordinary dividends from the Fund.
The Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. It is not expected that the
Fund will elect to pass such taxes through to its shareholders, who therefore
will generally not take such taxes into account on their own tax returns. The
Fund will generally deduct such taxes in determining the amounts available for
distribution to shareholders.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Fund. A state income (and
possibly local income and/or intangible
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property) tax exemption is generally available to the extent (if any) the Fund's
distributions are derived from interest on (or, in the case of intangibles
taxes, the value of its assets is attributable to) certain U.S. Government
obligations, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. For a further
discussion of certain tax consequences of investing in shares of the Fund, see
"Taxation" in the Additional Statement. Shareholders are urged to consult their
own tax advisers regarding specific questions as to federal, state and local
taxes as well as to any foreign taxes.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of the Fund
means the vote of the lesser of (i) 67% or more of the shares present at a
meeting, if the holders of more than 50% of the outstanding shares of the Fund
are present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
REPORTS TO SHAREHOLDERS
Institutional shareholders will receive an annual report containing audited
financial statements and a semi-annual report. Each Institutional Shareholder
will also be provided with a printed confirmation for each transaction in the
shareholder's account and an individual quarterly statement. A year-to-date
statement for any account will be provided upon request made to Goldman Sachs.
SUB-ACCOUNTING SERVICE
The 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 Fund does
not generally provide sub-accounting services.
PURCHASE OF INSTITUTIONAL SHARES
Institutional Shares may be purchased 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 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 Fund must be settled
within three (3) Business Days of the receipt of a complete purchase order.
Payment of the proceeds of redemption of shares purchased by check may be
delayed for a period of time as described under "Redemption of Institutional
Shares."
Prior to making an initial investment in the Fund, an investor must open an
account with the Fund by furnishing necessary information to the Fund or Goldman
Sachs. An Account Information Form, a copy of which is attached to this
Prospectus, should be used to open such an account. Subsequent purchases may be
made in the manner set forth below.
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PURCHASE PROCEDURES
Purchases of Institutional Shares may be made by placing an order with
Goldman Sachs at 800-621-2550 and either wiring Federal Funds to 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 check (except that a check drawn on a foreign bank will not be accepted)
or Federal Reserve draft payable to "Goldman Sachs Trust - Goldman Sachs High
Yield Fund" and should be directed to Goldman Sachs Trust - Goldman Sachs High
Yield Fund, c/o GSAM Shareholder Services, 4900 Sears Tower, Chicago, IL 60606.
The minimum initial investment is $1,000,000 in Institutional Shares of the
Fund alone or in combination with other assets under the management of the
Investment Manager and its affiliates. Institutional Shares of the Fund are
offered to (a) banks, trust companies or other types of depository institutions
investing for accounts for which they do not have investment discretion,
provided they have entered into an agreement with the Investment Manager
specifying certain operating policies and standards; (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 or broker-dealers,
financial institutions or financial planners, provided that they have entered
into an agreement with the Investment Manager specifying aggregate minimums and
certain operating policies and standards; (g) registered investment advisers
investing for accounts which they receive asset-based fees; (h) accounts over
which the Investment Manager or its advisory affiliates have investment
discretion; and (i) shareholders receiving distributions from a qualified
retirement plan invested in the Goldman Sachs Portfolios and reinvesting such
proceeds in a Goldman Sachs IRA. 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
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 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 Northern.
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 made.
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 Fund reserves the right to redeem the Institutional Shares of any
Institutional Shareholder whose account balance is less than $50 as a result of
earlier redemptions. Such redemptions will not be implemented if the value of
an Institutional Shareholder's account falls below the minimum account balance
solely as a result of market conditions. The Trust will give sixty (60) days'
prior written notice to Institutional Shareholders whose Institutional Shares
are being redeemed to allow them to purchase sufficient additional Institutional
Shares of the Fund to avoid such redemption.
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The Fund and Goldman Sachs each reserves the right to reject or restrict
any specific purchase order (including exchanges) by a particular purchaser (or
group of related purchasers). This may occur, for example, when a purchaser's
pattern of frequent purchases, sales or exchanges of Institutional Shares of the
Fund is evident, or if purchases, sales or exchanges are, or a subsequent abrupt
redemption might be, of a size that would disrupt management of the Fund.
EXCHANGE PRIVILEGE
Institutional Shares of the Fund may be exchanged for (i) Institutional
Shares of any other mutual fund sponsored by Goldman Sachs and designated as an
eligible fund for this purpose and (ii) the corresponding class of any portfolio
of Goldman Sachs Money Market Trust at the net asset value next determined
either by writing to Goldman Sachs, Attention: Goldman Sachs Trust - Goldman
Sachs High Yield Fund, 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 (8:00 a.m. to 4:00 p.m. Chicago
time). A shareholder should obtain and read the prospectus relating to any
other fund and its shares or units and consider its investment objective,
policies and applicable fees before making an exchange. Under the telephone
exchange privilege, Institutional Shares may be exchanged among accounts with
different names, addresses and social security or other taxpayer identification
numbers only if the exchange request is in writing and is received in accordance
with the procedures set forth under "Redemption of Institutional Shares."
In an effort to prevent unauthorized or fraudulent exchanges by telephone,
Goldman Sachs employs reasonable procedures as set forth under "Redemption of
Institutional Shares" to confirm that such instructions are genuine. In times
of drastic economic or market changes the telephone exchange privilege may be
difficult to implement. For federal income tax purposes, an exchange is treated
as a sale of the shares surrendered in the exchange, on which an investor may
realize a gain or loss, followed by a purchase of Institutional Shares or the
corresponding class of any portfolio of Goldman Sachs Money Market Trust
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 the Fund must
satisfy the minimum investment requirements of the fund into which the
Institutional Shares are being exchanged, except that this requirement may be
waived at the discretion of the officers of such fund. Exchanges are available
only in states where exchanges may legally be made. The exchange privilege may
be modified or withdrawn at any time on sixty (60) days' written notice to
Institutional Shareholders and is subject to certain limitations. See "Purchase
of Institutional Shares."
REDEMPTION OF INSTITUTIONAL SHARES
The Fund will redeem its Institutional Shares upon request of an
Institutional Shareholder on any Business Day at the net asset value next
determined after the receipt by the Transfer Agent of such request in proper
form. See "Net Asset Value." If Institutional Shares to be redeemed were
recently purchased by check, the Fund may delay transmittal of redemption
proceeds until such time as it has assured itself that good funds have been
collected for the purchase of such Institutional Shares. This may take up to
fifteen (15) days. Redemption requests may be made by writing to or calling the
Transfer Agent at the address or telephone number set forth on the back 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
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instructions are genuine. Among other things, any redemption request that
requires money to go to an account or address other than that designated on the
Account Information Form must be in writing and signed by an authorized person
designated on the Account Information Form. Any such written request is also
confirmed by telephone with both the requesting party and the designated bank
account to verify instructions. Exchanges among accounts with different names,
addresses and social security or other taxpayer identification numbers must be
in writing and signed by an authorized person designated on the Account
Information Form. Other procedures may be implemented from time to time. If
reasonable procedures are not implemented, the Trust may be liable for any loss
due to unauthorized or fraudulent transactions. In all other cases, neither the
Fund, the Trust nor Goldman Sachs will be responsible for the authenticity of
redemption or exchange instructions received by telephone.
Written requests for redemptions must be signed by each Institutional
Shareholder whose signature has been guaranteed by a bank, a securities broker
or dealer, a credit union having authority to issue signature guarantees, a
savings and loan association, a building and loan association, a cooperative
bank, a federal savings bank or association, a national securities exchange, a
registered securities association or a clearing agency, provided that such
institution satisfies the standards established by the Transfer Agent. If
Goldman Sachs receives a redemption request by 3:00 p.m. Chicago time,
Institutional Shares of the 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 Fund, 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.
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APPENDIX
GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON ACCOUNT INFORMATION FORM
You are required by law to provide the Fund with your correct Taxpayer
Identification Number ("TIN"), regardless of whether you file tax returns.
Failure to do so may subject you to penalties. Failure to provide your correct
TIN and to sign your name in the Certification section of the Account
Information Form could result in withholding of 31% by the Fund for the Federal
backup withholding tax on distributions, redemptions, exchanges and other
payments relating to your account.
Any tax withheld may be credited against taxes owed on your federal income
tax return.
If you do not have a TIN, you should apply for one immediately by
contacting your local office of the Social Security Administration or the
Internal Revenue Service (IRS). Backup withholding could 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 IRAs, 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.
28
<PAGE>
================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Fund Highlights...........................................................
Fees and Expenses.........................................................
Investment Objective and Policies.........................................
Description of Securities.................................................
Risk Factors..............................................................
Investment Techniques.....................................................
Investment Restrictions...................................................
Portfolio Turnover........................................................
Management................................................................
Dividends.................................................................
Net Asset Value...........................................................
Performance Information...................................................
Shares of the Trust.......................................................
Taxation..................................................................
Additional Information....................................................
Reports to Shareholders...................................................
Purchase of Institutional Shares..........................................
Exchange Privilege........................................................
Redemption of Institutional Shares........................................
Appendix..................................................................
Account Application.......................................................
</TABLE>
================================================================================
================================================================================
GOLDMAN SACHS HIGH YIELD
FUND
________
PROSPECTUS
INSTITUTIONAL SHARES
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE (IN U.S.).............800-621-2550
================================================================================
29
<PAGE>
SUBJECT TO COMPLETION-DATED JANUARY 3, 1997
PROSPECTUS
[ ], 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Goldman Sachs High Yield Fund
-----------------------------
Service Shares
_____________________
Goldman Sachs High Yield Fund (the "Fund") seeks a high level of
current income and secondarily, capital growth. The Fund invests primarily in
fixed income securities rated below investment grade.
THE 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. THE FUND IS INTENDED FOR
INVESTORS WHO CAN ACCEPT THE RISKS ASSOCIATED WITH THE FUND'S INVESTMENTS AND
MAY NOT BE SUITABLE FOR ALL INVESTORS. SEE "DESCRIPTION OF SECURITIES."
Goldman Sachs Asset Management (the "Investment Manager"), New York,
New York, a separate operating division of Goldman, Sachs & Co. ("Goldman
Sachs"), serves as the Fund's investment adviser and administrator. Goldman
Sachs serves as the Fund's distributor and transfer agent.
This Prospectus provides information about Goldman Sachs Trust (the
"Trust") and the Fund that a prospective investor should understand before
investing. This Prospectus should be retained for future reference. A
Statement of Additional Information (the "Additional Statement"), dated [ ]
1997, containing further information about the Trust and the Fund which may be
of interest to investors, has been filed with the Securities and Exchange
Commission, is incorporated herein by reference in its entirety, and may be
obtained without charge from institutions ("Service Organizations") that hold,
directly or through an agent, Service Shares for the benefit of their customers
or Goldman Sachs by calling the telephone number, or writing to one of the
addresses, listed on the back cover of this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following highlights certain information contained in this
Prospectus and is qualified in its entirety by the more detailed information
contained herein.
WHAT IS THE GOLDMAN SACHS TRUST?
Goldman Sachs Trust is an open-end management investment company that
offers its shares in several investment funds (mutual funds), one of which is
described in this Prospectus. The 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 the Fund's stated investment objective.
WHAT IS THE INVESTMENT OBJECTIVE AND POLICIES OF THE FUND?
The Fund's investment objective and key facts are summarized in the
table below. There can be no assurance that the Fund's objective will be
achieved. For a complete description of the Fund's investment objective and
policies, see "Investment Objective and Policies," "Description of Securities"
and "Investment Techniques."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
GOLDMAN SACHS HIGH YIELD FUND
- ------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT OBJECTIVE A high level of current income and secondarily, capital
growth.
- ------------------------------------------------------------------------------------------
DURATION Target = [Lehman High Yield Bond Index] plus or minus
[2.5] years
Maximum = 7.5 years
- ------------------------------------------------------------------------------------------
APPROXIMATE INTEREST RATE 6-year bond
SENSITIVITY
- ------------------------------------------------------------------------------------------
INVESTMENT SECTOR At least 65% of assets in fixed income securities rated
below investment grade, including U.S. and non-U.S.
dollar corporate debt, foreign government securities,
convertible securities and preferred stock.
- ------------------------------------------------------------------------------------------
CREDIT QUALITY At least 65% = BB/Ba or below.
- ------------------------------------------------------------------------------------------
OTHER INVESTMENTS Mortgage-backed and asset-backed securities, U.S.
Government securities, investment grade corporate fixed
income securities, structured securities, foreign
currencies and repurchase agreements collateralized by
U.S. Government securities.
- ------------------------------------------------------------------------------------------
BENCHMARK [LEHMAN HIGH YIELD BOND INDEX]
- ------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
The Fund's share price will fluctuate with market, economic and
foreign exchange conditions, so that an investment in the Fund may be worth more
or less when redeemed than when purchased. The Fund should not be relied upon as
a complete investment program. There can be no assurance that the Fund's
investment objective will be achieved. See "Risk Factors."
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 less liquidity
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 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. 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.
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 the
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 the 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.
Foreign Risks. Investments in securities of foreign issuers and
currencies involve risks that are different from those associated with
investment in domestic securities. The risks of foreign investments and
currencies include changes in relative currency exchange rates, political and
economic developments, the imposition of exchange controls, confiscation of
property and other governmental restrictions. In addition, the securities
markets of foreign countries are generally less liquid and subject to greater
price volatility.
Other. The 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.
3
<PAGE>
WHO MANAGES THE FUND?
Goldman Sachs Asset Management serves as the Investment Manager to the
Fund. As of January 31, 1997, the Investment Manager, together with its
affiliates, acted as investment adviser, administrator or distributor for assets
in excess of $[ ] billion.
WHO DISTRIBUTES THE FUND'S SHARES?
Goldman Sachs acts as distributor of the Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
The Fund does not have any minimum purchase or account requirements
with respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares, and may
establish other requirements such as a minimum account balance.
HOW DO I PURCHASE SERVICE SHARES?
It is expected that all purchasers of Service Shares of the Fund will
be Service Organizations or their nominees. Customers of Service Organizations
may invest in Service Shares only through their Service Organizations. Service
Shares of the Fund are purchased by Service Organizations through Goldman Sachs
at the current net asset value without any sales load. See "Purchase of Service
Shares."
ADDITIONAL SERVICES. The Trust, on behalf of the Fund, has adopted a
Service Plan with respect to the Service Shares which authorizes the Fund to
compensate Service Organizations for providing account administration and
shareholder liaison services to their customers who are the beneficial owners of
such Shares. The Trust, on behalf of the Fund, will enter into agreements with
each Service Organization which will provide for compensation to the Service
Organization in an amount up to 0.50% (on an annualized basis) of the average
daily net assets of the Service Shares of the Fund attributable to or held in
the name of the Service Organization for its customers. See "Additional
Services."
HOW DO I SELL MY SERVICE SHARES?
You may redeem Service Shares upon request on any Business Day, as
defined under "Additional Information," at the net asset value next determined
after receipt of such request in proper form. See "Redemption of Service
Shares."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
The Fund declares investment income dividends daily and pays those
dividends monthly. The Fund declares and pays capital gains dividends at least
annually. Recordholders of Service Shares may receive dividends in additional
shares of the same class of the Fund or you may elect to receive cash, shares of
the same class of other mutual funds sponsored by Goldman Sachs or the
corresponding class of any portfolio of Goldman Sachs Money Market Trust. For
further information concerning dividends, see "Dividends."
4
<PAGE>
FEES AND EXPENSES
(SERVICE SHARES)
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed On Purchases............... none
Maximum Sales Charge Imposed on Reinvested Dividends.... none
Redemption Fees......................................... none
Exchange Fees........................................... none
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average daily net assets)
Management Fees......................................... 0.55%
Service Fees**.......................................... 0.50%
Other Expenses (after expense limitation)............... 0.35%*
-----
TOTAL FUND OPERATING EXPENSES
(after expense limitation)................................... 1.35%*
=====
EXAMPLE:
1 Year 3 Years
------ -------
You would pay the following expenses on a hypothetical $14 $43
$1,000 investment assuming (i) a 5% annual return and
(ii) redemption at the end of each time period.
______________________________
* Based upon estimated amounts for the current fiscal year. The
Investment Manager has voluntarily agreed to reduce or limit certain
"Other Expenses" of the Fund (excluding management fees, fees under
service plans, transfer agent fees, taxes, interest and brokerage fees
and litigation, indemnification and other extraordinary expenses) to
the extent such expenses exceed 0.31% of the Fund's average daily net
assets. The Investment Manager has no current intention of modifying
or discontinuing any such limitation but may do so in the future at
its discretion. Without such limitation, "Other Expenses" and "Total
Fund Operating Expenses" attributable to Service Shares are estimated
to be 0.60% and 1.60%, respectively.
** Service Organizations (other than broker-dealers) may charge other
fees to their customers who are beneficial owners of Service Shares in
connection with their customer accounts. See "Additional Services."
Investors should be aware that, due to the service fees, a long-term
shareholder in the Fund may pay over time more than the economic
equivalent of the maximum front end sales charge permitted under the
rules of the National Association of Securities Dealers, Inc.
The information set forth in the foregoing table and hypothetical
example relates only to Service Shares of the Fund. The Fund also offers
Institutional, Class A and Class B Shares which are subject to different fees
and expenses (which affect performance), have different minimum investment
5
<PAGE>
requirements and are entitled to different services. Information regarding any
other class of the Fund may be obtained from your sales representative or from
Goldman Sachs by calling the number on the back cover of this Prospectus.
The purpose of the foregoing table is to assist investors in
understanding the various costs and expenses of the Fund that an investor will
bear directly or indirectly. Since the Fund does not yet have an operating
history, the information on fees and expenses included in the table and the
hypothetical example above are based on estimated fees and expenses for the
current fiscal year and should not be considered as representative of past or
future expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the Fund's
actual performance will vary and may result in an actual return greater or less
than 5%. See "Management-Investment Manager."
6
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective and principal investment policies are
described below. Other investment practices and management techniques, which
involve certain risks, are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that the Fund's
investment objective will be achieved.
The Investment Manager 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.
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 growth. The Fund is
intended for investors who can accept the risks associated with the Fund's
investments in non-investment grade securities and may not be suitable for all
investors.
DURATION. Under normal interest rate conditions, the Fund's duration
is expected to be equal to that of the Fund's benchmark, the [Lehman High Yield
Bond Index], plus or minus [2.5] years (currently ___ 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 Standard & Poor's Ratings Group ("S&P"), Ba
or below by Moody's Investors Service, Inc. ("Moody's"), an equivalent rating by
another rating organization, or if unrated by a rating organization, determined
by the Investment Manager 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 in the securities of foreign issuers,
including securities of issuers located in countries with emerging economies or
securities markets, and may invest up to 25% of its total assets in debt
securities of domestic and foreign issuers 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 will
be 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 Manager 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 know 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.
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;
7
<PAGE>
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
transactions to seek to hedge its exposure to foreign currencies. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities, repurchase agreements and other investment
practices described under "Investment Techniques."
DESCRIPTION OF SECURITIES
CORPORATE DEBT OBLIGATIONS
The Fund 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 Fund may invest in convertible securities, which include corporate
notes and preferred stock but are ordinarily long-term debt obligations of an
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 FUND INVESTS ARE SUBJECT TO
THE SAME RATING CRITERIA AS ITS OTHER INVESTMENTS IN FIXED INCOME SECURITIES.]
FOREIGN INVESTMENTS
Foreign Securities. The Fund may invest in fixed income securities of
foreign issuers, including securities of issuers located in countries with
emerging economies or securities markets. The Fund may also invest up to 25% of
its total assets in fixed income securities of domestic and foreign issuers
which are denominated in currencies other than the U.S. dollar. Investments in
foreign and non-U.S. dollar denominated securities 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 U.S. dollar-denominated securities of
domestic issuers. 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 exchange rate for the currency in which the Fund receives interest payments
declines against the U.S. dollar before such income is distributed as dividends
to shareholders, the Fund may have to sell portfolio securities to obtain
sufficient cash to pay such
8
<PAGE>
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 Fund may invest in an issuer domiciled in one country yet issuing
the security in the currency of another country. The Fund 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
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 Fund 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.
Most foreign securities markets may experience substantially less volume trading
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 taxes on dividend or interest payments, limitations on the removal
of funds or other assets of the Fund, political or social instability or
diplomatic developments which could affect investments in those countries.
Emerging Markets. Subject to the Fund's limitation regarding
investments in non-U.S. dollar denominated securities, the Fund may invest in
securities of issuers that are 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 the Fund's investments in emerging markets.
Foreign Currency Transactions. Because investment in foreign issuers
will usually involve currencies of foreign countries, the value of the assets of
the Fund as measured in U.S. dollars will be affected by changes in foreign
currency exchange rates. The Fund may 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. If the Fund
enters into a forward foreign currency exchange contract to buy foreign currency
for any purpose, the Fund will be required to place and maintain cash or liquid
debt securities in a segregated account with the Fund's custodian in an amount
equal to the value of the Fund's total assets committed to the consummation of
the forward contract. The Fund will incur costs in connection with conversions
between various currencies.
Currency exchange rates may fluctuate significantly over short periods
of time causing, along with other factors, the 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
9
<PAGE>
complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by the intervention of U.S. or foreign
governments or central banks, or the failure to intervene, or by currency
controls or political developments in the United States or abroad. To the extent
that a substantial portion of the Fund's total assets, adjusted to reflect the
Fund's net position after giving effect to currency transactions, is denominated
or quoted in the currencies of foreign countries, the Fund will be more
susceptible to the risk of adverse economic and political developments within
those countries.
The market in forward foreign currency exchange contracts, currency
swaps and other privately negotiated currency instruments authorized for use by
the Fund 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 the Fund of
unrealized profits, transaction costs or the benefits of a currency hedge or
force the Fund to cover its purchase or sale commitments, if any, at the current
market price. The Fund will not enter into forward foreign currency exchange
contracts 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 Manager.
STRUCTURED SECURITIES
The Fund may invest in structured securities. The value of the
principal of and/or interest on such securities is determined by reference to
changes in the value of specific currencies, interest rates, commodities,
indices or other financial indicators (the "Reference") or the relative change
in two or more References. The interest rate or the principal amount payable
upon maturity or redemption may be increased or decreased depending upon changes
in the applicable Reference. The terms of the structured securities may provide
that in certain circumstances no principal is due at maturity and, therefore,
may result in the loss of the Fund's investment. Structured securities may be
positively or negatively indexed, so that appreciation of the Reference may
produce an increase or decrease in the interest rate or value of the security at
maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the value of the Reference.
Consequently, structured securities may entail a greater degree of market risk
than other types of fixed income securities. Structured securities may also be
more volatile, less liquid and more difficult to accurately price than less
complex securities.
ZERO COUPON, DEFERRED INTEREST, CAPITAL APPRECIATION AND PAY-IN-KIND BONDS
The 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. The Fund may also
invest in pay-in-kind securities which are securities that have interest payable
by the delivery of additional securities. The market prices of zero coupon,
deferred interest, capital appreciation and pay-in-kind 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. The Fund's investments
in zero coupon, deferred interest, capital appreciation and pay-in-kind bonds
may require it to sell certain of its portfolio securities to generate
sufficient cash to satisfy certain income distribution requirements. See
"Taxation" in the Additional Statement.
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PREFERRED STOCK AND 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.
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. Government securities. Generally, these
securities include U.S. Treasury obligations and obligations issued or
guaranteed by U.S. Government agencies, instrumentalities or sponsored
enterprises 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. The Fund may invest in
mortgage-backed ("Mortgage-Backed Securities"), which 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 the 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 the 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
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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 Fund 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 the 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 the 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 the 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 Fund 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 issued) 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 Fund 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 or 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 Fund does not
intend to purchase residual interests in REMICS.
Stripped Mortgage-Backed Securities. The Fund 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
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mortgage loans experience different than anticipated prepayments of principal,
the Fund may fail to fully recoup its initial investment in these securities.
Although the market for SMBS is increasingly liquid, certain SMBS may not be
readily marketable and will be considered illiquid for purposes of the Fund's
limitation on investments in illiquid securities. The market value of the class
consisting entirely of principal payments generally is unusually volatile in
response to changes in interest rates. The yields on a class of SMBS that
receives all or most of the interest from mortgage 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 Fund may invest in asset-backed securities ("Asset-Backed
Securities"). The principal and interest payments on Asset-Backed Securities are
collateralized by pools of assets such as auto loans, credit card receivables,
leases, installment contracts and personal property. Such asset pools are
securitized through the use of special purpose trusts or corporations. Principal
and interest payments may be credit enhanced by a letter of credit, a pool
insurance policy or a senior/subordinated structure.
RISK FACTORS
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 rated
below investment grade 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 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, the Fund's ability to achieve its
investment objectives may depend to a greater extent on the Investment Manager'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
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the issuers of such securities. Investment by the 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 the 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 the Fund's ability to dispose
of particular portfolio investments. A less liquid secondary market also may
make it more difficult for the Fund to obtain precise valuations of the high
yield securities in its portfolio.
Changes in federal and state laws and industry initiatives could
adversely affect the secondary market for non-investment grade fixed income
securities and the financial condition of issuers of these securities. Such
legislation may also significantly depress the value of outstanding
non-investment grade fixed income securities.
Non-investment grade fixed income securities also present risks based
on payment expectations. Such securities frequently contain call or redemption
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 Fund may have to replace the security with a lower yielding security,
resulting in a decreased return for investors. Similarly, if the Fund
experiences unexpected net redemptions of the Fund's shares, it may be forced to
sell its higher rated more liquid securities, resulting in a decline in the
overall credit quality of the Fund's portfolio and increasing the exposure of
the Fund to the risks of non-investment grade fixed income securities.
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 Manager's credit analysis than would be the
case with investments in investment-grade debt obligations. The Investment
Manager 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 Manager continually monitors the
investments in the 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.
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.
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Default Risk/Credit Risk. Investments in fixed income securities are
subject to the risk that the issuer could default on its obligations and the
Fund could sustain losses on such investments. A default could impact both
interest and principal payments.
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 the 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 the Fund will suffer from the inability
to invest in higher yielding securities. Certain types of U.S. Government,
Asset-Backed, corporate, foreign and Mortgage-Backed 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 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. 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.
Foreign Risks. See "Foreign Securities" for a description of the
risks of investing in foreign securities and currencies.
INVESTMENT TECHNIQUES
Options on Securities and Securities Indices. The 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 Manager 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 Manager to manage
future price fluctuations and the degree of correlation between the options and
securities markets. If the Investment Manager is incorrect in its expectation of
changes in securities prices or determination of the correlation between the
securities indices on which options are written and purchased and the securities
in the Fund's investment portfolio, the investment performance of the Fund will
be less favorable than it would have been in the
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absence of such options transactions. The writing of options could increase the
Fund's portfolio turnover rate and, therefore, associated brokerage commissions
or spreads.
Options on Foreign Currencies. The Fund may, to the extent it invests 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. 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 the 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 the Fund's position, the Fund may forfeit the
entire amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by the Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
Futures Contacts and Options on Futures Contracts. To seek to increase
total return or to hedge against changes in interest rates, security prices, or
currency exchange rates, the Fund may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on any of such futures
contracts. The Fund may also enter into closing purchase and sale transactions
with respect to any such contracts and options. The futures contracts may be
based on various securities (such as U.S. Government securities), foreign
currencies, securities indices and other financial instruments and indices. The
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. The Fund may not purchase or sell futures contracts or purchase or
sell related options to seek to increase total return, except for closing
purchase or sale transactions, if immediately thereafter the sum of the amount
of initial margin deposits and premiums paid on the Fund's outstanding positions
in futures and related options entered into for the purpose of seeking to
increase total return would exceed 5% of the market value of the Fund's net
assets. These transactions involve brokerage costs, require margin deposits
and, in the case of contracts and options obligating the Fund to purchase
securities or currencies, require the Fund to segregate and maintain cash or
liquid securities 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 the 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 the Fund may be exposed
to risk of loss. The loss incurred by the Fund in entering into futures
contracts and in writing call options on futures is potentially unlimited and
may exceed the amount of the premium received. Futures markets are highly
volatile and the use of futures may increase the volatility of the Fund's net
asset value. The profitability of the Fund's transactions in futures to seek to
increase total return depends upon the ability of the Investment Manager to
correctly analyze the futures markets. In addition, because of the low margin
deposits normally required in futures trading, a relatively small price movement
in a futures contract may result in substantial losses to the Fund. Further,
futures contracts and options on futures may be illiquid, and exchanges may
limit fluctuations in futures contract prices during a single day.
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Risks of Derivative Transactions. The Fund's transactions, if any, in
options, futures, options on futures, swap transactions, interest rate caps,
floors and collars, structured securities and currency forward contracts involve
certain risks, including a possible lack of correlation between changes in the
value of hedging instruments and the portfolio assets being hedged, the
potential illiquidity of the markets for derivative instruments, the risks
arising from the margin requirements and related leverage factors associated
with such transactions. The use of these management techniques to seek to
increase total return may be regarded as a speculative practice and involves the
risk of loss if the Investment Manager is incorrect in its expectation of
fluctuations in securities prices, interest rates or currency prices. The
Fund's transactions in certain derivative instruments may be limited by the
requirements of the Code.
When-Issued Securities and Forward Commitments. The Fund may purchase
when-issued securities. When-issued transactions arise when securities are
purchased by the Fund with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous price and yield to the
Fund at the time of entering into the transaction. The Fund may also purchase
securities on a forward commitment basis; that is, make contracts to purchase
securities for a fixed price at a future date beyond the customary 3-day
settlement. The Fund is required to hold and maintain in a segregated account
with the Fund's custodian until 3 days prior to settlement date, cash or liquid
securities in an amount sufficient to meet the purchase price. Alternatively,
the Fund may enter into offsetting contracts for the forward sale of other
securities that it owns. The purchase of securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Although the Fund would
generally purchase securities on a when-issued or forward commitment basis with
the intention of acquiring securities for its portfolio, the Fund may dispose of
when-issued securities or forward commitments prior to settlement if the
Investment Manager deems it appropriate to do so.
Illiquid Securities. The Fund may not invest more than 15% of its net
assets in illiquid investments. The Board of Trustees has adopted guidelines
and delegated to the Investment Manager the daily function of determining and
monitoring the liquidity of portfolio securities. The Board of Trustees,
however, retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for each
determination. The purchase price and subsequent valuation of illiquid
securities normally reflect a discount, which may be significant, from the
market price of comparable securities for which a liquid market exists.
Repurchase Agreements. The Fund may enter into repurchase agreements with
dealers in U.S. Government securities and member banks of the Federal Reserve
System which furnish collateral at least equal in value or market price to the
amount of their repurchase obligation. If the other party or "seller" defaults,
the Fund might suffer a loss to the extent that the proceeds from the sale of
the underlying securities and other collateral held by the Fund in connection
with the related repurchase agreement are less than the repurchase price. In
addition, in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, the Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with delay
and enforcement of the repurchase agreement. The Trustees of the Trust have
reviewed and approved certain counterparties whom they believe to be
creditworthy and have authorized the Fund to enter into repurchase agreements
with such counterparties. In addition, the Fund, together with other registered
investment companies having advisory agreements with the Investment Manager, 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. The Fund may, for temporary defensive purposes,
invest up to 100% of its total assets in (a) U.S. Government securities, (b)
repurchase agreements collateralized by U.S. Government securities and (c)
investment grade rated securities.
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MISCELLANEOUS TECHNIQUES
In addition to the techniques described above, the Fund may, with respect
to no more than 5% of its total assets, engage in the following techniques: (i)
portfolio securities lending, (ii) interest rate, currency and mortgage swaps
and interest rate caps, floors and collars, (iii) yield curve options, (vi)
investments in other investment companies, (vi) custodial receipts and (vi)
inverse floating rate securities. For more information see the Additional
Statement.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions that are described
in detail under "Investment Restrictions" in the Additional Statement. The
fundamental investment restrictions of the Fund can not be changed without
approval of a majority of the outstanding shares of the Fund. The investment
objective and all policies not specifically designated as fundamental are non-
fundamental and may be changed without shareholder approval. If there is a
change in the Fund's investment objective, shareholders should consider whether
the Fund still remains an appropriate investment in light of their then current
financial positions and needs.
PORTFOLIO TURNOVER
The 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 annual
portfolio turnover rate of the Fund will not exceed [200%]. 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 the Fund were sold and replaced within
one year. The Investment Manager will not consider the portfolio turnover rate
a limiting factor in making investment decisions for the Fund consistent with
the Fund's investment objective and portfolio management policies. A high rate
of portfolio turnover results in increased transaction costs to the Fund.
MANAGEMENT
TRUSTEES AND OFFICERS
The Trust's Board of Trustees is responsible for deciding matters of
general policy and reviewing the actions of the Investment Manager distributor
and transfer agent. The officers of the Trust conduct and supervise the Fund's
daily business operations. The Additional Statement contains information as to
the identity of, and other information about, the Trustees and officers of the
Trust.
INVESTMENT MANAGER
Goldman Sachs Asset Management, One New York Plaza, New York, New York
10004, a separate operating division of Goldman Sachs, serves as the investment
adviser to the Fund. As of January 31, 1997, the Investment Manager and
affiliates acted as investment adviser, administrator or distributor for assets
in excess of $[ ] billion.
Under an Investment Management Agreement with the Fund, the Investment
Manager, subject to the general supervision of the Board of Trustees, provides
day-to-day advice as to the Fund's portfolio transactions. The Investment
Manager also provides personnel for supervisory, administrative, and clerical
functions; oversees the performance of administrative and professional
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services to the Fund by others; provides office facilities; and prepares, but
does not pay for, reports to shareholders, the SEC and other regulatory
authorities. Goldman Sachs has agreed to permit the Trust to use the name
"Goldman Sachs" or a derivative thereof as part of the Fund's name for as long
as the Fund's Investment Management Agreement is in effect.
In performing its investment management services, the Investment Manager,
while remaining ultimately responsible for the management of the Fund, is able
to draw upon the research and expertise of its affiliate offices for portfolio
decisions and management with respect to certain portfolio securities. [INSERT
DESCRIPTION OF PORTFOLIO MANAGER]
It is the responsibility of the Investment Manager to make investment
decisions for the Fund and to place the purchase and sale orders for the Fund's
portfolio transactions in U.S. and foreign securities and currency markets.
Such orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Goldman Sachs or its affiliates.
As compensation for its services rendered and assumption of certain
expenses pursuant to the Investment Management Agreement, the Investment Manager
is entitled to a fee from the Fund, computed daily and payable monthly, at the
annual rate of 0.50% of average daily net assets.
The Investment Manager has voluntarily agreed to reduce or limit certain
"Other Expenses" of the Fund (excluding applicable fees payable by the Fund to
Service Organizations, management fees, transfer agent fees, taxes, interest and
brokerage fees and litigation, indemnification and other extraordinary expenses)
to the extent such expenses exceed 0.31% of the Fund's average daily net assets.
Such reductions or limits, if any, are calculated monthly on a cumulative basis
and may be discontinued or modified by the Investment Manager 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 Manager, Goldman Sachs and
its affiliates in the management of, or their interest in, other accounts and
other activities of Goldman Sachs may present conflicts of interest with respect
to the Fund or limit the Fund's investment activities. Goldman Sachs and its
affiliates engage in proprietary trading and advise accounts and funds which
have investment objectives similar to that of the Fund and/or which engage in
and compete for transactions in the same types of securities, currencies and
instruments as the Fund. Goldman Sachs and its affiliates will not have any
obligation to make available any information regarding their proprietary
activities or strategies, or the activities or strategies used for other
accounts managed by them, for the benefit of the management of the Fund, and in
general it is not anticipated that the Investment Manager will have access to
proprietary information for the purpose of managing the Fund. The results of
the Fund's investment activities, therefore, may differ from those of Goldman
Sachs and its affiliates and it is possible that the Fund could sustain losses
during periods in which Goldman Sachs and its affiliates and other accounts and
funds achieve significant profits on their trading for proprietary or other
accounts. From time to time, the Fund's activities may be limited because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. See
"Management-Activities of Goldman Sachs and its Affiliates and Other Accounts
Managed by Goldman Sachs" in the Additional Statement for further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor of the Fund's shares. Goldman Sachs, 4900 Sears Tower,
Chicago, Illinois 60606, also serves as the Fund's transfer agent (the "Transfer
Agent") and as such performs various shareholder servicing
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<PAGE>
functions. Shareholders with inquiries regarding the Fund should contact Goldman
Sachs (as Transfer Agent) at the address or the telephone number set forth on
the inside back cover page of this Prospectus. [INSERT DESCRIPTION OF TRANSFER
AGENCY FEE].
DIVIDENDS
The 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.
Over the course of the fiscal year, dividends accrued and paid will constitute
all or substantially all of the Fund's net investment income. From time to time
a portion of such dividends may constitute a return of capital. The Fund also
intends 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. 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 Fund's net investment income is determined on a daily basis. On days
on which net asset value is calculated, such determination is made immediately
prior to the calculation of the 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 from net investment income will be made on the last
calendar day of each month in additional shares of the 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. 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 the Fund, a portion of
the net asset value per share may be represented by realized or unrealized
appreciation of the Fund's portfolio securities. Therefore, subsequent
distributions on such shares from such income or realized appreciation may be
taxable to the investor even if the net asset value of the 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 the Fund is calculated by
the Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time) on each
Business Day (as such term is defined under "Additional Information")
immediately after the determination, if any, of the income to be declared as a
dividend. 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.
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<PAGE>
The 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
Trust's Board of 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 the Fund may publish yield, distribution rate and average
annual total return information in advertisements and communications to
shareholders and prospective investors. Average annual total return is
determined by computing the average annual percentage change in value of $1,000
invested at the maximum public offering price for specified periods ending with
the most recent calendar quarter, assuming reinvestment of all dividends and
distributions at net asset value. The total return calculation assumes a
complete redemption of the investment at the end of the relevant period. The
Fund may also from time to time advertise total return on a cumulative, average,
year-by-year or other basis for various specified periods by means of
quotations, charts, graphs or schedules. In addition to the above, the Fund may
from time to time advertise its performance relative to certain performance
rankings and indices.
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.
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.
The Fund's yield, total return and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, 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" below.
The investment results of the Fund will fluctuate over time and any
presentation of investment results for any prior period should not be considered
a representation of what an investment may earn or what the Fund's performance
may be in any future period. In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of its
holdings available to investors upon request.
SHARES OF THE TRUST
The Fund is a series of the Goldman Sachs Trust, which was organized under
the laws of The Commonwealth of Massachusetts on September 24, 1987 as a
Massachusetts business trust under an
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Agreement and Declaration of Trust, as amended (the "Trust Agreement"). Under
the Trust Agreement, the Trustees are authorized to issue an unlimited number of
shares of beneficial interest, $.001 par value per share. The Trustees of the
Trust are responsible for the overall management and supervision of its affairs.
The Trustees of the Trust have authority to create and classify shares of
beneficial interest in separate series, without further action by shareholders.
Additional series may be added in the future. The Trustees have authorization to
classify or reclassify any series or portfolio of shares into one or more
classes. The Fund offers Institutional, Service, Class A and Class B shares.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the 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.
Unless otherwise required by the Investment Company Act of 1940, ordinarily
it will not be necessary for the Trust to hold annual meetings of shareholders.
As a result, shareholders may not consider each year the election of Trustees or
the appointment of independent accountants. Shareholders may remove a Trustee by
the affirmative vote of at least two-thirds of the Trust's outstanding shares
and the Trustees must promptly call a meeting for such purpose when requested to
do so in writing by the record holders of not less than 10% of the outstanding
shares of the Trust. Shareholders may, under certain circumstances, communicate
with other shareholders in connection with requesting a special meeting of
shareholders. The Board of Trustees, however, 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 Fund's shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Fund are reflected in
account statements from the Transfer Agent.
Under Massachusetts law, there exists a remote possibility that
shareholders of a business trust could, under certain circumstances, be held
personally liable as partners for the obligations of such trust. The Trust
Agreement contains provisions intended to limit such liability and to provide
indemnification out of Trust property of any shareholder charged or held
personally liable for obligations or liabilities of the Trust solely by reason
of being or having been a shareholder of the Trust and not because of such
shareholder's acts or omissions or for some other reason. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
It is anticipated that each series of the Trust, including the Fund, will
be reorganized on April 30, 1997, or as soon thereafter as practicable, into
newly established series of a Delaware business trust (the "Delaware Trust").
The above description regarding shares of the Trust applies equally to shares of
the Delaware Trust except that, under Delaware law, shareholders of the Delaware
Trust are not personally liable as partners for the obligations of such Trust.
The Trustees of the Trust will also serve as trustees of the Delaware Trust, the
Investment Manager will also serve as the investment adviser to the Delaware
Trust's series corresponding to the Fund, and such series' investment objective,
policies and restrictions will be identical to those of the Fund. The initial
shareholder of the Fund has approved the reorganization of the Trust into the
Delaware Trust and any and all matters incidental thereto, including the
election of trustees of the Delaware Trust, the approval of an investment
advisory agreement between the Investment Manager and the Delaware Trust on
behalf of such Trust's series corresponding to the Fund, and the ratification of
the selection of the Delaware Trust's independent public accountants. In the
event that the shareholders of the other series of the Trust do
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<PAGE>
not approve the reorganization, the Fund may not be reorganized into the
Delaware Trust. See the Additional Statement for further information.
TAXATION
FEDERAL TAXES
The Fund is treated as a separate entity for tax purposes and intends to
elect to be treated as a regulated investment company and to qualify for such
treatment for each taxable year under Subchapter M of the Code. To qualify as
such, the Fund must satisfy certain requirements relating to the sources of its
income, diversification of its assets and distribution of its income to
shareholders. As a regulated investment company, the Fund will not be subject
to federal income or excise tax on any net investment income and net realized
capital gains that are distributed to its shareholders in accordance with
certain timing requirements of the Code.
Dividends paid by the Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net long-
term capital loss and original issue discount or market discount income will be
taxable to shareholders as ordinary income. Dividends paid by the Fund from the
excess of net long-term capital gain over net short-term capital loss will be
taxable as long-term capital gains regardless of how long the shareholders have
held their shares. These tax consequences will apply regardless of whether
distributions are received in cash or reinvested in shares. Certain
distributions paid by the Fund in January of a given year may be taxable to
shareholders as if received the prior December 31. Shareholders will be
informed annually about the amount and character of distributions received from
the Fund for federal income tax purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution 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 on which a
shareholder may recognize a gain or loss.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications required by the Internal Revenue Service or if they
are otherwise subject to backup withholding. Individuals, corporations and
other shareholders that are not U.S. persons under the Code are subject to
different tax rules and may be subject to nonresident alien withholding at the
rate of 30% (or a lower rate provided by an applicable tax treaty) on amounts
treated as ordinary dividends from the Fund.
The Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. It is not expected that the
Fund will elect to pass such taxes through to its shareholders, who therefore
will generally not take such taxes into account on their own tax returns. The
Fund will generally deduct such taxes in determining the amounts available for
distribution to shareholders.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Fund. A state income (and
possibly local income and/or intangible
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<PAGE>
property) tax exemption is generally available to the extent (if any) the Fund's
distributions are derived from interest on (or, in the case of intangibles
taxes, the value of its assets is attributable to) certain U.S. Government
obligations, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. For a further
discussion of certain tax consequences of investing in shares of the Fund, see
"Taxation" in the Additional Statement. Shareholders are urged to consult their
own tax advisers regarding specific questions as to federal, state and local
taxes as well as to any foreign taxes.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of the Fund
means the vote of the lesser of (i) 67% or more of the shares present at a
meeting, if the holders of more than 50% of the outstanding shares of the Fund
are present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
ADDITIONAL SERVICES
The Trust, on behalf of the Fund, has adopted a Service Plan with respect
to the Service Shares which authorizes the Fund to compensate Service
Organizations for providing account administration and personal and account
maintenance services to their customers who are beneficial owners of such
Shares. The Trust, on behalf of the Fund, enters into agreements with Service
Organizations which purchase Service Shares on behalf of their 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.
Holders of Service Shares of the Fund bear all expenses and fees paid to
Service Organizations for their services with respect to such Shares as well as
any other expenses which are directly attributable to such Shares.
Service Organizations (other than broker-dealers) may charge other fees to
their customers who are the beneficial owners of Service Shares in connection
with their customer accounts. These fees would be in addition to any amounts
received by the Service Organization under a Service Agreement and may affect
the return earned on an investment in the Fund. The Trust, on behalf of the
Fund, 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 Fund will receive an annual report
containing audited financial statements and a semi-annual report. Each
recordholder of Service Shares will also be
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<PAGE>
provided with a printed confirmation for each transaction in its account and a
quarterly account statement. A year-to-date statement for any account will be
provided to a Service Organization upon a 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.
PURCHASE OF SERVICE SHARES
It is expected that all direct purchasers of Service Shares of the Fund
will be Service Organizations or their nominees. Customers of Service
Organizations may invest in Service Shares only through Service Organizations.
Service Shares may be purchased 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 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." Purchase of Service Shares of
the Fund must be settled within three (3) Business Days of the receipt of a
complete purchase order. Payment of the proceeds of redemption of shares
purchased by check may be delayed for a period of time as described under
"Redemption of Service Shares."
The Service Organizations are responsible for the timely transmittal of
purchase orders to Goldman Sachs and payments to State Street. In order to
facilitate timely transmittal, the Service Organizations have established times
by which purchase orders and payments must be received by them.
PURCHASE PROCEDURES
Purchasers 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
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 a check drawn on a
foreign bank will not be accepted) or Federal Reserve draft made payable to
"Goldman Sachs Trust --Goldman Sachs High Yield Fund" and should be directed to
"Goldman Sachs Trust -- Goldman Sachs High Yield Fund," c/o GSAM Shareholder
Services, 4900 Sears Tower, Chicago, IL 60606.
OTHER PURCHASE INFORMATION
The Fund does not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a minimum
amount for initial and subsequent investments in Service Shares, and may
establish other requirements such as a minimum account balance. A Service
Organization may effect redemptions of noncomplying accounts, and may impose a
charge for any special services rendered to its customers. Customers should
contact their Service Organization for information concerning such requirements
and charges.
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 purchase shares on the
25
<PAGE>
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
Northern.
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 Fund reserves 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. The Trust will give sixty (60) days' prior written notice
to Service Organizations whose Service Shares are being redeemed to allow them
to purchase sufficient additional Service Shares to avoid such redemption.
The Fund and Goldman Sachs each reserves the right to reject or restrict
any specific purchase order (including an exchange) by a particular purchaser
(or group of related purchasers). This may occur, for example, when a
purchaser's pattern of frequent purchases, sales or exchanges of Service Shares
of the Fund is evident, or if purchase, sales, or exchanges are, or a subsequent
abrupt redemption might be, of a size that would disrupt management of the Fund.
EXCHANGE PRIVILEGE
Service Shares of the Fund may be exchanged by a Service Organization for
(i) Service Shares of any other mutual fund sponsored by Goldman Sachs and
designated as an eligible fund for this purpose and (ii) the corresponding class
of any portfolio of Goldman Sachs Money Market Trust at the net asset value next
determined either by writing to Goldman Sachs, Attention: Goldman Sachs Trust --
Goldman Sachs High Yield Fund, 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 (8:00 a.m. to 4:00 p.m. Chicago
time). A shareholder should obtain and read the prospectus relating to any other
fund and its shares or units and consider its investment objective, policies and
applicable fees before making an exchange. Service Shares acquired by telephone
exchange must be registered in the same name(s) and have the same address as
Service Shares of the Fund for which the exchange is being made.
In an effort to prevent unauthorized or fraudulent exchanges by telephone,
Goldman Sachs employs reasonable procedures as set forth under "Redemption of
Service Shares" to confirm that such instructions are genuine. In times of
drastic economic or market changes the telephone exchange privilege may be
difficult to implement. For federal income tax purposes, an exchange is treated
as a sale of the Service Shares surrendered in the exchange, on which an
investor may realize a gain or loss, followed by a purchase of Service Shares or
the corresponding class of any portfolio of Goldman Sachs Money Market Trust
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 Services Shares and is subject to certain limitations. See
"Purchase of Service Shares."
REDEMPTION OF SERVICE SHARES
The Fund will redeem its Service Shares upon request of the recordholder of
such Shares on any Business Day at the net asset value next determined after the
receipt by the Transfer Agent of such request in proper form. See "Net Asset
Value." If Service Shares to be redeemed were recently
26
<PAGE>
purchased by check, the Fund may delay transmittal of redemption proceeds until
such time as it has assured itself that good funds have been collected for the
purchase of such Service Shares. This may take up to fifteen (15) days.
Redemption requests may be made by writing to or calling the Transfer Agent at
the address or telephone number set forth on the back cover of this Prospectus.
A Service Organization may request redemptions by telephone if the optional
telephone redemption 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 Fund, the Trust nor Goldman Sachs will be responsible
for the authenticity of redemption or exchange instructions received by
telephone.
The Fund will arrange for the proceeds of redemptions effected by any means
to be wired to the recordholder of Service Shares, or if the recordholder elects
in writing, by check. Redemption proceeds paid by wire transfer will normally be
wired on the next Business Day in Federal Funds (for a total one-day delay), but
may be paid up to three (3) days after receipt of a properly executed redemption
request. Wiring of redemption proceeds may be delayed one additional Business
Day if the Federal Reserve Bank is closed on the day redemption proceeds would
ordinarily be wired. Redemption proceeds paid by check will normally be mailed
to the address of record within three (3) Business Days of receipt of a properly
executed redemption request. Once wire transfer instructions have been given by
Goldman Sachs, neither the Fund, the Trust nor Goldman Sachs assumes any further
responsibility for the performance of intermediaries or the customer's Service
Organization in the transfer process. If a problem with such performance arises,
the customer should deal directly with such intermediaries or Service
Organizations.
Additional documentation regarding a redemption by any means may be
required to effect a redemption when deemed appropriate by the Transfer Agent.
The request for such redemption will not be considered to have been received in
proper form until such additional documentation has been submitted to the
Transfer Agent by the recordholder of Service Shares.
Service Organizations are responsible for the timely transmittal of
redemption requests by their customers to the Transfer Agent. In order to
facilitate timely transmittal of redemption requests, Service Organizations have
established times by which redemption requests must be received by them.
Additional documentation may be required when deemed appropriate by a Service
Organization.
27
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================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Fund Highlights......................................................
Fees and Expenses....................................................
Investment Objective and Policies....................................
Description of Securities............................................
Risk Factors.........................................................
Investment Techniques................................................
Investment Restrictions..............................................
Portfolio Turnover...................................................
Management...........................................................
Dividends............................................................
Net Asset Value......................................................
Performance Information..............................................
Shares of the Trust..................................................
Taxation.............................................................
Additional Information...............................................
Reports to Shareholders..............................................
Purchase of Service Shares...........................................
Exchange Privilege...................................................
Redemption of Service Shares.........................................
</TABLE>
GOLDMAN SACHS HIGH YIELD
FUND
________
PROSPECTUS
SERVICE SHARES
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE (IN U.S.).............800-621-2550
================================================================================
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Prospectus SUBJECT TO COMPLETION - DATED JANUARY 3, 1997
[ ], 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Goldman Sachs High Yield Fund
-----------------------------
Class A and B Shares
______________________________
Goldman Sachs High Yield Fund (the "Fund") seeks a high level of current
income and secondarily, capital growth. The Fund invests primarily in fixed
income securities rated below investment grade.
THE 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. THE FUND IS INTENDED FOR
INVESTORS WHO CAN ACCEPT THE RISKS ASSOCIATED WITH THE FUND'S INVESTMENTS AND
MAY NOT BE SUITABLE FOR ALL INVESTORS. SEE "DESCRIPTION OF SECURITIES."
Goldman Sachs Asset Management (the "Investment Manager"), New York, New
York, a separate operating division of Goldman, Sachs & Co. ("Goldman Sachs"),
serves as the Fund's investment adviser and administrator. Goldman Sachs serves
as the Fund's distributor and transfer agent.
This Prospectus provides information about Goldman Sachs Trust (the
"Trust") and the Fund that a prospective investor should understand before
investing. This Prospectus should be retained for future reference. A Statement
of Additional Information (the "Additional Statement"), dated [ ] 1997,
containing further information about the Trust and the Fund which may be of
interest to investors, has been filed with the Securities and Exchange
Commission, 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.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following highlights certain information contained in this Prospectus
and is qualified in its entirety by the more detailed information contained
herein.
WHAT IS THE GOLDMAN SACHS TRUST?
Goldman Sachs Trust is an open-end management investment company that
offers its shares in several investment funds (mutual funds), one of which is
described in this Prospectus. The 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 the Fund's stated investment objective.
WHAT IS THE INVESTMENT OBJECTIVE AND POLICIES OF THE FUND?
The Fund's investment objective and key facts are summarized in the table
below. There can be no assurance that the Fund's objective will be achieved. For
a complete description of the Fund's investment objective and policies, see
"Investment Objective and Policies," "Description of Securities" and "Investment
Techniques."
<TABLE>
<CAPTION>
GOLDMAN SACHS HIGH YIELD FUND
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT OBJECTIVE A high level of current income and secondarily, capital growth.
- ---------------------------------------------------------------------------------------------------------------------
DURATION Target = [Lehman High Yield Bond Index] plus or minus [2.5] years
Maximum = 7.5 years
- ---------------------------------------------------------------------------------------------------------------------
APPROXIMATE INTEREST RATE SENSITIVITY 6-year bond
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT SECTOR At least 65% of assets in fixed income securities rated below
investment grade, including U.S. and non-U.S. dollar corporate
debt, foreign government securities, convertible securities and
preferred stock.
- ---------------------------------------------------------------------------------------------------------------------
CREDIT QUALITY At least 65% = BB/Ba or below.
- ---------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS Mortgage-backed and asset-backed securities, U.S. Government
securities, investment grade corporate fixed income securities,
structured securities, foreign currencies and repurchase
agreements collateralized by U.S. Government securities.
- ---------------------------------------------------------------------------------------------------------------------
BENCHMARK [LEHMAN HIGH YIELD BOND INDEX]
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
The Fund's share price will fluctuate with market, economic and foreign
exchange conditions, so that an investment in the Fund may be worth more or less
when redeemed than when purchased. The Fund should not be relied upon as a
complete investment program. There can be no assurance that the Fund's
investment objective will be achieved. See "Risk Factors."
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 less liquidity 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 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. 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.
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 the
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 the 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.
Foreign Risks. Investments in securities of foreign issuers and currencies
involve risks that are different from those associated with investment in
domestic securities. The risks of foreign investments and currencies include
changes in relative currency exchange rates, political and economic
developments, the imposition of exchange controls, confiscation of property and
other governmental restrictions. In addition, the securities markets of foreign
countries are generally less liquid and subject to greater price volatility.
Other. The 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.
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<PAGE>
WHO MANAGES THE FUND?
Goldman Sachs Asset Management serves as the Investment Manager to the
Fund. As of January 31, 1997, the Investment Manager, together with its
affiliates, acted as investment adviser, administrator or distributor for assets
in excess of $[ ] billion.
WHO DISTRIBUTES THE FUND'S SHARES?
Goldman Sachs acts as distributor of the Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
<TABLE>
<CAPTION>
Minimum
------------------------------------------------------------
Type of Purchase Initial Purchase Amount Additional Investments
- -------------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Regular Purchases $ 1,500 $ 50
Tax-Sheltered Retirement Plans $ 250 $ 50
Automatic Investment Plan $ 50 $ 50
</TABLE>
For further information, see "How to Invest-How to Buy Shares of the Fund" on
page [ ].
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Goldman Sachs and certain
investment dealers, including members of the National Association of Securities
Dealers, Inc. (the "NASD") and certain other financial service firms that have
sales agreements with Goldman Sachs ("Authorized Dealers"). See "How to Invest"
on page ___.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers two classes of shares through this Prospectus which may be
purchased at the next determined net asset value ("NAV") plus a sales charge
which, depending on the class of shares you choose for investment, may be
imposed either at the time of purchase (Class A shares) or on a contingent
deferred basis at the time of redemption (Class B shares). Direct purchases of
$1 million or more of Class A shares will be sold without an initial sales
charge and will be subject to a contingent deferred sales charge at the time of
certain redemptions.
<TABLE>
<CAPTION>
Maximum Front End Sales Maximum Contingent Deferred
Charge Sales Charge
---------------------------- ---------------------------
<S> <C> <C>
Class A ........ 4.5% (See above)
Class B ........ N/A 5% declining to 0%
after six years
</TABLE>
4
<PAGE>
Over time, the deferred sales charge and distribution fees attributable to
Class B shares will exceed the initial sales charge and distribution fees
attributable to Class A shares. See "How to Invest-Alternative Purchase
Arrangements" on page [ ].
HOW DO I SELL MY SHARES?
You may redeem shares upon request on any Business Day, as defined under
"Additional Information," at the net asset value next determined after receipt
of such request in proper form, subject to any applicable contingent deferred
sales charge. See "How to Sell Shares of the Fund."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
The Fund declares investment income dividends daily and pays those
dividends monthly. The Fund declares and pays capital gains dividends at least
annually.
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
Portfolios") or ILA Service Units of the Prime Obligations Portfolio or the Tax-
Exempt Diversified Portfolio of Goldman Sachs Money Market Trust, if you hold
Class A shares of a Fund, or ILA Class B Units of the Prime Obligations
Portfolio, if you hold Class B shares of a Fund (the "ILA Portfolios"). For
further information concerning dividends, see "Dividends."
5
<PAGE>
FEES AND EXPENSES
<TABLE>
<CAPTION>
Class A Class B
------- -------
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C> <C>
Maximum Sales Charge Imposed On Purchases ................... 4.50%/1/ none
Maximum Sales Charge Imposed on Reinvested
Dividends .................................................... none none
Maximum Deferred Sales Charge ................................. none/1/ 5.00%
Redemption Fees/2/ ............................................. none none
Exchange Fees/2/ ............................................. none none
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average daily net assets)
Management Fees ............................................... 0.50% 0.50%
Distribution (Rule 12b-1) Fees (after limitation) ................. 0.00%/3/ 0.75%
Other Expenses:
Authorized Dealer Service Fees .............................. 0.25% 0.25%
Other Expenses (after limitation) ........................... 0.50% 0.50%
---- -----
TOTAL FUND OPERATING EXPENSES
(after expense limitation) ................................. 1.25%/3/ 2.00%/3/
==== ====
</TABLE>
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>
1 Year 3 Years
------ -------
<S> <C> <C>
Class A Shares ................................... $ 57 $ 83
Class B Shares
- - Assuming complete redemption at end
of period ....................................... 70 93
- - Assuming no redemption .......................... 20 63
</TABLE>
The hypothetical example assumes that a contingent deferred sales charge
will not apply to redemptions of Class A shares within the first 18 months.
Class B shares convert to Class A shares
6
<PAGE>
eight years after purchase; therefore, Class A expenses are used in the
hypothetical example after year eight.
______________________________
1 As a percentage of the offering price. No sales charge is imposed on
purchases of Class A shares by certain classes of investors. A contingent
deferred sales charge of 1.00% is imposed on certain redemptions of Class A
shares sold without an initial sales charge as part of an investment of $1
million or more. See "How to Invest - Offering Price."
2 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 Portfolios 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."
3 Based upon estimated amounts for the current fiscal year. Goldman Sachs
voluntarily has agreed not to impose any distribution fee attributable to
Class A shares of the Fund. The Investment Manager has also voluntarily
agreed to reduce or limit certain "Other Expenses" of the Fund (excluding
management fees, distribution and authorized dealer service fees, transfer
agent fees, taxes, interest and brokerage fees and litigation,
indemnification and other extraordinary expenses) to the extent such
expenses exceed 0.31% of the Fund's average daily net assets. Goldman
Sachs and the Investment Manager have no current intention of modifying or
discontinuing any such limitation or waiver but may do so in the future at
their discretion. Without such limitation and waiver, "Distribution Fees,"
"Other Expenses" and "Total Fund Operating Expenses" attributable to Class
A Shares are estimated to be 0.25%, 0.75% and 1.75%, respectively, and
attributable to Class B Shares are estimated to be 0.75%, 1.00% and 2.25%,
respectively.
The information set forth in the foregoing table and hypothetical example
relates only to Class A and Class B Shares of the Fund. The Fund also offers
Service and Institutional Shares which are subject to different fees and
expenses (which affect performance), have different minimum investment
requirements and are entitled to different services than Class A Shares and
Class B Shares. Information regarding Service and Institutional 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 National Association of Securities
Dealers, Inc.'s rules regarding investment companies.
The purpose of the foregoing table is to assist investors in understanding
the various costs and expenses of the Fund that an investor will bear directly
or indirectly. Since the Fund does not yet have an operating history, the
information on fees and expenses included in the table and the hypothetical
example above are based on estimated fees and expenses for the current fiscal
year and should not be considered as representative of past or future expenses.
Actual fees and expenses may be greater or less than those indicated. Moreover,
while the example assumes a 5% annual return, the Fund's actual performance will
vary and may result in an actual return greater or less than 5%. See
"Management-Investment Manager."
7
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective and principal investment policies are
described below. Other investment practices and management techniques, which
involve certain risks, are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that the Fund's
investment objective will be achieved.
The Investment Manager 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.
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 growth. The Fund is intended for
investors who can accept the risks associated with the Fund's investments in
non-investment grade securities and may not be suitable for all investors.
DURATION. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the [Lehman High Yield
Bond Index], plus or minus [2.5] years (currently ___ 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 Standard & Poor's Ratings Group ("S&P"), Ba or
below by Moody's Investors Service, Inc. ("Moody's"), an equivalent rating by
another rating organization, or if unrated by a rating organization, determined
by the Investment Manager 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 in the securities of foreign issuers,
including securities of issuers located in countries with emerging economies or
securities markets, and may invest up to 25% of its total assets in debt
securities of domestic and foreign issuers 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 will
be 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 Manager 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 know 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.
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;
8
<PAGE>
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
transactions to seek to hedge its exposure to foreign currencies. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities, repurchase agreements and other investment
practices described under "Investment Techniques."
DESCRIPTION OF SECURITIES
CORPORATE DEBT OBLIGATIONS
The Fund 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 Fund may invest in convertible securities, which include corporate
notes and preferred stock but are ordinarily long-term debt obligations of an
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 FUND INVESTS ARE SUBJECT TO
THE SAME RATING CRITERIA AS ITS OTHER INVESTMENTS IN FIXED INCOME SECURITIES.]
FOREIGN INVESTMENTS
Foreign Securities. The Fund may invest in fixed income securities of
foreign issuers, including securities of issuers located in countries with
emerging economies and securities markets. The Fund may also invest up to 25%
of its total assets in fixed income securities of domestic and foreign issuers
which are denominated in currencies other than the U.S. dollar. Investments in
foreign and non-U.S. dollar denominated securities 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 U.S. dollar-denominated securities of
domestic issuers. 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 exchange rate for the currency in which the Fund receives interest payments
declines against the U.S. dollar before such income is distributed as dividends
to shareholders, the Fund may have to sell portfolio securities to obtain
sufficient cash to pay such
9
<PAGE>
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 Fund may invest in an issuer domiciled in one country yet issuing the
security in the currency of another country. The Fund 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
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 Fund 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.
Most foreign securities markets may experience substantially less trading 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 taxes on dividend or interest payments, limitations on the removal
of funds or other assets of the Fund, political or social instability or
diplomatic developments which could affect investments in those countries.
Emerging Markets. Subject to the Fund's limitation regarding investments in
non-U.S. dollar denominated securities, the Fund may invest in securities of
issuers that are 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 the
Fund's investments in emerging markets.
Foreign Currency Transactions. Because investment in foreign issuers will
usually involve currencies of foreign countries, the value of the assets of the
Fund as measured in U.S. dollars will be affected by changes in foreign currency
exchange rates. The Fund may 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. If the Fund enters into a
forward foreign currency exchange contract to buy foreign currency for any
purpose, the Fund will be required to place and maintain cash or liquid debt
securities in a segregated account with the Fund's custodian in an amount equal
to the value of the Fund's total assets committed to the consummation of the
forward contract. The Fund will incur costs in connection with conversions
between various currencies.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, the 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
10
<PAGE>
complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by the intervention of U.S. or foreign
governments or central banks, or the failure to intervene, or by currency
controls or political developments in the United States or abroad. To the extent
that a substantial portion of the Fund's total assets, adjusted to reflect the
Fund's net position after giving effect to currency transactions, is denominated
or quoted in the currencies of foreign countries, the Fund will be more
susceptible to the risk of adverse economic and political developments within
those countries.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments authorized for use by the
Fund 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 the Fund of
unrealized profits, transaction costs or the benefits of a currency hedge or
force the Fund to cover its purchase or sale commitments, if any, at the current
market price. The Fund will not enter into forward foreign currency exchange
contracts 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 Manager.
STRUCTURED SECURITIES
The Fund may invest in structured securities. The value of the principal
of and/or interest on such securities is determined by reference to changes in
the value of specific currencies, interest rates, commodities, indices or other
financial indicators (the "Reference") or the relative change in two or more
References. The interest rate or the principal amount payable upon maturity or
redemption may be increased or decreased depending upon changes in the
applicable Reference. The terms of the structured securities may provide that
in certain circumstances no principal is due at maturity and, therefore, may
result in the loss of the Fund's investment. Structured securities may be
positively or negatively indexed, so that appreciation of the Reference may
produce an increase or decrease in the interest rate or value of the security at
maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the value of the Reference.
Consequently, structured securities may entail a greater degree of market risk
than other types of fixed income securities. Structured securities may also be
more volatile, less liquid and more difficult to accurately price than less
complex securities.
ZERO COUPON, DEFERRED INTEREST, CAPITAL APPRECIATION AND PAY-IN-KIND BONDS
The 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. The Fund
may also invest in pay-in-kind securities which are securities that have
interest payable by the delivery of additional securities. The market prices of
zero coupon, deferred interest, capital appreciation and pay-in-kind 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. The Fund's investments in zero coupon, deferred interest, capital
appreciation and pay-in-kind bonds may require it to sell certain of its
portfolio securities to generate sufficient cash to satisfy certain income
distribution requirements. See "Taxation" in the Additional Statement.
11
<PAGE>
PREFERRED STOCK AND 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.
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. Government securities. Generally, these
securities include U.S. Treasury obligations and obligations issued or
guaranteed by U.S. Government agencies, instrumentalities or sponsored
enterprises 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. The Fund may invest in
mortgage-backed ("Mortgage-Backed Securities"), which 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 the 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 the 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
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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 Fund 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 the 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
the 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 the 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 Fund 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 issued) 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 Fund 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 or 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 Fund does not intend to
purchase residual interests in REMICS.
Stripped Mortgage-Backed Securities. The Fund 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
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mortgage loans experience different than anticipated prepayments of principal,
the Fund may fail to fully recoup its initial investment in these securities.
Although the market for SMBS is increasingly liquid, certain SMBS may not be
readily marketable and will be considered illiquid for purposes of the Fund's
limitation on investments in illiquid securities. The market value of the class
consisting entirely of principal payments generally is unusually volatile in
response to changes in interest rates. The yields on a class of SMBS that
receives all or most of the interest from mortgage 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 Fund may invest in asset-backed securities ("Asset-Backed Securities").
The principal and interest payments on Asset-Backed Securities are
collateralized by pools of assets such as auto loans, credit card receivables,
leases, installment contracts and personal property. Such asset pools are
securitized through the use of special purpose trusts or corporations. Principal
and interest payments may be credit enhanced by a letter of credit, a pool
insurance policy or a senior/subordinated structure.
RISK FACTORS
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 rated
below investment grade 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 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, the Fund's ability to achieve its
investment objectives may depend to a greater extent on the Investment Manager'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
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the issuers of such securities. Investment by the 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 the 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 the Fund's ability to dispose
of particular portfolio investments. A less liquid secondary market also may
make it more difficult for the Fund to obtain precise valuations of the high
yield securities in its portfolio.
Changes in federal and state laws and industry initiatives could adversely
affect the secondary market for non-investment grade fixed income securities and
the financial condition of issuers of these securities. Such legislation may
also significantly depress the value of outstanding non-investment grade fixed
income securities.
Non-investment grade fixed income securities also present risks based on
payment expectations. Such securities frequently contain call or redemption
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 Fund may have to replace the security with a lower yielding security,
resulting in a decreased return for investors. Similarly, if the Fund
experiences unexpected net redemptions of the Fund's shares, it may be forced to
sell its higher rated more liquid securities, resulting in a decline in the
overall credit quality of the Fund's portfolio and increasing the exposure of
the Fund to the risks of non-investment grade fixed income securities.
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
Manager's credit analysis than would be the case with investments in investment-
grade debt obligations. The Investment Manager 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 Manager continually monitors the investments in the 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.
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.
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Default Risk/Credit Risk. Investments in fixed income securities are
subject to the risk that the issuer could default on its obligations and the
Fund could sustain losses on such investments. A default could impact both
interest and principal payments.
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 the 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 the Fund will suffer from the inability to invest in higher
yielding securities. Certain types of U.S. Government, Asset-Backed, corporate,
foreign and Mortgage-Backed 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 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. 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.
Foreign Risks. See "Foreign Securities" for a description of the risks of
investing in foreign securities and currencies.
INVESTMENT TECHNIQUES
Options on Securities and Securities Indices. The 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
Manager 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 Manager to manage future price
fluctuations and the degree of correlation between the options and securities
markets. If the Investment Manager is incorrect in its expectation of changes in
securities prices or determination of the correlation between the securities
indices on which options are written and purchased and the securities in the
Fund's investment portfolio, the investment performance of the Fund will be less
favorable than it would have been in the
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absence of such options transactions. The writing of options could increase the
Fund's portfolio turnover rate and, therefore, associated brokerage commissions
or spreads.
Options on Foreign Currencies. The Fund may, to the extent it invests 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. 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 the 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 the Fund's position, the Fund may forfeit the
entire amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by the Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
Futures Contacts and Options on Futures Contracts. To seek to increase
total return or to hedge against changes in interest rates, security prices, or
currency exchange rates, the Fund may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on any of such futures
contracts. The Fund may also enter into closing purchase and sale transactions
with respect to any such contracts and options. The futures contracts may be
based on various securities (such as U.S. Government securities), foreign
currencies, securities indices and other financial instruments and indices. The
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. The Fund may not purchase or sell futures contracts or purchase or
sell related options to seek to increase total return, except for closing
purchase or sale transactions, if immediately thereafter the sum of the amount
of initial margin deposits and premiums paid on the Fund's outstanding positions
in futures and related options entered into for the purpose of seeking to
increase total return would exceed 5% of the market value of the Fund's net
assets. These transactions involve brokerage costs, require margin deposits and,
in the case of contracts and options obligating the Fund to purchase securities
or currencies, require the Fund to segregate and maintain cash or liquid
securities 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 the 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 the Fund may be exposed to risk
of loss. The loss incurred by the Fund in entering into futures contracts and in
writing call options on futures is potentially unlimited and may exceed the
amount of the premium received. Futures markets are highly volatile and the use
of futures may increase the volatility of the Fund's net asset value. The
profitability of the Fund's transactions in futures to seek to increase total
return depends upon the ability of the Investment Manager to correctly analyze
the futures markets. In addition, because of the low margin deposits normally
required in futures trading, a relatively small price movement in a futures
contract may result in substantial losses to the Fund. Further, futures
contracts and options on futures may be illiquid, and exchanges may limit
fluctuations in futures contract prices during a single day.
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Risks of Derivative Transactions. The Fund's transactions, if any, in
options, futures, options on futures, swap transactions, interest rate caps,
floors and collars, structured securities and currency forward contracts involve
certain risks, including a possible lack of correlation between changes in the
value of hedging instruments and the portfolio assets being hedged, the
potential illiquidity of the markets for derivative instruments, the risks
arising from the margin requirements and related leverage factors associated
with such transactions. The use of these management techniques to seek to
increase total return may be regarded as a speculative practice and involves the
risk of loss if the Investment Manager is incorrect in its expectation of
fluctuations in securities prices, interest rates or currency prices. The Fund's
transactions in certain derivative instruments may be limited by the
requirements of the Code.
When-Issued Securities and Forward Commitments. The Fund may purchase when-
issued securities. When-issued transactions arise when securities are purchased
by the Fund with payment and delivery taking place in the future in order to
secure what is considered to be an advantageous price and yield to the Fund at
the time of entering into the transaction. The Fund may also purchase securities
on a forward commitment basis; that is, make contracts to purchase securities
for a fixed price at a future date beyond the customary 3-day settlement. The
Fund is required to hold and maintain in a segregated account with the Fund's
custodian until 3 days prior to settlement date, cash or liquid securities in an
amount sufficient to meet the purchase price. Alternatively, the Fund may enter
into offsetting contracts for the forward sale of other securities that it owns.
The purchase of securities on a when-issued or forward commitment basis involves
a risk of loss if the value of the security to be purchased declines prior to
the settlement date. Although the Fund would generally purchase securities on a
when-issued or forward commitment basis with the intention of acquiring
securities for its portfolio, the Fund may dispose of when-issued securities or
forward commitments prior to settlement if the Investment Manager deems it
appropriate to do so.
Illiquid Securities. The Fund may not invest more than 15% of its net
assets in illiquid investments. The Board of Trustees has adopted guidelines and
delegated to the Investment Manager the daily function of determining and
monitoring the liquidity of portfolio securities. The Board of Trustees,
however, retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for each
determination. The purchase price and subsequent valuation of illiquid
securities normally reflect a discount, which may be significant, from the
market price of comparable securities for which a liquid market exists.
Repurchase Agreements. The Fund may enter into repurchase agreements with
dealers in U.S. Government securities and member banks of the Federal Reserve
System which furnish collateral at least equal in value or market price to the
amount of their repurchase obligation. If the other party or "seller" defaults,
the Fund might suffer a loss to the extent that the proceeds from the sale of
the underlying securities and other collateral held by the Fund in connection
with the related repurchase agreement are less than the repurchase price. In
addition, in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, the Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with delay
and enforcement of the repurchase agreement. The Trustees of the Trust have
reviewed and approved certain counterparties whom they believe to be
creditworthy and have authorized the Fund to enter into repurchase agreements
with such counterparties. In addition, the Fund, together with other registered
investment companies having advisory agreements with the Investment Manager, 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. The Fund may, for temporary defensive purposes,
invest up to 100% of its total assets in (a) U.S. Government securities, (b)
repurchase agreements collateralized by U.S. Government securities and (c)
investment grade rated securities.
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MISCELLANEOUS TECHNIQUES
In addition to the techniques described above, the Fund may, with respect
to no more than 5% of its total assets, engage in the following techniques: (i)
portfolio securities lending, (ii) interest rate, currency and mortgage swaps
and interest rate caps, floors and collars, (iii) yield curve options, (vi)
investments in other investment companies, (vi) custodial receipts and (vi)
inverse floating rate securities. For more information see the Additional
Statement.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions that are described
in detail under "Investment Restrictions" in the Additional Statement. The
fundamental investment restrictions of the Fund can not be changed without
approval of a majority of the outstanding shares of the Fund. The investment
objective and all policies not specifically designated as fundamental are non-
fundamental and may be changed without shareholder approval. If there is a
change in the Fund's investment objective, shareholders should consider whether
the Fund still remains an appropriate investment in light of their then current
financial positions and needs.
PORTFOLIO TURNOVER
The 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 annual
portfolio turnover rate of the Fund will not exceed [200%]. 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 the Fund were sold and replaced within
one year. The Investment Manager will not consider the portfolio turnover rate a
limiting factor in making investment decisions for the Fund consistent with the
Fund's investment objective and portfolio management policies. A high rate of
portfolio turnover results in increased transaction costs to the Fund.
MANAGEMENT
TRUSTEES AND OFFICERS
The Trust's Board of Trustees is responsible for deciding matters of
general policy and reviewing the actions of the Investment Manager, distributor
and transfer agent. The officers of the Trust conduct and supervise the Fund's
daily business operations. The Additional Statement contains information as to
the identity of, and other information about, the Trustees and officers of the
Trust.
INVESTMENT MANAGER
Goldman Sachs Asset Management, One New York Plaza, New York, New York
10004, a separate operating division of Goldman Sachs, serves as the investment
adviser to the Fund. As of January 31, 1997, the Investment Manager and
affiliates acted as investment adviser, administrator or distributor for assets
in excess of $[ ] billion.
Under an Investment Management Agreement with the Fund, the Investment
Manager, subject to the general supervision of the Board of Trustees, provides
day-to-day advice as to the Fund's portfolio transactions. The Investment
Manager also provides personnel for supervisory, administrative, and clerical
functions; oversees the performance of administrative and professional
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services to the Fund by others; provides office facilities; and prepares, but
does not pay for, reports to shareholders, the SEC and other regulatory
authorities. Goldman Sachs has agreed to permit the Trust to use the name
"Goldman Sachs" or a derivative thereof as part of the Fund's name for as long
as the Fund's Investment Management Agreement is in effect.
In performing its investment management services, the Investment Manager,
while remaining ultimately responsible for the management of the Fund, is able
to draw upon the research and expertise of its affiliate offices for portfolio
decisions and management with respect to certain portfolio securities. [INSERT
DESCRIPTION OF PORTFOLIO MANAGER]
It is the responsibility of the Investment Manager to make investment
decisions for the Fund and to place the purchase and sale orders for the Fund's
portfolio transactions in U.S. and foreign securities and currency markets.
Such orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Goldman Sachs or its affiliates.
As compensation for its services rendered and assumption of certain
expenses pursuant to the Investment Management Agreement, the Investment Manager
is entitled to a fee from the Fund, computed daily and payable monthly, at the
annual rate of 0.55% of average daily net assets.
The Investment Manager has voluntarily agreed to reduce or limit certain
"Other Expenses" of the Fund (excluding management, distribution and authorized
dealer service fees, transfer agent fees, taxes, interest and brokerage fees and
litigation, indemnification and other extraordinary expenses) to the extent such
expenses exceed 0.31% of the Fund's average daily net assets. Such reductions
or limits, if any, are calculated monthly on a cumulative basis and may be
discontinued or modified by the Investment Manager in its discretion at any
time.
Goldman Sachs may from time to time, at its own expense, provide
compensation to certain Authorized Dealers for performing administrative
services to their customers. These services include maintaining account
records, processing orders to purchase, redeem and exchange Fund shares and
responding to certain customer inquiries. The amount of such compensation may
be up to 0.25% annually of the average daily net assets of the Fund,
attributable to shares held by customers of such Authorized Dealers. In
addition, Goldman Sachs may from time to time, at its own expense, provide
compensation to certain Authorized Dealers who perform administrative services
with respect to depository institutions whose customers purchase shares of the
Fund. These services include responding to certain inquiries from and providing
written materials to depository institutions about the Fund; furnishing advice
about and assisting depository institutions in obtaining from state regulatory
agencies any rulings, exemptions or other authorizations that may be required to
conduct a mutual fund sales program; acting as liaison between depository
institutions and national regulatory organizations; assisting with the
preparation of sales material; and providing general assistance and advice in
establishing and maintaining mutual fund sales programs on the premises of
depository institutions. The amount of such compensation may be up to 0.08%
annually of the average net assets of a Fund's shares attributable to purchases
through, and held by the customers of, such depository institutions. Such
compensation does not represent an additional expense to the Fund or its
shareholders, since it will be paid from the assets of Goldman Sachs or its
affiliates.
Activities of Goldman Sachs and its Affiliates and Other Accounts Managed
by Goldman Sachs. The involvement of the Investment Manager, Goldman Sachs and
its affiliates in the management of, or their interest in, other accounts and
other activities of Goldman Sachs may present conflicts of interest with respect
to the Fund or limit the Fund's investment activities. Goldman Sachs and its
affiliates engage in proprietary trading and advise accounts and funds which
have investment objectives similar to that of the Fund and/or which engage in
and compete for transactions in the same types of securities, currencies and
instruments as the Fund. Goldman Sachs and its affiliates will not have any
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obligation to make available any information regarding their proprietary
activities or strategies, or the activities or strategies used for other
accounts managed by them, for the benefit of the management of the Fund, and in
general it is not anticipated that the Investment Manager will have access to
proprietary information for the purpose of managing the Fund. The results of
the Fund's investment activities, therefore, may differ from those of Goldman
Sachs and its affiliates and it is possible that the Fund could sustain losses
during periods in which Goldman Sachs and its affiliates and other accounts and
funds achieve significant profits on their trading for proprietary or other
accounts. From time to time, the Fund's activities may be limited because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. See
"Management-Activities of Goldman Sachs and its Affiliates and Other Accounts
Managed by Goldman Sachs" in the Additional Statement for further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor of the Fund's shares (the "Distributors"). 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
the Fund's transfer agent (the "Transfer Agent") and as such performs various
shareholder servicing functions. As compensation for the services rendered to
the Fund by Goldman Sachs (as Transfer Agent) and the assumption by Goldman
Sachs of the expenses related thereto, Goldman Sachs is entitled to receive a
fee from the Fund, with respect to Class A shares and Class B shares of
[$12,000] per year plus [$7.50] per account, together with out-of-pocket and
transaction-related expenses (including those out-of-pocket expenses payable to
servicing agents). Shareholders with inquiries regarding the Fund should
contact Goldman Sachs (as Transfer Agent) at the address or the telephone number
set forth on the back cover page of this Prospectus.
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 Fund does not
generally provide sub-accounting services.
HOW TO INVEST
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund continuously offers Class A and Class B shares through this
Prospectus as described more fully in "How to Buy Shares of the Fund." If you
do not specify in your instructions to the Fund which class of shares you wish
to purchase, the Fund will assume that your instructions apply to Class A
shares.
Class A Shares. If you invest less than $1 million in Class A shares, you
will pay an initial sales charge. Certain purchases may qualify for reduced
initial sales charges. If you initially invest $1
21
<PAGE>
million or more in Class A shares of the Fund, no sales charge will be imposed
at the time of purchase, but you will incur a deferred sales charge equal to
1.00% if you redeem your shares within 18 months of purchase. Class A shares are
subject to distribution fees of up to 0.25% [(WHICH IS CURRENTLY NOT BEING
IMPOSED)] and authorized dealer service fees of up to 0.25%, respectively, of
the Fund's average daily net assets attributable to Class A shares.
Class B Shares. Class B shares are sold without an initial sales charge
but are subject to a contingent deferred sales charge ("CDSC") of up to 5% if
redeemed within six years of purchase. Class B shares are subject to
distribution and authorized dealer service fees of up to 0.75% and 0.25%,
respectively, of the Fund's average daily net assets attributable to Class B
shares. See "Distribution and Authorized Dealer Service Plans." Your entire
investment in Class B shares is available to work for you from the time you make
your initial investment, but the distribution fee paid by Class B shares will
cause your Class B shares (until conversion to Class A shares) to have a higher
expense ratio and to pay lower dividends, to the extent dividends are paid, than
Class A shares. Class B shares will automatically convert to Class A shares,
based on their relative net asset values, eight years after the initial
purchase.
Factors to Consider in Choosing Class A or Class B Shares. The decision as
to which class to purchase depends on the amount you invest, the intended length
of the investment and your personal situation. For example, if you are making
an investment of $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, you might consider purchasing Class B
shares. There is a maximum purchase limitation of $250,000 of Class B shares.
HOW TO BUY SHARES OF THE FUND - CLASS A AND CLASS B SHARES
You may purchase shares of the Fund through any Authorized Dealer
(including Goldman Sachs) or directly from the 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 (currently 4:00 p.m. New York time), a purchase order is
received by the 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. Dividends declared will begin to accrue on the Business Day after
receipt of payment.
The minimum initial investment in the Fund is $1,500. An initial
investment minimum of $250 applies to purchases in connection with Individual
Retirement Account Plans. For purchases through the Automatic Investment Plan,
the minimum 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 a check drawn on
a foreign bank will not be accepted), 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 Trust - (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.
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<PAGE>
In order to make an initial investment in the Fund, an investor must
establish an account with the Fund by furnishing to the Fund, Goldman Sachs or
the investor's Authorized Dealer the information in the Account Application
attached to this Prospectus. The Fund may refuse to open an account for any
investor who fails to (1) provide a social security number or other taxpayer
identification number, or (2) certify that such number is correct (if required
to do so under applicable law).
The Fund reserves 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.
The 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 Fund 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 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 $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* **
</TABLE>
_________________________
* No sales charge is payable at the time of purchase of Class A shares
of $1 million or more, but a CDSC may be imposed in the event of
certain redemption transactions made within 18 months of purchase.
** Goldman Sachs pays a one-time commission to Authorized Dealers who
initiate or are responsible for purchases of $1 million or more of
shares of the Funds equal to 1.00% of the amount under $3 million,
0.50% of the next $2 million, and 0.25% thereafter. Goldman Sachs may
also pay, with respect to all or a portion of the assets, a commission
in accordance with the foregoing schedule to Authorized Dealers who
initiate or are responsible for purchases of $1 million or more by
investors or "wrap" accounts satisfying the criteria set forth in (h)
or (j) below. Authorized Dealers shall remit to Goldman Sachs such
payments received in connection with "wrap" accounts in the event that
shares are redeemed within 18 months after the end of the calendar
month in which the purchase was made.
Purchases of $1 million or more of Class A shares will be made at net
asset value with no initial sales charge, but if the shares are redeemed within
18 months after the end of the calendar month in which the purchase was made
(the contingent deferred sales charge period), a CDSC of
23
<PAGE>
1.00% will be imposed. Any applicable CDSC will be assessed on an amount equal
to the lesser of the current market value or the original purchase cost of the
redeemed Class A shares. Accordingly, no CDSC will be imposed on increases in
account value above the initial purchase price, including any dividends which
have been reinvested in additional Class A shares. In determining whether a CDSC
applies to a redemption, the calculation will be determined in a manner that
results in the lowest possible rate being charged. Therefore, it will be assumed
that the redemption is first made from any Class A shares in your account that
are not subject to the CDSC. The CDSC is waived on redemptions in certain
circumstances. See "Waiver or Reduction of Contingent Deferred Sales Charges"
below.
Class A shares of the Fund 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, provided they have entered
into an agreement with the Investment Manager specifying certain operating
policies and standards; (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 the Fund; (h) pension and profit sharing plans, pension
funds and other company-sponsored benefit plans having either 200 eligible
employees or at least $1,000,000 under management with the Investment Manager
and its affiliates; (i) shareholders whose purchase is attributable to
redemption proceeds 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 Fund
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 the Investment Manager 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
the Investment Manager or its advisory affiliates have investment discretion;
and (m) shareholders receiving distributions from a qualified retirement plan
invested in the Goldman Sachs Portfolios and reinvesting such proceeds in a
Goldman Sachs IRA. Purchasers must certify eligibility for an exemption on the
Account Application and notify Goldman Sachs if the shareholder is no longer
eligible for an exemption. Exemptions will be granted subject to confirmation
of a purchaser's entitlement. Investors purchasing shares of the Fund 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 Portfolios may be reinvested in shares of the 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 the 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 the Fund or of any other Goldman Sachs
Portfolio. 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
24
<PAGE>
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 attributable to
such shares previously charged, and the reinvested shares will continue to be
subject to a CDSC. The holding period of the Class A shares acquired through
reinvestment, for purposes of computing the CDSC payable upon a subsequent
redemption, will include the holding period of the redeemed shares. Shares are
sold to a reinvesting shareholder at the net asset value next determined
following timely receipt by Goldman Sachs or an Authorized Dealer of a written
purchase order indicating that the shares are eligible for reinvestment at net
asset value.
A reinvesting shareholder may realize a gain or loss for federal tax
purposes as a result of such redemption. If the redemption occurs within ninety
(90) days after the original purchase of the Class A shares, any sales charge
paid on the original purchase cannot be taken into account by a shareholder
reinvesting at net asset value pursuant to the reinvestment privilege for
purposes of determining gain or loss realized on the redemption, but instead
will be added to the tax basis of the Class A shares received in the
reinvestment. To the extent that any loss is realized and shares of the same
Fund are purchased within thirty (30) days before or after the redemption, some
or all of the loss may not be allowed as a deduction depending upon the number
of shares purchased. Shareholders should consult their own tax advisers
concerning the tax consequences of a reinvestment. Upon receipt of a written
request, the reinvestment privilege may be exercised once annually by a
shareholder, except that there is no such time limit as to the availability of
this privilege in connection with transactions the sole purpose of which is to
reinvest the proceeds at net asset value in a tax-sheltered retirement plan.
RIGHT OF ACCUMULATION - CLASS A SHARES
Class A purchasers may qualify for reduced sales charges when the current
market value of holdings (shares at current offering price), plus new purchases,
reaches $100,000 or more. Class A shares of the Goldman Sachs Portfolios may be
combined under the Right of Accumulation. See the Additional Statement for more
information about the Right of Accumulation.
STATEMENT OF INTENTION - CLASS A SHARES
Purchases of $100,000 or more made over a 13-month period are eligible for
reduced sales charges. Class A shares of the Goldman Sachs Portfolios may be
combined under the Statement of Intention. See the Additional Statement for
more information about the Statement of Intention.
OFFERING PRICE - CLASS B SHARES
Investors may purchase Class B shares of the Fund at the next determined
net asset value without the imposition of an initial sales charge. However,
Class B shares redeemed within six years of purchase will be subject to a CDSC
at the rates shown in the table that follows. At redemption, the charge will be
assessed on the amount equal to the lesser of the current market value or the
original purchase cost of the shares being redeemed. No CDSC will be imposed on
increases in account value above the initial purchase price, including shares
derived from the reinvestment of dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of purchase until the time of redemption of Class B shares. For
the purpose of determining the number of years from the time of any purchase,
all payments during a month will be aggregated and deemed to have been made on
the first day of that month. In processing redemptions of Class B shares, the
25
<PAGE>
Fund will first redeem shares not subject to any CDSC, and then shares held
longest during the eight-year period. As a result, a redeeming shareholder will
pay the lowest possible CDSC.
<TABLE>
<CAPTION>
CDSC as a
Percentage of Dollar
Amount Subject to
Year Since Purchase CDSC
------------------------ --------------------
<S> <C>
First................... 5.0%
Second.................. 4.0%
Third................... 3.0%
Fourth.................. 3.0%
Fifth................... 2.0%
Sixth................... 1.0%
Seventh and thereafter.. none
</TABLE>
Proceeds from the CDSC are payable to the Distributor and may be used in
whole or part to defray the Distributor's expenses related to providing
distribution-related services to the Fund in connection with the sale of Class B
shares, including the payment of compensation to Authorized Dealers. A
commission equal to 4.00% of the amount invested is paid to Authorized Dealers.
Class B shares of the Fund will automatically convert into Class A shares
of the Fund at the end of the calendar quarter that is eight years after the
purchase date, except as noted below. Class B shares of the 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 is subject to the
continuing availability of a ruling from the Internal Revenue Service, for which
the Fund will apply, or an opinion of counsel that such conversions will not
constitute taxable events for Federal tax purposes. There can be no assurance
that such ruling or opinion will be available. The conversion of Class B shares
to Class A shares will not occur if such ruling or opinion is not available and,
therefore, Class B shares would continue to be subject to higher expenses than
Class A shares for an indeterminate period.
Waiver or Reduction of Contingent Deferred Sales Charge. The CDSC on
Class B shares and Class A shares that are subject to a CDSC may be waived or
reduced if the redemption relates to (i) 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, (ii) excess contributions being returned to pension and
profit sharing plans, pension funds and other company-sponsored benefit plans,
(iii) distributions from a qualified retirement plan invested in the Goldman
Sachs Portfolios which are being reinvested into a Goldman Sachs IRA, and (iv)
redemption proceeds which are to be reinvested in accounts or non-registered
products over which the Investment Manager or its advisory affiliates have
investment discretion. In addition, Class A and Class B shares subject to a
Systematic Withdrawal Plan may be redeemed without a CDSC. However, Goldman
Sachs reserves the right to limit such redemptions, on an annual basis, to 12%
of the value of your Class B shares and 10% of the value of your Class A shares.
26
<PAGE>
SHAREHOLDER 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 the Fund in shares of the same Class or an equivalent
Class of any other Goldman Sachs Portfolio or ILA Portfolio. See "Fund
Highlights." Shareholders may also elect to exchange automatically a specified
dollar amount of shares of the Fund for shares of the same Class or an
equivalent Class of any other Goldman Sachs Portfolio 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 $10,000 and (ii) the value of the account in the acquired fund
must equal or exceed the acquired fund's minimum initial investment requirement
or the shareholder must elect to continue cross-reinvestment or automatic
exchanges until the value of acquired fund shares in the shareholder's account
equals or exceeds the acquired fund's minimum initial investment requirement. A
Fund shareholder may elect cross-reinvestment into an identical account or an
account registered in a different name or with a different address, social
security or other taxpayer identification number, provided that the account in
the acquired fund has been established, appropriate signatures have been
obtained and the minimum initial investment requirement has been satisfied. A
Fund shareholder should obtain and read the prospectus of the fund into which
dividends are invested or automatic exchanges are made.
TAX-SHELTERED RETIREMENT PLANS
The Fund offers its shares for purchase by retirement plans, including IRA
Plans for individuals and their non-employed spouses and defined contribution
plans such as 401(k) Salary Reduction Plans. Detailed information concerning
these plans and copies of the plans may be obtained from the Transfer Agent.
This information should be read carefully, and consultation with an attorney or
tax adviser may be advisable. The information sets forth the service fee charged
for retirement plans and describes the federal income tax consequences of
establishing a plan. Under all plans, dividends and distributions will be
automatically reinvested in additional shares of the same class of the Fund or,
if so directed by the shareholder, in cash or in shares of the same or an
equivalent class of any other Goldman Sachs Portfolio or ILA Portfolio.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged at net asset value without the
imposition of an initial or contingent deferred sales charge at the time of
exchange for shares of the same class or an equivalent
27
<PAGE>
class of any other Fund, Goldman Sachs Portfolio or ILA Portfolio. A shareholder
needs to obtain and read the prospectus of the fund into which the exchange is
made. The shares or units of these other funds acquired by an exchange may later
be exchanged for shares of the same (or an equivalent class) of the 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 a sales charge. Shares or units of these other
funds purchased through dividends and/or capital gains reinvestment may be
exchanged for shares of the Fund 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 Fund and class of shares and
either writing to Goldman Sachs, Attention: Goldman Sachs Trust, Shareholder
Services, c/o NFDS, P.O. Box 419711, Kansas City, MO 64141-6711 or, if
previously elected in the Fund's Account Application, by telephone at 800-526-
7384 (8:00 a.m. to 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 Fund." Under the telephone exchange privilege, shares may be
exchanged among accounts with different names, addresses and social security or
other taxpayer identification numbers only if the exchange request is in writing
and is received in accordance with the procedures set forth under "How to Sell
Shares of the Fund." In times of drastic economic or market changes the
telephone exchange privilege may be difficult to implement.
For federal income tax purposes, an exchange, including an automatic
exchange, is treated as a sale of the shares surrendered in the exchange, on
which an investor may realize a gain or loss, followed by a purchase of shares
or units received in the exchange. If such sale occurs within ninety (90) days
after the purchase of such shares, to the extent an initial sales charge that
would otherwise apply to the shares or units received in the exchange is not
imposed, the sales charge paid on such purchase of Class A shares cannot be
taken into account by the exchanging shareholder for purposes of determining
gain or loss realized on such sale for federal income tax purposes, but instead
will be added to the tax basis of the shares or units received in the exchange.
Shareholders should consult their own tax advisers concerning the tax
consequences of an exchange.
All exchanges which represent an initial investment in the Fund must
satisfy the minimum investment requirements of the Fund into which the shares
are being exchanged. Exchanges are available only in states where exchanges may
legally be made.
OTHER PURCHASE INFORMATION
If shares of the Fund are held in a "street name" account or were purchased
through an Authorized Dealer, shareholders should contact the Authorized Dealer
to purchase, redeem or exchange shares, to make changes in or give instructions
concerning the account or to obtain information about the account. Authorized
Dealers who receive a portion of the sales charge applicable to the purchase of
Class A or Class B shares will not be permitted to impose any other fees on the
shareholders in connection with the purchase of such shares.
28
<PAGE>
The Fund and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by a
particular purchaser (or group of related purchasers). The Fund or Goldman Sachs
may reject or restrict purchases or exchanges of shares by a particular
purchaser or group, for example, when a pattern of frequent purchases and sales
of shares of the Fund is evident, or if the purchase and sale or exchange orders
are, or a subsequent abrupt redemption might be, of a size that would disrupt
management of the Fund. Goldman Sachs reserves the right to limit the
participation in the Fund of its partners and employees.
In addition to concessions allowed to Authorized Dealers, Goldman Sachs
may, from time to time, assist Authorized Dealers by, among other things,
providing sales literature to and holding informational programs for the benefit
of Authorized Dealers' registered representatives. Authorized Dealers may limit
the participation of registered representatives in such informational programs
by means of sales incentive programs which may require the sale of minimum
dollar amounts of shares of the Goldman Sachs Portfolios. Goldman Sachs may also
provide additional promotional incentives to Authorized Dealers in connection
with sales of shares of the Goldman Sachs Portfolios. These incentives may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by qualified registered representatives and members of their
families within or without the United States. Incentive payments will be
provided for out of the sales charge and distribution fees or out of Goldman
Sachs' other resources. Other than sales charges and distribution fees, the Fund
and its shareholders do not bear distribution expenses. An Authorized Dealer
receiving such incentives may be deemed to be an underwriter under the
Securities Act of 1933. In some instances, such incentives may be made available
only to certain Authorized Dealers whose representatives have sold or are
expected to sell significant amounts of shares.
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
DISTRIBUTION PLAN - CLASS A SHARES
The Trust, on behalf of the Fund's Class A shares, has adopted a
Distribution Plan (the "Class A Distribution Plan") pursuant to Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "Act") . Under the Class A
Distribution Plan, Goldman Sachs is entitled to a quarterly fee from the Fund
for distribution services equal, on an annual basis, to 0.25% of the Fund's
average daily net assets attributable to Class A shares of the Fund. Currently,
Goldman Sachs has voluntarily agreed not to impose any such fee. Goldman Sachs
has no current intention of modifying or discontinuing such agreement, but may
do so in the future at its discretion.
Goldman Sachs may use the distribution fee for its expenses of distributing
Class A shares of the Fund. 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 Board of Trustees of the Trust. 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.
29
<PAGE>
DISTRIBUTION PLAN - CLASS B SHARES
The Trust, on behalf of the Fund's Class B shares, has adopted a
Distribution Plan pursuant to Rule 12b-1 under the Act (the "Class B
Distribution Plan"). Under the Class B Distribution Plan, Goldman Sachs is
entitled to a quarterly fee from the Fund for distribution services equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares.
Goldman Sachs may use the distribution fee for its expenses of distributing
Class B shares of the Fund. The types of expenses for which Goldman Sachs may be
compensated for distribution services under the Class B Distribution Plan
include compensation paid to and expenses incurred by Authorized Dealers,
Goldman Sachs and their respective officers, employees and sales
representatives, commissions paid to Authorized Dealers, allocable overhead,
telephone and travel expenses, the printing of prospectuses for prospective
shareholders, preparation and distribution of sales literature, advertising of
any type and all other expenses incurred in connection with activities primarily
intended to result in the sale of Class B shares. If the fee received by Goldman
Sachs pursuant to the Class B Distribution Plan exceeds its expenses, Goldman
Sachs may realize a profit from these arrangements. The Class B Distribution
Plan will be reviewed and is subject to approval annually by the Board of
Trustees of the Trust. The aggregate compensation that may be received under the
Class B Distribution Plan for distribution services may not exceed the
limitations imposed by the NASD's Conduct Rules.
AUTHORIZED DEALER SERVICE PLANS
The Trust on behalf of the Fund's Class A and Class B shares has adopted
non-Rule 12b-1 Authorized Dealer Service Plans (each a "Service Plan") pursuant
to which Goldman Sachs and Authorized Dealers are compensated for providing
personal and account maintenance services. The Fund pays a fee under its Class A
or Class B Service Plan equal on an annual basis to 0.25% of its average daily
net assets attributable to Class A or Class B shares. The fee for personal and
account maintenance services paid pursuant to a Service Plan may be used to make
payments to Goldman Sachs, Authorized Dealers and their officers, sales
representatives and employees for responding to inquiries of, and furnishing
assistance to, shareholders regarding ownership of their shares or their
accounts or similar services not otherwise provided on behalf of the Fund. The
Service Plans will be reviewed and are subject to approval annually by the Board
of Trustees.
HOW TO SELL SHARES OF THE FUND
The 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 contingent deferred sales
charge. 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, the Fund
may delay transmittal of redemption proceeds until such time as it has assured
itself that good funds have been collected for the purchase of such 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 inside front cover page of this Prospectus or an Authorized Dealer.
A shareholder may request redemptions by telephone if the optional
telephone redemption privilege is elected on the Account Application. It may be
difficult to implement redemptions by telephone in times of drastic economic or
market changes. In an effort to prevent unauthorized or fraudulent redemption
and exchange requests by telephone, Goldman Sachs and NFDS each employ
reasonable procedures specified by the Trust to confirm that such instructions
are genuine. Consequently, proceeds of telephone redemption requests will be
sent only to the shareholder's
30
<PAGE>
address of record or authorized bank account designated in the Account
Application and exchanges of shares will be made only to an identical account.
Telephone requests will also be recorded. The Trust may implement other
procedures from time to time. If reasonable procedures are not implemented, the
Trust may be liable for any loss due to unauthorized or fraudulent transactions.
In all other cases, neither the Fund, the Trust nor Goldman Sachs will be
responsible for the authenticity of instructions received by telephone. Proceeds
of telephone redemptions will be mailed to the shareholder's address of record
or wired to the authorized bank account indicated on the Account Application,
unless the shareholder provides written instructions (accompanied by a signature
guarantee) indicating another address. Shares earn dividends accrued through the
day on which the 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 Fund 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 paid by wire transfer
will normally be wired on the next Business Day in Federal Funds (for a total
one-day delay). 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 the Fund, the Trust,
Goldman Sachs nor any Authorized Dealer assumes any further responsibility for
the performance of intermediaries or the shareholder's bank in the transfer
process. If a problem with such performance arises, the shareholder should deal
directly with such intermediaries or bank.
Additional documentation regarding a redemption by any means may be
required to effect a redemption when deemed appropriate by the Transfer Agent.
The request for such redemption will not be considered to have been received in
proper form until such additional documentation has been received.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may draw on shareholdings systematically via check or ACH in
any amount specified by the shareholder over $50. Checks are only available on
or about the 25th of each month. Each systematic withdrawal is a sale for tax
purposes. A minimum balance of $5,000 in shares of the Fund is required. The
maintenance of a withdrawal plan concurrently with purchases of additional Class
A or Class B shares would be disadvantageous because of the sales charge imposed
on your purchases of Class A shares or the imposition of a CDSC on your
redemptions of Class A and Class B shares. The CDSC applicable to Class B shares
redeemed under a systematic withdrawal plan may be waived. See "How to Invest-
Waiver or Reduction of Contingent Deferred Sales Charge." See the Additional
Statement for more information about the Systematic Withdrawal Plan.
DIVIDENDS
Each dividend and capital gains distribution, if any, declared by the
Fund on its outstanding shares will, at the election of each shareholder, be
paid (i) in cash, (ii) in additional shares of the same
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<PAGE>
class of the Fund or (iii) in shares of the same or an equivalent class of any
of the Goldman Sachs Portfolios or units of the ILA Portfolios (the Prime
Obligations Portfolio only for Class B) as described under "Cross-Reinvestment
of Dividends and Distributions and Automatic Exchange Program." This election
should initially be made on a shareholder's Account Application and may be
changed upon written notice to Goldman Sachs at any time prior to the record
date for a particular dividend or distribution. If no election is made, all
dividends 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 Portfolio 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 Portfolio or
an ILA Portfolio.
The 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. 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 Fund will declare
dividends daily and pay dividends monthly. The Fund will pay dividends from net
realized long-term and short-term capital gains, reduced by available capital
losses, at least annually. From time to time a portion of the Fund's dividends
may constitute a return of capital.
At the time of an investor's purchase of shares of the Fund a portion of
the net asset value per share may be represented by realized or unrealized
appreciation of the Fund's portfolio securities. Therefore, subsequent
distributions on such shares from such income or realized appreciation may be
taxable to the investor even if the net asset value of the investor's shares is,
as a result of the distributions, reduced below the cost of such shares and the
distributions (or portions thereof) represent a return of a portion of the
purchase price.
NET ASSET VALUE
The net asset value per share of each class of the Fund is calculated by
the Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time) on each
Business Day (as such term is defined under "Additional Information")
immediately after the determination, if any, of the income to be declared as a
dividend. 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.
The 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
Trust's Board of 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
32
<PAGE>
From time to time the Fund may publish yield, distribution rate and average
annual total return information in advertisements and communications to
shareholders and prospective investors. Average annual total return is
determined by computing the average annual percentage change in value of $1,000
invested at the maximum public offering price for specified periods ending with
the most recent calendar quarter, assuming reinvestment of all dividends and
distributions at net asset value. The total return calculation assumes a
complete redemption of the investment at the end of the relevant period. Total
return calculations for Class A shares reflect the effect of paying the maximum
initial sales charge. Investment at a lower sales charge would result in higher
performance figures. Total return calculations for Class B shares reflect
deduction of the applicable CDSC imposed upon redemption of Class B shares held
for the applicable period. The Fund may also from time to time advertise total
return on a cumulative, average, year-by-year or other basis for various
specified periods by means of quotations, charts, graphs or schedules. In
addition, the Fund may furnish total return calculations based on investments at
various sales charge levels or at net asset value. Any performance data based on
the Fund's net asset value per share would be reduced if a sales charge were
taken into account. In addition to the above, the Fund may from time to time
advertise its performance relative to certain performance rankings and indices.
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.
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.
The Fund's yield, total return and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, the yield, total return and distribution
rate calculations with respect to each class of shares for the same period will
differ. The investment performance of the Class A and Class B shares will be
affected by the payment of a sales charge and distribution fees. See "Shares of
the Trust" below.
The investment results of the Fund will fluctuate over time and any
presentation of investment results for any prior period should not be considered
a representation of what an investment may earn or what the Fund's performance
may be in any future period. In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of its
holdings available to investors upon request.
SHARES OF THE TRUST
The Fund is a series of the Goldman Sachs Trust, which was organized under
the laws of The Commonwealth of Massachusetts on September 24, 1987 as a
Massachusetts business trust under an Agreement and Declaration of Trust, as
amended (the "Trust Agreement"). Under the Trust Agreement, the Trustees are
authorized to issue an unlimited number of shares of beneficial interest, $.001
par value per share. The Trustees of the Trust are responsible for the overall
management and supervision of its affairs. The Trustees of the Trust have
authority to create and classify shares of beneficial interest in separate
series, without further action by shareholders. Additional series may be
33
<PAGE>
added in the future. The Trustees have authorization to classify or reclassify
any series or portfolio of shares into one or more classes. The Fund offers
Institutional, Service, Class A and Class B shares.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the 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.
Unless otherwise required by the Act, ordinarily it will not be necessary
for the Trust to hold annual meetings of shareholders. As a result, shareholders
may not consider each year the election of Trustees or the appointment of
independent accountants. Shareholders may remove a Trustee by the affirmative
vote of at least two-thirds of the Trust's outstanding shares and the Trustees
must promptly call a meeting for such purpose when requested to do so in writing
by the record holders of not less than 10% of the outstanding shares of the
Trust. Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
The Board of Trustees, however, 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 Fund's shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Fund are reflected in
account statements from the Transfer Agent.
Under Massachusetts law, there exists a remote possibility that
shareholders of a business trust could, under certain circumstances, be held
personally liable as partners for the obligations of such trust. The Trust
Agreement contains provisions intended to limit such liability and to provide
indemnification out of Trust property of any shareholder charged or held
personally liable for obligations or liabilities of the Trust solely by reason
of being or having been a shareholder of the Trust and not because of such
shareholder's acts or omissions or for some other reason. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
It is anticipated that each series of the Trust, including the Fund, will
be reorganized on April 30, 1997, or as soon thereafter as practicable, into
newly established series of a Delaware business trust (the "Delaware Trust").
The above description regarding shares of the Trust applies equally to shares of
the Delaware Trust except that, under Delaware law, shareholders of the Delaware
Trust are not personally liable as partners for the obligations of such Trust.
The Trustees of the Trust will also serve as trustees of the Delaware Trust, the
Investment Manager will also serve as the investment adviser to the Delaware
Trust's series corresponding to the Fund, and such series' investment objective,
policies and restrictions will be identical to those of the Fund. The initial
shareholder of the Fund has approved the reorganization of the Trust into the
Delaware Trust and any and all matters incidental thereto, including the
election of trustees of the Delaware Trust, the approval of an investment
advisory agreement between the Investment Manager and the Delaware Trust on
behalf of such Trust's series corresponding to the Fund, and the ratification of
the selection of the Delaware Trust's independent public accountants. In the
event that the shareholders of the other series of the Trust do not approve the
reorganization, the Fund may not be reorganized into the Delaware Trust. See the
Additional Statement for further information.
TAXATION
FEDERAL TAXES
34
<PAGE>
The Fund is treated as a separate entity for tax purposes and intends to
elect to be treated as a regulated investment company and to qualify for such
treatment for each taxable year under Subchapter M of the Code. To qualify as
such, the Fund must satisfy certain requirements relating to the sources of its
income, diversification of its assets and distribution of its income to
shareholders. As a regulated investment company, the Fund will not be subject to
federal income or excise tax on any net investment income and net realized
capital gains that are distributed to its shareholders in accordance with
certain timing requirements of the Code.
Dividends paid by the Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net long-
term capital loss and original issue discount or market discount income will be
taxable to shareholders as ordinary income. Dividends paid by the Fund from the
excess of net long-term capital gain over net short-term capital loss will be
taxable as long-term capital gains regardless of how long the shareholders have
held their shares. These tax consequences will apply regardless of whether
distributions are received in cash or reinvested in shares. Certain
distributions paid by the Fund in January of a given year may be taxable to
shareholders as if received the prior December 31. Shareholders will be informed
annually about the amount and character of distributions received from the Fund
for federal income tax purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the record
date for a distribution will pay a per share price that includes the value of
the anticipated distribution and will be taxed on 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 on which a
shareholder may recognize a gain or loss.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications required by the Internal Revenue Service or if they
are otherwise subject to backup withholding. Individuals, corporations and other
shareholders that are not U.S. persons under the Code are subject to different
tax rules and may be subject to nonresident alien withholding at the rate of 30%
(or a lower rate provided by an applicable tax treaty) on amounts treated as
ordinary dividends from the Fund.
The Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. It is not expected that the Fund
will elect to pass such taxes through to its shareholders, who therefore will
generally not take such taxes into account on their own tax returns. The Fund
will generally deduct such taxes in determining the amounts available for
distribution to shareholders.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Fund. A state income (and
possibly local income and/or intangible property) tax exemption is generally
available to the extent (if any) the Fund's distributions are derived from
interest on (or, in the case of intangibles taxes, the value of its assets is
attributable to) certain U.S. Government obligations, provided in some states
that certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied. For a further discussion of certain tax consequences
of investing in shares of the Fund, see "Taxation" in the Additional Statement.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state and local taxes as well as to any foreign taxes.
35
<PAGE>
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of the Fund
means the vote of the lesser of (i) 67% or more of the shares present at a
meeting, if the holders of more than 50% of the outstanding shares of the Fund
are present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
36
<PAGE>
APPENDIX
STATEMENT OF INTENTION
(APPLICABLE ONLY TO CLASS A SHARES PURCHASED SUBJECT TO A SALES CHARGE)
If a shareholder anticipates purchasing $100,000 or more of Class A shares
of the Fund alone or in combination with Class A shares of another Fund or
another Goldman Sachs Portfolio 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 apply toward the
completion of this Statement of Intention.
To ensure that the reduced price will be received on future purchases, the
investor must inform Goldman, Sachs & Co. that this Statement of Intention is in
effect each time shares are purchased. Subject to the conditions mentioned
below, each purchase will be made at the public offering price applicable to a
single transaction of the dollar amount specified on the Account Application.
The investor makes no commitment to purchase additional shares, but if his
purchases within 13 months plus the value of shares credited toward completion
do not total the sum specified, he will pay the increased amount of the sales
charge prescribed in the Escrow Agreement.
ESCROW AGREEMENT
Out of the initial purchase (or subsequent purchases if necessary) 5% of
the dollar amount specified on the Account Application shall be held in escrow
by the Transfer Agent in the form of shares registered in the investor's name.
All income dividends and capital gains distributions on escrowed shares will be
paid to the investor or to his order. When the minimum investment so specified
is completed (either prior to or by the end of the thirteenth month), the
shareholder will be notified and the escrowed shares will be released. In
signing the Account Application, the investor irrevocably constitutes and
appoints the Transfer Agent his attorney to surrender for redemption any or all
escrowed shares with full power of substitution in the premises.
If the intended investment is not completed, the investor will be asked to
remit to Goldman, Sachs & Co. any difference between the sales charge on the
amount specified and on the amount actually attained. If the investor does not
within 20 days after written request by Goldman, Sachs & Co. pay such difference
in the sales charge, the Transfer Agent will redeem an appropriate number of the
escrowed shares in order to realize such difference. Shares remaining after any
such redemption will be released by the Transfer Agent.
GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON ACCOUNT INFORMATION FORM
You are required by law to provide the Fund with your correct Taxpayer
Identification Number ("TIN"), regardless of whether you file tax returns.
Failure to do so may subject you to penalties. Failure to provide your correct
TIN and to sign your name in the Certification section of the Account
Information Form could result in withholding of 31% by the Fund for the Federal
backup withholding tax on distributions, redemptions, exchanges and other
payments relating to your account.
Any tax withheld may be credited against taxes owed on your federal income
tax return.
37
<PAGE>
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 IRAs, 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.
38
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================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Fund Highlights.........................................................
Fees and Expenses.......................................................
Investment Objective and Policies.......................................
Description of Securities...............................................
Risk Factors............................................................
Investment Techniques...................................................
Investment Restrictions.................................................
Portfolio Turnover......................................................
Management..............................................................
Reports to Shareholders.................................................
How to Invest...........................................................
Shareholder Services Available to Shareholders..........................
Distribution and Authorized Dealer Service Plans........................
How to Sell Shares of the Fund..........................................
Dividends...............................................................
Net Asset Value.........................................................
Performance Information.................................................
Shares of the Trust.....................................................
Taxation................................................................
Additional Information..................................................
Appendix................................................................
Account Application
</TABLE>
================================================================================
================================================================================
GOLDMAN SACHS HIGH YIELD
FUND
________
PROSPECTUS
CLASS A AND CLASS B SHARES
GOLDMAN SACHS ASSET MANAGEMENT
Investment Manager
One New York Plaza
New York, New York 10004
GOLDMAN, SACHS & CO.
Distributor
85 Broad Street
New York, New York 10004
GOLDMAN, SACHS & CO.
Transfer Agent
4900 Sears Tower
Chicago, Illinois 60606
Toll Free (in U.S.).............800-526-7384
================================================================================
39
<PAGE>
Subject to Completion: dated January 3, 1997
INFORMATION CONAINED 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 ANY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
PART B
STATEMENT OF ADDITIONAL INFORMATION
________ __, 1997
INSTITUTIONAL SHARES
GOLDMAN SACHS HIGH YIELD FUND
(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 a separate investment series of
Goldman Sachs Trust (the "Trust"). This Additional Statement should be read in
conjunction with the prospectus for the Institutional Shares of 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>
PAGE
----
<S> <C>
Introduction .................................................................
Investment Objective and Policies ............................................
Other Investments and Practices ..............................................
Investment Restrictions ......................................................
Management ...................................................................
Portfolio Transactions .......................................................
Shares of the Trust ..........................................................
Net Asset Value ..............................................................
Taxation .....................................................................
Performance Information ......................................................
Other Information ............................................................
Financial Statements .........................................................
Appendix A ...................................................................
Appendix B ...................................................................
Appendix C ...................................................................
</TABLE>
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
INVESTMENT MANAGER DISTRIBUTOR
ONE NEW YORK PLAZA 85 BROAD STREET
NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE (IN U.S.) .......800-621-2550
B-2
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") was organized under the laws of The
Commonwealth of Massachusetts on September 24, 1987 as a Massachusetts business
trust. The Trust assumed its current name on March 22, 1991. The Trustees of the
Trust have authority under the Declaration of Trust to create and classify
shares into separate series and to classify and reclassify any series of shares
into one or more classes without further action by shareholders. Pursuant
thereto, the Trustees have created Goldman Sachs High Yield Fund (the "Fund"),
as well as other series of the Trust. The Fund is authorized to issue four
classes of shares: Institutional Shares, Service Shares, Class A Shares and
Class B Shares.
Goldman Sachs Asset Management ("GSAM" or the "Investment Manager"), a
separate operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
the investment adviser and manager to the Fund. In addition, Goldman Sachs
serves as the Fund's distributor and transfer agent. The Fund's custodian is
State Street Bank and Trust Company.
Because the Fund's shares may be redeemed upon request of a shareholder on
any business day at net asset value, the Fund offers greater liquidity than many
competing investments, such as certificates of deposit and direct investments in
certain securities in which the Fund may invest. However, unlike certificates of
deposit, shares of the Fund are not insured by the Federal Deposit Insurance
Corporation.
The following information relates to and supplements the description of the
Fund's investment policies contained in the Prospectus. See the Prospectus for a
fuller description of the Fund's investment objective and policies. Investing in
the Fund entails certain risks and there is no assurance that the 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.
INVESTMENT OBJECTIVE AND POLICIES
OTHER INVESTMENTS AND PRACTICES
B-3
<PAGE>
CORPORATE DEBT OBLIGATIONS
The Fund may make a variety of investments, including investment in long-
term, intermediate-term and short-term senior and subordinated corporate debt
obligations. Such corporate debt obligations will typically be unrated or rated
in the non-investment grade rating categories of Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("Standard & Poor's") or another
rating organization. Bonds rated BB or below by Standard & Poor's or Ba or below
by 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 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 & 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 the 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
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
B-4
<PAGE>
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 the 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 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 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 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 Fund of its initial investment and any
anticipated income or appreciation is uncertain. The Fund may be required to
liquidate other portfolio securities to satisfy the Fund's annual distribution
obligations in respect of accrued interest income on securities which are
subsequently written off, even though the Fund has not received any cash
payments of such interest.
The secondary market for high yield, 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, 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 Fund's ability to dispose of particular
B-5
<PAGE>
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 Fund's net asset value. A less liquid secondary market also
may make it more difficult for the 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 in 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 Fund may have to replace such security
with a lower yielding security, resulting in a decreased return for investors.
In addition, if the Fund experiences unexpected net redemptions of the Fund's
shares, it may be forced to sell its higher rated securities, resulting in a
decline in the overall credit quality of the Fund's portfolio and increasing the
exposure of the Fund to the risks of high yield securities. The 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 Investment
Manager's credit analysis than would be the case with investments in investment-
grade debt obligations. The Investment Manager 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 Manager continually monitors the investments in the 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.
B-6
<PAGE>
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
The 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 Treasury bills, notes and bonds, which differ
only in their interest rates, maturities and times of issuance) are supported by
the full faith and credit of the United States of America. Others, such as
obligations issued or guaranteed by U.S. government agencies, instrumentalities
or sponsored enterprises, are supported either by (a) the full faith and credit
of the U.S. government (such as securities of the Small Business
Administration), (b) the right of the issuer to borrow from the Treasury (such
as securities of Federal Home Loan Banks), (c) the discretionary authority of
the U.S. government to purchase the agency's obligations (such as securities of
Federal National Mortgage Association ("Fannie Mae")) or (d) only the credit of
the issuer (such as securities of the Financing Corporation). The U.S.
government is under no legal obligation, in general, to purchase the obligations
of its agencies, instrumentalities or sponsored enterprises. No assurance can be
given that the U.S. government will provide financial support to the U.S.
government agencies, instrumentalities or sponsored enterprises in the future.
U.S. Government Securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, its agencies, instrumentalities or sponsored
enterprises. U.S. Government Securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a substantial secondary market, such participations are regarded as illiquid.
The Fund may also purchase U.S. Government Securities in private placements,
subject to the Fund's limitation on investment in illiquid securities.
The Fund 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").
B-7
<PAGE>
Custodial Receipts
The 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
The Fund may 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 Fund invests in Mortgage-Backed Securities, the Investment Manager will
seek to manage these potential risks by investing in a variety of Mortgage-
Backed Securities and by using certain hedging techniques.
B-8
<PAGE>
Adjustable Rate Mortgage Loans ("ARMs"). ARMs generally provide for a
---------------------------------------
fixed initial mortgage interest rate for a specified period of time. Thereafter,
the interest rates (the "Mortgage Interest Rates") may be subject to periodic
adjustment based on changes in the applicable index rate (the "Index Rate"). The
adjusted rate would be equal to the Index Rate plus a fixed percentage spread
over the Index Rate established for each ARM at the time of its origination.
Adjustable interest rates can cause payment increases that some mortgagors
may find difficult to make. However, certain ARMs may provide that the Mortgage
Interest Rate may not be adjusted to a rate above an applicable lifetime maximum
rate or below an applicable lifetime minimum rate for such ARM. Certain ARMs may
also be subject to limitations on the maximum amount by which the Mortgage
Interest Rate may adjust for any single adjustment period (the "Maximum
Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may provide instead or
as well for limitations on changes in the monthly payment on such ARMs.
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In the
event that a monthly payment is not sufficient to pay the interest accruing on a
Negatively Amortizing ARM, any such excess interest is added to the principal
balance of the loan, causing negative amortization, and will be repaid through
future monthly payments. It may take borrowers under Negatively Amortizing ARMs
longer periods of time to build up equity and may increase the likelihood of
default by such borrowers. In the event that a monthly payment exceeds the sum
of the interest accrued at the applicable Mortgage Interest Rate and the
principal payment which would have been necessary to amortize the outstanding
principal balance over the remaining term of the loan, the excess (or
"accelerated amortization") further reduces the principal balance of the ARM.
Negatively Amortizing ARMs do not provide for the extension of their original
maturity to accommodate changes in their Mortgage Interest Rate. As a result,
unless there is a periodic recalculation of the payment amount (which there
generally is), the final payment may be substantially larger than the other
payments. These limitations on periodic increases in interest rates and on
changes in monthly payments protect borrowers from unlimited interest rate and
payment increases.
There are two main categories of indices which provide the basis for rate
adjustments on ARMs: those based on U.S. Treasury securities and those derived
from a calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year, three-year and
five-year 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-
B-9
<PAGE>
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 the Fund's portfolio
and therefore in the net asset value of the Fund's shares will be a function of
the length of the interest rate reset periods and the degree of volatility in
the applicable indices.
Fixed-Rate Mortgage Loans. Generally, fixed-rate mortgage loans included
-------------------------
in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple interest
at fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed-Rate Mortgage Loans generally provide for monthly payments of
principal and interest in substantially equal installments for the term of the
mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain Fixed-Rate Mortgage Loans provide for a large final "balloon"
payment upon maturity.
Legal Considerations of Mortgage Loans. The following is a discussion of
--------------------------------------
certain legal and regulatory aspects of the mortgage loans in which the Fund 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 Fund's investments in Mortgage-Backed Securities (including those issued or
guaranteed by the U.S. government, its agencies or instrumentalities) by
delaying the Fund's 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
B-10
<PAGE>
provisions, including the federal bankruptcy laws and state laws affording
relief to debtors, may interfere with or affect the ability of a secured
mortgage lender to enforce its security interest. For example, a bankruptcy
court may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may also
reduce the monthly payments due under such mortgage loan, change the rate of
interest, reduce the principal balance of the loan to the then-current appraised
value of the related mortgaged property, alter the mortgage loan repayment
schedule and grant priority of certain liens over the lien of the mortgage loan.
If a court relieves a borrower's obligation to repay amounts otherwise due on a
mortgage loan, the mortgage loan servicer will not be required to advance such
amounts, and any loss may be borne by the holders of securities backed by such
loans. In addition, numerous federal and state consumer protection laws impose
penalties for failure to comply with specific requirements in connection with
origination and servicing of mortgage loans.
4. "Due-on-Sale" Provisions. Fixed-rate mortgage loans may contain a so-
------------------------
called "due-on-sale" clause permitting acceleration of the maturity of the
mortgage loan if the borrower transfers the property. The Garn-St. Germain
Depository Institutions Act of 1982 sets forth nine specific instances in which
no mortgage lender covered by that Act may exercise a "due-on-sale" clause upon
a transfer of property. The inability to enforce a "due-on-sale" clause or the
lack of such a clause in mortgage loan documents may result in a mortgage loan
being assumed by a purchaser of the property that bears an interest rate below
the current market rate.
5. Usury Laws. Some states prohibit charging interest on mortgage loans in
----------
excess of statutory limits. If such limits are exceeded, substantial penalties
may be incurred and, in some cases, enforceability of the obligation to pay
principal and interest may be affected.
Government Guaranteed Mortgage-Backed Securities. There are several types
------------------------------------------------
of guaranteed Mortgage-Backed Securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), other collateralized mortgage obligations and stripped
Mortgage-Backed Securities. The Fund is permitted to invest in other types of
Mortgage-Backed Securities that may be available in the future to the extent
consistent with its investment policies and objective.
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
B-11
<PAGE>
certificates that are based on and backed by a pool of mortgage loans insured by
the Federal Housing Administration ("FHA Loans"), or guaranteed by the Veterans
Administration ("VA Loans"), or by pools of other eligible mortgage loans. In
order to meet its obligations, Ginnie Mae is authorized to borrow from the U.S.
Treasury in an unlimited amount.
Fannie Mae Certificates. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the U.S. Congress. Each Fannie Mae Certificate is
issued and guaranteed by Fannie Mae and represents an undivided interest in a
pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool consists of
residential mortgage loans ("Mortgage Loans") either previously owned by Fannie
Mae or purchased by it in connection with the formation of the Pool. The
Mortgage Loans may be either conventional Mortgage Loans (i.e., not insured or
guaranteed by any U.S. government agency) or Mortgage Loans that are either
insured by the FHA or guaranteed by the VA. However, the Mortgage Loans in
Fannie Mae Pools are primarily conventional Mortgage Loans. The lenders
originating and servicing the Mortgage Loans are subject to certain eligibility
requirements established by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to distribute
to holders of Certificates an amount equal to the full principal balance of any
foreclosed Mortgage Loan, whether or not such principal balance is actually
recovered. The obligations of Fannie Mae under its guaranty of the Fannie Mae
Certificates are obligations solely of Fannie Mae.
Freddie Mac Certificates. The Federal Home Loan Corporation ("Freddie
------------------------
Mac") is a publicly held U.S. government sponsored enterprise. The principal
activity of Freddie Mac currently is the purchase of first lien, conventional,
residential mortgage loans and participation interests in such mortgage loans
and their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a
group of mortgage loans or participations in mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
B-12
<PAGE>
Conventional Mortgage Loans. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed
rate mortgage loans with original terms to maturity of between five and thirty
years. Substantially all of these mortgage loans are secured by first liens on
one- to four-family residential properties or multi-family projects. Each
mortgage loan must meet the applicable standards set forth in the law creating
Freddie Mac or Fannie Mae. A Freddie Mac Certificate group may include whole
loans, participation interests in whole loans, undivided interests in whole
loans and participations comprising another Freddie Mac Certificate group.
Mortgage Pass-Through Securities. The Fund 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-
B-13
<PAGE>
through rate (less the amount, if any, of retained yield) with respect to each
mortgage loan will generally be paid to the servicer as a servicing fee. Since
certain adjustable rate mortgage loans included in a mortgage pool may provide
for deferred interest (i.e., negative amortization), the amount of interest
actually paid by a mortgagor in any month may be less than the amount of
interest accrued on the outstanding principal balance of the related mortgage
loan during the relevant period at the applicable mortgage interest rate. In
such event, the amount of interest that is treated as deferred interest will be
added to the principal balance of the related mortgage loan and will be
distributed pro rata to certificate-holders as principal of such mortgage loan
--- ----
when paid by the mortgagor in subsequent monthly payments or at maturity.
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage
---------------------------------------------------------------------
Obligations. The 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 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,
B-14
<PAGE>
which are known as "regular" interests or "residual" interests. The Fund does
not intend to purchase residual interests in REMICs. The REMIC Certificates
represent beneficial ownership interests in a REMIC trust, generally consisting
of mortgage loans or Fannie Mae, Freddie Mac or Ginnie Mae guaranteed Mortgage-
Backed Securities (the "Mortgage Assets"). The obligations of Fannie Mae or
Freddie Mac under their respective guaranty of the REMIC Certificates are
obligations solely of Fannie Mae or Freddie Mac, respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans or
the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or
all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final scheduled distribution dates. Generally, interest is
paid or accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization 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
B-15
<PAGE>
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 Fund 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. The Fund may also invest in privately-issued SMBS. Although
the market for such securities is increasingly liquid, privately-issued SMBS may
not be readily marketable and will be considered illiquid for purposes of the
Fund's limitation on investments in illiquid securities. The Investment Manager
may determine that SMBS which are U.S. Government Securities are liquid for
purposes of the 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.
B-16
<PAGE>
Credit Enhancement. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things, payment
guarantees, letters of credit, pool insurance, subordination, or any combination
thereof.
Subordination; Shifting of Interest; Reserve Fund. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of the
senior certificates while increasing the interest in the trust fund evidenced by
the subordinate certificates. Increasing the interest of the subordinate
certificates relative to that of the senior certificates is intended to preserve
the availability of the subordination provided by the subordinate certificates.
In addition, because the senior certificate-holders in a shifting interest
credit enhancement structure are entitled to receive a percentage of principal
prepayments which is greater than their proportionate interest in the trust
fund, the rate of principal prepayments on the mortgage loans will have an even
greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-
B-17
<PAGE>
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 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
The Fund may invest in asset-backed securities. Such securities are often
subject to more rapid repayment than their
B-18
<PAGE>
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, the Fund's ability to maintain positions in
such securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns
of principal at comparable yields is subject to generally prevailing interest
rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
ZERO COUPON, DEFERRED INTEREST, CAPITAL APPRECIATION BONDS AND PIK SECURITIES
The Fund may invest in zero coupon bonds, deferred interest and capital
appreciation bonds and payable-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 and 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.
B-19
<PAGE>
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, the 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, the 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 Fund is nonetheless required to accrue
income on such investments that are debt securities for each taxable year and
generally is 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, the Fund may be required to liquidate other
portfolio securities to 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 the Fund may
invest is 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 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.
B-20
<PAGE>
Accordingly, the duration of an inverse floater may exceed its stated final
maturity. Certain inverse floaters may be deemed to be illiquid securities for
purposes of the Fund's limitation on illiquid investments.
BANK OBLIGATIONS
The Fund may invest in obligations issued or guaranteed by United States
and foreign banks. Bank obligations, including without limitation time
deposits, bankers' acceptances and certificates of deposit, may be general
obligations of the parent bank or may be obligations only of the issuing branch
pursuant to the terms of the specific obligations or government regulation.
Banks are subject to extensive but different governmental regulations which
may limit both the amount and types of loans which may be made and interest
rates which may be charged. Foreign banks are subject to different regulations
and are permitted to engage in different activities than U.S. banks. In
addition, the profitability of the banking industry is largely dependent upon
the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
FOREIGN INVESTMENTS
The Fund 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 the
Fund may temporarily hold funds in bank deposits in foreign currencies during
completion of investment programs, the Fund may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations and
may incur costs in connection with conversions between various currencies.
Foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. In addition, there may be less publicly available
information about a foreign company than about a comparable U.S. company.
Volume and liquidity in most foreign bond markets are less than in the United
States markets and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Commissions on foreign
securities exchanges are often fixed and generally are higher than negotiated
commissions or dealer mark-ups in the U.S. markets, although the Fund endeavors
to
B-21
<PAGE>
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 the Fund is uninvested and no return is
earned thereon. The inability of the Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund or due to subsequent declines
in value of the portfolio securities, or, if the Fund has entered into a
contract to sell the securities, could result in possible liability to the
purchaser. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could adversely affect the Fund's
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, 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 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 the Fund needs cash to meet redemption requests, to pay dividends and other
distributions or to pay its expenses.
B-22
<PAGE>
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 settlement could result in
temporary periods when a portion of the Fund's assets is uninvested and
settlement could result in temporary periods when a portion of the Fund's assets
in 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 that could
significantly disrupt the principal financial markets than are 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 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
B-23
<PAGE>
(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 the 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 the Fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and the 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. The Fund may enter into
forward foreign currency exchange contracts for hedging purposes. A forward
foreign currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are generally charged at any stage for trades.
At the maturity of a forward contract, the Fund may either accept or make
delivery of the currency specified in the contract
B-24
<PAGE>
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.
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. First, when the Fund enters into a contract for the
purchase or sale of a security quoted or denominated in a foreign currency, or
when the Fund anticipates the receipt in a foreign currency of a dividend or
interest payment on such a security which it holds, the Fund may desire to "lock
in" the U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for the purchase or sale, for a fixed amount of U.S. dollars, of the
amount of foreign currency involved in the underlying transactions, the Fund
will attempt to protect itself against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the Investment Manager 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 the 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 the 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 the 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 the Fund's foreign
assets.
The Fund's custodian will place cash or liquid securities 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. 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
B-25
<PAGE>
respect to such contracts. The segregated account will be marked-to-market on a
daily basis. Although the contracts are not presently regulated by the Commodity
Trading Futures Commission ("CFTC"), the CFTC may in the future assert authority
to regulate these contracts. In such event, the Fund's ability to utilize
forward foreign currency exchange contracts may be restricted. The Fund will not
enter into a forward contract with a term of greater than one year.
While the Fund may enter into forward contracts to seek to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while the Fund may benefit from such transactions, unanticipated changes
in currency prices may result in a poorer overall performance for the Fund than
if it had not engaged in any such transactions. Moreover, there may be
imperfect correlation between the Fund's portfolio holdings of securities quoted
or denominated in a particular currency and forward contracts entered into by
the Fund. Such imperfect correlation may cause the Fund to sustain losses which
will prevent the Fund from achieving a complete hedge or expose the Fund to risk
of foreign exchange loss.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive the Fund of unrealized profits, transaction costs
or the benefits of a currency hedge or force the Fund to cover its purchase or
sale commitments, if any, at the current market price. The 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 Investment Manager.
INTEREST RATE SWAPS, MORTGAGE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS,
FLOORS AND COLLARS
The Fund may enter into interest rate swaps, caps, floors and collars. In
addition, the Fund may also enter into currency swaps. The Fund may enter into
swap transactions for hedging purposes and, except for currency swaps, to seek
to increase total return. Interest rate swaps involve the exchange by the 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
B-26
<PAGE>
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, the Fund expects to achieve an acceptable degree of
correlation between its portfolio investments and its swap, cap, floor and
collar positions.
The 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 the Fund is contractually obligated to make. If the other party
to an interest rate swap defaults, the Fund's risk of loss consists of the net
amount of payments that the 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 the 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 securities having
an aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by the Fund's custodian. Inasmuch as these
transactions are entered into for hedging purposes or are offset by cash or
liquid securities maintained in a segregated account the Fund and the Investment
Manager believes that swaps do not constitute senior securities under the Act
and, accordingly, will not treat them as being subject to the Fund's borrowing
restriction.
The Fund 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, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with the
B-27
<PAGE>
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
the 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 Investment Manager is incorrect in its
forecasts of market values, interest rates and currency exchange rates, the
investment performance of the 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. The 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. The 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 the 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 the 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 the 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, the Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by the Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. The purpose of writing such
options is to generate additional income. However, in return for the option
premium, the Fund accepts the risk that it will be required to purchase the
underlying securities at a price in excess of the securities' market value at
the time of purchase.
All call and put options written by the Fund are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid
securities, either of which 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
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<PAGE>
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.
The 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."
The 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 Fund may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by the Fund's custodian) upon conversion or exchange of other
securities in its portfolio. The Fund may also cover call and put options on a
securities index by maintaining cash or liquid securities with a value equal to
the exercise price in a segregated account with its custodian or by using the
other methods described above.
PURCHASING OPTIONS. The Fund may also purchase put and call options on any
------------------
securities in which it may invest or on any securities index based on securities
in which it may invest, and the Fund may enter into closing sale transactions in
order to realize gains or minimize losses on options it had purchased.
The 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 the Fund, in return for the premium paid, to
purchase specified securities at a specified price during the option period. The
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 the Fund, in exchange for the premium
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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 the Fund's securities. Put options may also be
purchased by the Fund for the purpose of affirmatively benefiting from a decline
in the price of securities which it does not own. The 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.
The 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 the 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 the
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Investment Manager. 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. The Fund may write
----------------------------------------------------
covered put and call options and purchase put and call options on foreign
currencies in an attempt to protect against declines in the dollar value of
portfolio securities and against increases in the dollar cost of securities to
be acquired.
A call option written by the Fund obligates the Fund to sell specified
currency to the holder of the option at a specified price if the option is
exercised at any time before the expiration date. A put option written by the
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.
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The writing of currency options involves a risk that the 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.
The 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." The Fund would also be able to
enter into closing sale transactions in order to realize gains or minimize
losses on purchased options.
The Fund 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 the Fund, in return for the premium paid, to purchase specified currency
at a specified price during the option period. The 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.
The Fund would normally purchase put options in anticipation of a decline
in the U.S. dollar value of currency in which securities in its portfolio are
denominated or quoted ("protective puts"). The purchase of a put option would
entitle the Fund in exchange for the premium paid, to sell specified currency at
a specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the U.S. dollar value of
the Fund's portfolio securities due to currency exchange rate fluctuations. The
Fund would ordinarily realize a gain if, during the option period, the value of
the underlying currency decreased below the exercise price sufficiently to more
than cover the premium and transaction costs; otherwise the Fund would realize
either no gain or a loss on the purchase of the put option. Gains and losses on
the purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency.
YIELD CURVE OPTIONS. The 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.
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<PAGE>
Yield curve options may be used for the same purposes as other options on
securities. For example, the Fund may purchase a call option on the yield
spread between two securities if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. The 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 Investment Manager,
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 the 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 securities sufficient to cover the Fund's net liability
under the two options. Therefore, the 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 the 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 the 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
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restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
The 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 Fund will treat
purchased over-the-counter options and all assets used to cover written over-
the-counter options as illiquid securities, except that with respect to options
written with primary dealers in U.S. Government Securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to 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 Investment Manager'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, securities prices or (but only for hedging purposes) currency exchange
rates, the Fund may purchase and sell various kinds of futures contracts, and
purchase and write call and put options on any of such futures contracts. The
Fund may also enter into closing purchase and sale transactions with respect to
any of such contracts and options. The futures contracts may be based on various
securities (such as U.S. Government Securities), securities indices, foreign
currencies and any other financial instruments and indices. The Fund will
engage in futures and related options transaction only for bona fide hedging
purposes as defined below or for purposes of seeking to increase total return to
the extent permitted by regulations of the CFTC. All futures contracts entered
into by the Fund are traded on U.S. exchanges or boards of trade that are
licensed and regulated by the CFTC or on foreign exchanges.
B-33
<PAGE>
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
When interest rates are rising or securities prices are falling, the 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, the 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. The Fund may
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, the 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 the Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are quoted or denominated. The Fund may, for example, take a "short"
position in the futures market by selling futures contracts in an attempt to
hedge against an anticipated rise in interest rates or a decline in market
prices or foreign currency rates that would adversely affect the U.S. dollar
value of the Fund's portfolio securities. Such futures contracts may include
contracts for the future delivery of securities held by the Fund or securities
with characteristics similar to those of the Fund's portfolio securities.
Similarly, the Fund may sell futures contracts on any currencies in which its
portfolio securities are quoted or denominated or in one currency to hedge
against fluctuations in the value of securities denominated in a different
currency if there is an established historical pattern of correlation between
the two currencies. If, in the opinion of the Investment Manager, there is a
sufficient degree of correlation between price trends for the Fund's portfolio
securities and futures contracts based on other
B-34
<PAGE>
financial instruments, securities indices or other indices, the Fund may also
enter into such futures contracts as part of its hedging strategy. Although
under some circumstances prices of securities in the Fund's portfolio may be
more or less volatile than prices of such futures contracts, the Investment
Manager will attempt to estimate the extent of this volatility difference based
on historical patterns and compensate for any such differential by having the
Fund enter into a greater or lesser number of futures contracts or by attempting
to achieve only a partial hedge against price changes affecting the Fund's
portfolio securities. When hedging of this character is successful, any
depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position. On the other hand, any
unanticipated appreciation in the value of the Fund's portfolio securities would
be substantially offset by a decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing
futures contracts. This would be done, for example, when the Fund anticipates
the subsequent purchase of particular securities when it has the necessary cash,
but expects the prices or currency exchange rates then available in the
applicable market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give the 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, the 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 the Fund's assets. By
writing a call option, the 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 the Fund intends to
purchase. However, the Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. Thus, the loss incurred by the Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Fund will incur transaction costs in connection with the
writing of options on futures.
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<PAGE>
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. The 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. The Fund will engage in futures and related options
--------------------
transactions only for bona fide hedging or, except for purchases or sales by the
Fund of futures on currencies, to seek to increase total return as permitted by
the CFTC regulations which permit principals of an investment company registered
under the Act to engage in such transactions without registering as commodity
pool operators. The Fund will determine that the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
securities or instruments which it expects to purchase. Except as stated below,
the Fund's futures transactions will be entered into for traditional hedging
purposes -- i.e., futures contracts will be sold to protect against a decline in
the price of securities (or the currency in which they are quoted or
denominated) that the Fund owns or futures contracts will be purchased to
protect the Fund against an increase in the price of securities (or the currency
in which they are quoted or denominated) it intends to purchase. As evidence of
this hedging intent, the 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 the 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 Fund 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 the 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
Fund will engage in transactions in currency forward contracts, 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 its qualification as a regulated
investment company for federal income tax purposes. See "Taxation."
B-36
<PAGE>
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
securities in an amount equal to the underlying value of such contracts and
options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while the 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 the 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 the Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Perfect correlation between the Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government Securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies.
[MORTGAGE DOLLAR ROLLS. THE FUND MAY ENTER INTO MORTGAGE "DOLLAR ROLLS" IN
---------------------
WHICH THE FUND SELLS SECURITIES FOR DELIVERY IN THE CURRENT MONTH AND
SIMULTANEOUSLY CONTRACTS WITH THE SAME COUNTERPARTY TO REPURCHASE 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 (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 THE 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 FUND. THE FUND
WILL HOLD AND MAINTAIN IN A SEGREGATED ACCOUNT UNTIL THE SETTLEMENT DATE CASH OR
LIQUID SECURITIES IN AN AMOUNT EQUAL TO ITS FORWARD PURCHASE PRICE.
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<PAGE>
FOR FINANCIAL REPORTING AND TAX PURPOSES, THE FUND TREATS MORTGAGE DOLLAR
ROLLS AS TWO SEPARATE TRANSACTIONS: ONE INVOLVING THE PURCHASE OF A SECURITY AND
A SEPARATE TRANSACTION INVOLVING A SALE. THE FUND DOES NOT CURRENTLY INTEND TO
ENTER INTO MORTGAGE DOLLAR ROLLS THAT ARE ACCOUNTED FOR AS A FINANCING.
MORTGAGE DOLLAR ROLLS INVOLVE CERTAIN RISKS INCLUDING THE FOLLOWING: IF
THE BROKER-DEALER TO WHOM THE FUND SELLS THE SECURITY BECOMES INSOLVENT, THE
FUND'S RIGHT TO PURCHASE OR REPURCHASE THE MORTGAGE-RELATED SECURITIES SUBJECT
TO THE MORTGAGE DOLLAR ROLL MAY BE RESTRICTED AND THE INSTRUMENT WHICH THE FUND
IS REQUIRED TO REPURCHASE MAY BE WORTH LESS THAN AN INSTRUMENT WHICH THE FUND
ORIGINALLY HELD. SUCCESSFUL USE OF MORTGAGE DOLLAR ROLLS WILL DEPEND UPON THE
INVESTMENT MANAGER'S ABILITY TO MANAGE THE FUND'S INTEREST RATE AND MORTGAGE
PREPAYMENTS EXPOSURE. FOR THESE REASONS, THERE IS NO ASSURANCE THAT MORTGAGE
DOLLAR ROLLS CAN BE SUCCESSFULLY EMPLOYED.]
CONVERTIBLE SECURITIES. Convertible securities include corporate notes or
----------------------
preferred stock but are ordinarily long-term debt obligations 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 Fund invests will be subject
to the same rating criteria as its other investments in fixed-income securities.
LENDING OF PORTFOLIO SECURITIES
The 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. The 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, the 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. The Fund would not
have the right to vote any securities having voting rights during
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the existence of the loan, but the 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 Investment
Manager to be of good standing, and when, in the judgment of the Investment
Manager, the consideration which can be earned currently from securities loans
of this type justifies the attendant risk. If the Investment Manager determines
to make securities loans, the value of the securities loaned will not exceed
one-third of the value of the total assets of the Fund.
RESTRICTED AND ILLIQUID SECURITIES
The 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 (the "1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
However, the Fund will not invest more than 15% of its total assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate swaps, mortgage swaps and currency swaps, and interest rate
caps, floors and collars, 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 Investment Manager the daily function of determining and
monitoring the liquidity of the Fund's 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 Fund's investments in these securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
This investment practice could have the effect of increasing the level of
illiquidity in the 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
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<PAGE>
will bear the expenses of registering the Restricted Securities and prevailing
supply and demand conditions.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Fund may purchase securities on a when-issued basis or purchase or sell
securities on a forward commitment basis. These transactions involve a
commitment by the Fund to purchase or sell securities at a future date. The
price of the underlying securities (usually expressed in terms of yield) and the
date when the securities will be delivered and paid for (the settlement date)
are fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. The Fund will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, the Fund may dispose of or negotiate a
commitment after entering into it. The Fund also may sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Fund may realize a capital gain or loss in connection with
these transactions. For purposes of determining the Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. The 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 securities in an amount sufficient to meet the purchase price.
Alternatively, the Fund may enter into offsetting contracts for the forward sale
of other securities that it owns. 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
The 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 Fund may invest in money market funds for which the Investment
Manager or any of its affiliates serves as investment adviser. The 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 fees paid by the Fund. However, to the extent that the Fund invests in
a money market fund for which the Investment Manager acts as adviser, the
advisory fees payable by the Fund to the Investment Manager will be
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<PAGE>
reduced by an amount equal to the Fund's proportionate share of the advisory
fees paid by such money market fund to the Investment Manager or any of its
affiliates.
Repurchase Agreements
The Fund may enter into repurchase agreements with selected broker-dealers,
banks or other financial institutions. A repurchase agreement is an arrangement
under which the 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 the Fund's custodian. The repurchase price may
be higher than the purchase price, the difference being income to the Fund, or
the purchase and repurchase prices may be the same, with interest at a stated
rate due to the Fund together with the repurchase price on repurchase. In either
case, the income to the 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 the Fund to the seller of the security.
For other purposes, it is not clear whether a court would consider the security
purchased by the Fund subject to a repurchase agreement as being owned by the
Fund or as being collateral for a loan by the Fund to the seller. In the event
of commencement of bankruptcy or insolvency proceedings with respect to the
seller of the security before repurchase of the security under a repurchase
agreement, the 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
the 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, the 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 the Fund, the
Investment Manager 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), the 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.
B-41
<PAGE>
In addition, the Fund, together with other registered investment companies
having advisory agreements with the Investment Manager 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 Fund, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the Fund. The investment
objective of the Fund and all other investment policies or practices of the
Fund, are considered by the Trust not to be fundamental and accordingly may be
changed without shareholder approval. See "INVESTMENT OBJECTIVE AND POLICIES"
in the Prospectus. As defined in the Act, "a majority of the outstanding voting
securities" of the Fund means the vote (a) of 67% or more of the shares of the
Fund present at a meeting, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy or (b) more than 50% of
the outstanding shares of the Fund, whichever is less.
For the purposes of the limitations (except for the 300% asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, the Fund.
The Trust may not on behalf of the Fund:
(1) make any investment inconsistent with the Fund's classification as a
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.
B-42
<PAGE>
(3) borrow money, except (a) the Fund may borrow from banks (as defined in the
Act) or through reverse repurchase agreements in amounts up to 33 1/3% of
its total assets (including the amount borrowed), (b) the Fund may, to the
extent permitted by applicable law, borrow up to an additional 5% of its
total assets for temporary purposes, (c) the Fund may obtain such short-
term credits as may be necessary for the clearance of purchases and sales
of portfolio securities, (d) the Fund may purchase securities on margin to
the extent permitted by applicable law and (e) the Fund may engage
transactions in mortgage dollar rolls which are accounted for as
financings.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, and (c) loans of securities as permitted by applicable law.
(5) underwrite securities issued by others, except to the extent that the sale
of portfolio securities by the Fund may be deemed to be underwriting.
(6) purchase, hold or deal in real estate, although the Fund may purchase and
sell securities that are secured by real estate or interests therein,
securities of real estate investment trusts and mortgage-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 to the investment restrictions mentioned above, the Trustees of
the Trust have voluntarily adopted the following policies and restrictions on
behalf of the Fund which are observed in the conduct of its affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment restrictions in that they may be changed or
amended by action of the Trustees of the Trust without prior notice to or
approval of shareholders. Accordingly, the Fund may not:
B-43
<PAGE>
(a) Invest in companies for the purpose of exercising control or
management.
(b) Invest more than 15% of the Fund's net assets in illiquid investments
including repurchase agreements maturing in more than seven days, securities
which are not readily marketable and restricted securities not eligible for
resale pursuant to Rule 144A under the 1933 Act.
(c) Purchase additional securities if the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
MANAGEMENT
Trustees and Officers
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees deemed to be
"interested persons" of the Trust for purposes of the Act are indicated by an
asterisk.
Ashok N. Bakhru, Age 54, 1325 Avenue of the Americas, 34th Floor, New York, New
York 10019. Chairman of the Board of Trustees. President, ABN Associates, Inc.,
---------------------------------
until March 1996. Retired, Senior Vice President, Scott Paper Company;
Director, Arkwright Mutual Insurance Company; Trustee, International House of
Philadelphia; Member of Cornell University Council; Trustee of Walnut Street
Theater.
Douglas Grip,* Age 34, One New York Plaza, New York, New York 10004. Trustee
-------
and President. Vice President, Goldman Sachs since May 1996. President, MFS
- -------------
Retirement Services Inc of Massachusetts Financial Services prior thereto.
David B. Ford,* Age 51, One New York Plaza, New York, New York 10004. Trustee.
-------
General Partner, Goldman Sachs, since 1986; Chairman and Chief Executive
Officer, GSAM since December 1994.
Alan A. Shuch,* Age 47, One New York Plaza, New York, New York 10004. Trustee.
-------
Director and Vice President, Goldman Sachs Funds Management, Inc. from April
1990 to November 1994; President and Chief Operating Officer, GSAM from
September 1988 to November 1994; Limited Partner, Goldman Sachs since December
1994.
Jackson W. Smart, Jr., Age 66, One Northfield Plaza, #218, Northfield, Illinois
60093. Trustee. Chairman and Chief Executive Officer, MSP Communications Inc.
-------
(a company engaged in radio broadcasting) since November 1988; Director,
Federal Express Corporation; and North American Private Equity Group (a venture
capital fund).
B-44
<PAGE>
William H. Springer, Age 67, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman, Ameritech (a telecommunications holding company) from
- -------
February 1987 to retirement in 1992 and Vice Chairman, Chief Financial and
Administrative Officer of Ameritech prior thereto; Director, American
Information Technologies Corporation; Director, Walgreen Co. (a retail drugstore
business); and Baker, Fentress & Co. (a closed-end non-diversified management
investment company).
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; Consultant since 1989
- ---------
to June 1992.
Nancy L. Mucker,* Age 47, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
- ---------
GSAM Funds Group.
John W. Mosior,* Age 48, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
- ---------
GSAM Funds Group.
Scott M. Gilman,* Age 37, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990; Assistant Treasurer of the
Trust from April 1990 until October 1991.
John Perlowski, Age 32, One New York Plaza, New York, New York 10004. Assistant
---------
Treasurer. Vice President, Goldman, Sachs & Co., Sachs & Co., July 1995 to
- ---------
Present. 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. Vice President and Assistant General Counsel to the Funds Group,
- ---------
GSAM since February 1994; Partner, Hale and Dorr from September 1991 to June
1992; Attorney-at-Law, Gaston & Snow from September 1985 to September 1991.
Howard B. Surloff,* Age 31, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General Counsel, Goldman Sachs since
- ---------
November 1993 and May 1994, respectively; Counsel to the Funds Group, GSAM since
November 1993; Associate of Shereff, Friedman, Hoffman & Goodman (prior
thereto).
Steven E. Hartstein*, Age 33, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs (June 1993 to
- -------------------
present); Funds Compliance Officer, Citibank Global Asset Management (August
1991 to June 1993); Legal Assistant, Brown & Wood (prior thereto).
B-45
<PAGE>
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 35, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Portfolio Manager, GSAM 1988 to
- -------------------
Present.
Elizabeth Alexander*, Age 27, One New York Plaza, New York, New York 10004.
Assistant Secretary. Junior Portfolio Manager, 1995 to Present. Funds Trading
- -------------------
Assistant, GSAM 1993 - 1995. Formerly, Compliance Analyst, Prudential
Insurance, 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 its
affiliates is the investment adviser, administrator and/or distributor.
Immediately after the Fund commences its public offering, it is expected that
the Trustees and officers as a group will own less than 1% of the outstanding
shares of beneficial interest of the Fund.
The following table sets forth certain information with respect to the
estimated compensation of each Trustee of the Trust for the fiscal year ending
October 31, 1997:
<TABLE>
<CAPTION>
Total
Compensa-
tion from
Goldman
Retirement Sachs
Benefits Mutual
Aggregate Accrued as Funds
Compensa- of Part of (includ-
tion from Trust's ing the
Name of Trustees the Fund* Expenses Trust)**
- ---------------- --------- ----------- --------
<S> <C> <C> <C>
Ashok N. Bakhru $4,688 $0 $93,750
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
Alan A. Shuch 0 0 0
Jackson W. Smart 3,525 0 70,500
William H. Springer 3,525 0 70,500
Richard P. Strubel 3,525 0 70,500
</TABLE>
- -------------------
B-46
<PAGE>
* These compensation amounts are estimates for the Fund's fiscal year ending
October 31, 1997, as operation of the Fund has not yet commenced.
** The Goldman Sachs Mutual Funds consisted of 29 mutual funds, including 7
series of the Trust, on [_________ __,] 1997.
INVESTMENT MANAGER
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to the Fund pursuant
to an investment management agreement. See "MANAGEMENT" in the Fund's
Prospectus for a description of the Investment Manager's duties as investment
adviser and manager.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24 hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico, Milan,
Montreal, Osaka, Paris, S[_]o Paulo, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Investment Manager is 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 Investment Manager.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry surveys conducted in the U.S. and abroad. Goldman Sachs is
also
B-47
<PAGE>
among the leading investment firms using quantitative analytics (now used by a
growing number of investors) to structure and evaluate portfolios. For example,
Goldman Sachs' options evaluation model analyzes each security's term, coupon
and call option, providing an overall analysis of the security's value relative
to its interest risk.
The Investment Manager expects to utilize Goldman Sachs' sophisticated
option-adjusted analytics to help make strategic asset allocations within the
markets for U.S. government and other securities and to employ this technology
periodically to re-evaluate the Fund's 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 Investment Manager uses 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 Investment Manager'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 Investment Manager considers it a better way to measure a security's
expected return and absolute and relative values than yield to maturity. In
using OAS technology, the Investment Manager will first evaluate the absolute
level of a security's OAS considering its liquidity and its interest rate,
volatility and prepayment sensitivity. The Investment Manager will then analyze
its value relative to alternative investments and to its own investments. The
Investment Manager will also measure a security's interest rate risk by
computing an option adjusted duration (OAD). The Investment Manager believes a
security's OAD is a better measurement of its price sensitivity than cash flow
duration, which systematically misstates portfolio duration. The Investment
Manager also evaluates returns for different mortgage market sectors and
evaluates the credit risk of individual securities. This sophisticated technical
analysis allows the Investment Manager 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 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
Investment Manager also expects 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
B-48
<PAGE>
can be combined and analyzed in an optimal risk-return matching framework.
The Investment Manager will use OAS analytics to choose what it believes is
an appropriate portfolio of investments for the Fund from a universe of eligible
investments. In connection with initial portfolio selections, in addition to
using OAS analytics as an aid to meeting the Fund's particular composition and
performance targets, the Investment Manager will also take into account
important market criteria like the available supply and relative liquidity of
various mortgage securities in structuring the portfolio.
Goldman Sachs has agreed to provide the Investment Manager, 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 Investment Manager with respect to the Fund does not preclude Goldman
Sachs from providing these services to third parties or using such services as a
basis for trading for its own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
Investment Manager, 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 the Fund's investments.
In addition to fixed-income research and credit research, the Investment
Manager in managing the Fund is 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,
B-49
<PAGE>
1988-1995; International Government Bond Market 1993-1995; and Currency
Movements 1986-1993.
The Fund's investment management agreement (the "Investment Management
Agreement") was 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 January 28, 1997. The Fund's Investment Management
Agreement was approved by the sole initial shareholder of the Fund on
[_____________], 1997. The Investment Management Agreement will remain in
effect until June 30, 1998 and will continue in effect 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 the 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.
The Investment Management Agreement will terminate automatically if
assigned (as defined in the Act). The Investment 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 the Fund on 60 days
written notice to the Investment Manager or by the Investment Manager on 60 days
written notice of the Trust.
The Investment Management Agreement provides that GSAM in its capacity as
investment manager may render similar services to others so long as the services
under the Investment Management Agreement are not impaired thereby. Pursuant to
the Investment Management Agreement, the Investment Manager is entitled to
receive the fee set forth below and the Investment Manager is currently limiting
the fee to the rate set forth below:
<TABLE>
<CAPTION>
Contractual Current
Rate Rate
----------- -------
<S> <C> <C>
High Yield 0.50% 0.50%
</TABLE>
Such reduction or limits, if any, are calculated monthly on a cumulative
basis and may be discontinued or modified by the Investment Manager at its
discretion at any time.
The Investment Manager performs administrative services for the Fund
under the Investment Management Agreement. Such administrative services
include, subject to the general supervision of the Trustees of the Trust, (a)
providing supervision of all aspects of the Fund's non-investment operations
(other than certain operations performed by others pursuant to agreements with
the
B-50
<PAGE>
Fund), (b) providing the Fund, to the extent not provided pursuant to such
agreements, 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 Fund, (c) arranging, to the
extent not provided pursuant to such agreements, for the preparation, at the
Fund's expense, of the Fund's tax returns, reports to shareholders, periodic
updating of the Fund's prospectus and statements of additional information, and
reports filed with the SEC and other regulatory authorities, (d) providing the
Fund, 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 Fund's records other than those maintained pursuant to
such agreements.
Activities of Goldman Sachs and Its Affiliates and Other Accounts
Managed by Goldman Sachs. The involvement of the Investment Manager 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 Fund or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Investment Manager and its advisory affiliates, Goldman Sachs Funds Management,
L.P. ("GSFM"), Goldman Sachs International ("GSI") and J. Aron & Co. ("ARON"),
have proprietary interests in, and may manage or advise with respect to,
accounts or funds (including separate accounts and other funds and collective
investment vehicles) which have investment objectives similar to those of the
Fund and/or which engage in transactions in the same types of securities,
currencies and instruments as the Fund. 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 Fund invests.
Such activities could affect the prices and availability of the securities,
currencies, and instruments in which the Fund invests, which could have an
adverse impact on the Fund's performance. Such transactions, particularly in
respect of proprietary accounts or customer accounts other than those included
in the Investment Manager's and its advisory affiliates' asset management
activities, will be executed independently of the Fund's transactions and thus
at prices or rates that may be more or less favorable. When the Investment
Manager and its advisory affiliates seek to purchase or sell the same assets for
their managed accounts, including the Fund, the assets actually purchased or
sold may be allocated among the accounts on a basis determined in its good faith
discretion to be equitable. In some cases, this system may adversely affect the
size or the price of the assets purchased or sold for the Fund.
B-51
<PAGE>
From time to time, the Fund's activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Investment Manager, and/or its
affiliates, will not initiate or recommend certain types of transactions in
certain securities or instruments with respect to which, or in securities of
issuers for which, the Investment Manager and/or its affiliates are performing
services or when position limits have been reached.
In connection with its management of the Fund, the Investment Manager may
have access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs, GSFM, ARON and other affiliates. The Investment
Manager will not be under any obligation, however, to effect transactions on
behalf of the Fund in accordance with such analysis and models. In addition,
neither Goldman Sachs nor any of its affiliates will have any obligation to make
available any information regarding their proprietary activities or strategies,
or the activities or strategies used for other accounts managed by them, for the
benefit of the management of the Fund and it is not anticipated that the
Investment Manager will have access to such information for the purpose of
managing the Fund. The proprietary activities or portfolio strategies of Goldman
Sachs and its affiliates or the activities or strategies used for accounts
managed by them or other customer accounts could conflict with the transactions
and strategies employed by the Investment Manager in managing the Fund.
The results of the Fund's investment activities may differ significantly
from the results achieved by the Investment Manager and its affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by the
Fund. Moreover, it is possible that the 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 the Fund's activities
but will not be involved in the day-to-day management of the Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any such
member of an investment policy committee will have direct or indirect interests
in the activities of Goldman Sachs and its affiliates in securities,
B-52
<PAGE>
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Investment Manager are also principals or employees of Goldman Sachs, GSFM, ARON
and/or their affiliated entities. As a result, the performance by these
principals and employees of their obligations to such other entities may be a
consideration of which investors in the Fund should be aware.
The Investment Manager may enter into transactions and invest in
instruments and currencies on behalf of the Fund in which customers of Goldman
Sachs serve as the counterparty, principal or issuer. In such cases, such
party's interests in the transaction will be adverse to the interests of the
Fund, and such party may have no incentive to assure that the Fund obtains the
best possible prices or terms in connection with the transactions. Goldman Sachs
and its affiliates may also create, write or issue derivative instruments for
customers of Goldman Sachs or its affiliates, the underlying securities,
currencies or instruments of which may be those in which the Fund invests or
which may be based on the performance of the Fund. The Fund 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 Fund. The Fund will deal
with Goldman Sachs and its affiliates on an arm's-length basis.
The 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 the Fund's establishment of its business relationships, nor is
it expected that the 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 the Fund in order to increase the
assets of the Fund. Increasing the Fund's assets may enhance investment
flexibility and diversification and may contribute to economies of scale that
tend to reduce the Fund's expense ratio. Goldman Sachs reserves the right to
redeem at any time some or all of the shares of the Fund acquired for its own
account. A large redemption of shares of the Fund by Goldman Sachs could
significantly reduce the asset size of the Fund, which might have an adverse
effect on the Fund's investment flexibility, portfolio diversification and
expense ratio. Goldman Sachs will consider the effect of redemptions on the
Fund and other shareholders in deciding whether to redeem its shares.
B-53
<PAGE>
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs serves as the exclusive distributor of shares of the Fund
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust dated February 1, 1993, as amended as of January 30, 1996.
Pursuant to the distribution agreement, after the Fund's Prospectus and periodic
reports have been prepared, set in type and mailed to shareholders, Goldman
Sachs will pay for the printing and distribution of copies thereof used in
connection with the offering to prospective investors. Goldman Sachs will also
pay for other supplementary sales literature and advertising costs. Goldman
Sachs has entered into sales agreements with certain investment dealers and
financial service firms (the "Authorized Dealers") to solicit subscriptions for
Class A and Class B Shares of the Fund. Goldman Sachs receives a portion of the
sales load imposed on the sale, in the case of Class A Shares, or redemption in
the case of Class B Shares, of the Fund 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 the Fund to (i) record the issuance, transfer and
redemption of shares, (ii) provide confirmations of purchases and redemptions,
and quarterly statements, as well as certain other statements, (iii) provide
certain information to the Trust's custodian and the relevant subcustodian in
connection with redemptions, (iv) provide dividend crediting and certain
disbursing agent services, (v) maintain shareholder accounts, (vi) provide
certain state Blue Sky and other information, (vii) provide shareholders and
certain regulatory authorities with tax-related information, (viii) respond to
shareholder inquiries, and (ix) render certain other miscellaneous services.
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer and dividend disbursing agent and the assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs is entitled to receive a fee from
the Fund equal to 0.04 of 1% (on an annualized basis) of the average daily net
assets attributable to the Institutional and Service Classes of the Fund and
$7.50 per account for the Class A and Class B Shares of the Fund.
The foregoing distribution and transfer agency agreements each provide that
Goldman Sachs may render similar services to others so long as the services it
provides thereunder to the Fund are not impaired thereby. Each such agreement
also provides that the Trust will indemnify Goldman Sachs against certain
liabilities.
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EXPENSES
Except as set forth in the Prospectus under "MANAGEMENT" the Trust, on
behalf of the Fund, is responsible for the payment of the Fund's respective
expenses. The expenses borne by the outstanding classes of the Fund include,
without limitation, the fees payable to the Investment Manager, the fees and
expenses of the Trust's custodian, transfer agent fees, brokerage fees and
commissions, filing fees for the registration or qualification of the Trust's
shares under federal or state securities laws, expenses of the organization of
the Trust, fees and expenses incurred by the Trust in connection with membership
in investment company organizations, taxes, interest, costs of liability
insurance, fidelity bonds or indemnification, any costs, expenses or losses
arising out of any liability of, or claim for damages or other relief asserted
against, the Trust for violation of any law, legal, tax and auditing fees and
expenses (including the cost of legal and certain accounting services rendered
by employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
The Investment Manager voluntarily has agreed to reduce or otherwise limit
certain Other Expenses (excluding transfer agency fees, management fees,
transfer agent fees, fees payable under administration, distribution, service
and authorized dealer service plans, taxes, interest, brokerage fees and
litigation, indemnification and other extraordinary expenses) to 0.31% of the
Fund's average daily net assets.
Such reductions or limits are calculated monthly on a cumulative basis.
Although the Investment Manager has no current intention of modifying or
discontinuing such expense limitation, it may do so in the future at its
discretion.
Fees and expenses of legal counsel, registering shares of the Fund, holding
meetings and communicating with shareholders may include an allocable portion of
the cost of maintaining an internal legal and compliance department. The Fund
may also bear an allocable portion of the costs incurred by the Investment
Manager in performing certain accounting services not being provided by the
Trust's custodian.
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CUSTODIAN AND SUB-CUSTODIANS
State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, is the custodian of the Trust's portfolio
securities and cash. State Street also maintains the Trust's accounting
records. State Street may appoint sub-custodians from time to time to hold
certain securities purchased by the Trust in foreign countries and to hold cash
and currencies for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the Trust.
In addition to audit services, Arthur Andersen LLP prepares the Trust's federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Fund are generally effected at a
net price without a broker's commission (i.e., a dealer is dealing with the 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 Fund may invest are traded on
exchanges at fixed commission rates. In connection with portfolio transactions,
the Investment Management Agreement provides that the Investment Manager shall
attempt to obtain the best net price and the most favorable execution. The
Investment Management Agreement provides that, on occasions when the Investment
Manager deems the purchase or sale of a security to be in the best interests of
the Fund as well as its other customers (including any other fund or other
investment company or advisory account for which the Investment Manager or an
affiliate act as investment adviser), the 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 Investment Manager in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to the Fund and such other customers. In some instances, this
procedure may adversely affect the size and price of the position obtainable for
the Fund. To the extent that the execution and price offered by more than one
dealer are comparable, the Investment Management Agreement permits the
Investment Manager, in its discretion, to purchase and sell portfolio securities
to and from dealers who provide the Trust with brokerage or research services.
Brokerage
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and research services furnished by firms through which the Fund effects its
securities transactions may be used by the Investment Manager in servicing other
accounts and not all of these services may be used by the Investment Manager in
connection with the Fund. The fees received under the Investment Management
Agreement are not reduced by reason of the Investment Manager receiving such
brokerage and research services. In addition, under the Investment Management
Agreement, the Investment Manager is authorized to take into account sales of
shares of the Fund and other funds in the Goldman Sachs Group of Funds in
allocating purchase and sale orders of portfolio securities provided that the
Investment Manager believes that the quality of the transaction and commision is
comparable to other qualified firms.
SHARES OF THE TRUST
The Trust is a Massachusetts business trust established under an Agreement
and Declaration of Trust dated September 24, 1987, as amended (the
"Massachusetts Trust Agreement"). It is anticipated that each series of the
Trust, including the Fund, will be reorganized on April 30, 1997, or as soon
thereafter as practicable, into newly established series of a Delaware business
trust (the "Delaware Trust"). The Trustees of the Trust will also serve as
Trustees of the Delaware Trust, the Investment Manager will also serve as the
investment adviser to the Delaware Trust's series corresponding to the Fund, and
such series' investment objective, policies and restrictions will be identical
to those of the Fund. The initial shareholder of the Fund has approved (i) the
reorganization of the Trust into the Delaware Trust and any and all matters
incidental thereto, including the election of Trustees of the Delaware Trust,
(ii) an Investment Management Agreement between the Investment Manager and the
Delaware Trust on behalf of such Trust's series corresponding to the Fund, and
(iii) distribution and authorized dealer service plans with respect to such
series' Class A and Class B Shares and a service plan with respect to such
series' Service Shares, and has ratified the selection of the Delaware Trust's
independent public accountants. In the event that the shareholders of the other
series of the Trust do not approve the reorganization, the Fund may not be
reorganized into the Delaware Trust.
The Massachusetts Trust Agreement and the Agreement and Declaration of
Trust of the Delaware Trust (the "Trust Agreements") permit the Trustees of the
Trust and the Delaware Trust to issue an unlimited number of full and fractional
shares of beneficial interest of one or more separate series, provided each
share has a par value of $.001 per share, represents an equal proportionate
interest in that series with each other share of the same class and is entitled
to such dividends out of the income belonging to such series as are declared by
the Trustees.
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The Trustees of the Trust and the Delaware Trust have authority under the
Trust Agreements to create and classify shares of beneficial interest in
separate series without further action by shareholders. As of the date of this
Additional Statement, the Trustees have authorized shares of nine series of the
Trust, including the Fund. The Trust Agreements further authorize the Trustees
of both the Trust and the Delaware Trust to classify or reclassify any series or
portfolio of shares into one or more classes. Pursuant thereto, the Board of
Trustees of the Trust has authorized the issuance of four classes of shares of
the Fund; Institutional Shares, Service Shares, Class A Shares and Class B
Shares.
Each Institutional Share, Service Share, Class A Share and Class B Share of
the Fund represents an equal proportionate interest in the assets belonging to
the Fund. All Fund expenses are allocated among classes based on a percentage of
the Fund's aggregate average net assets, except that transfer agency fees and
fees under distribution, authorized dealer service, administration and service
plans relating to a particular class will be borne exclusively by that class.
It is contemplated that most Service Shares will be held in accounts of
which the record owner is a bank or other institution acting, directly or
through an agent, as nominee for its customers who are the beneficial owners of
the shares or another organization designated by such bank or institution.
Service Shares will be marketed only to such investors, at net asset value with
no sales load. Institutional Shares may be purchased for accounts in the name of
an investor or institution that is not compensated by the Fund for services
provided to the institution's customers. Service Shares may be purchased for
accounts held in the name of an institution that provides certain account
administration and shareholder liaison services to its customers, including
maintenance of account records and processing orders to purchase, redeem or
exchange Service Shares, responding to customer inquiries and assisting
customers with investment procedures. Service Shares bear the cost of service
fees at the annual rate of up to 0.50% of the average daily net assets of such
Service Shares. Institutions that provide services to holders of Service Shares
are referred to in this Additional Statement as "Service Organizations."
Class A Shares are sold, with an initial sales charge of up to 4.50%,
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 Fund bear the cost
of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.25% of the
average daily net assets of such Class A Shares. Class A Shares also bear the
cost of an Authorized Dealer Service Plan at an annual rate of up to 0.25% of
average daily net assets attributable to Class A Shares.
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Class B Shares of the Fund are sold subject to a contingent deferred
sales charge of up to 5.0% through brokers and dealers who are members of the
National Association of Securities Dealers Inc. and certain other financial
services firms that have sales arrangements with Goldman Sachs. Class B shares
bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to
0.75% of the average daily net assets attributable to Class B shares. Class B
shares also bear the cost of an Authorized Dealer Service Plan at an annual
rate of up to 0.25% of the average daily net assets attributable to Class B
shares.
It is possible that an institution or its affiliate may offer different
classes of shares (i.e., Institutional, Service, Class A and Class B Shares) to
its customers and thus receive different compensation with respect to different
classes of shares of Fund. Shares of each class may each have certain exclusive
voting rights on matters relating to their respective plans. Shares of each
class may be exchanged only for shares of the same class in another fund and
certain money market funds sponsored by Goldman Sachs. Dividends paid by the
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 transfer agent,
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, the Fund's shares are fully paid and non-assessable. In
the event of liquidation of the Fund, shareholders of the Fund are entitled to
share pro rata in the net assets of the 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.
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
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the election of Trustees from the separate voting requirements of Rule 18f-2.
Shareholder and Trustee Liability
MASSACHUSETTS TRUST. Under Massachusetts law, there is a remote
-------------------
possibility that shareholders of a business trust could, under certain
circumstances, be held personally liable as partners for the obligations of such
trust. The Massachusetts Trust Agreement contains an express disclaimer of
shareholder liability for acts or obligations of the Trust and requires that
notice of such disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Trust or the Trustees. The Massachusetts Trust
Agreement provides for indemnification out of Trust property of any shareholder
charged or held personally liable for obligations or liabilities of the Trust
solely by reason of being or having been a shareholder of the Trust and not
because of such shareholder's acts or omissions or for some other reason. The
Massachusetts Trust Agreement also provides that the Trust shall, upon proper
and timely request, assume the defense of any charge made against any
shareholder as such for any obligation or liability of the Trust and satisfy any
judgment thereon. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the Trust
itself would be unable to meet its obligations.
DELAWARE TRUST. Under Delaware Law, the shareholders of the Delaware
--------------
Trust are not generally subject to liability for the debts or obligations of the
Delaware Trust. Similarly, Delaware Law provides that a series of the Delaware
Trust will not be liable for the debts or obligations of any other series of the
Delaware Trust. However, no similar statutory or other authority limiting
business trust shareholder liability exists in other states. As a result, to
the extent that a Delaware business trust or a shareholder is subject to the
jurisdiction of courts of such other states, the courts may not apply Delaware
law and may thereby subject the Delaware business trust shareholders to
liability. To guard against this risk, the Declaration of Trust of the Delaware
Trust contains an express disclaimer of shareholder liability for acts or
obligations of a series. Notice of such disclaimer will normally be given in
each agreement, obligation or instrument entered into or executed by a series or
the Trustees. The Declaration of Trust of the Delaware Trust provides for
indemnification by the relevant series for all loss suffered by a shareholder as
a result of an obligation of the series. The Declaration of Trust of the
Delaware Trust also provides that a series shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the series and satisfy any judgment thereon. In view of the above, the risk of
personal liability of shareholders of a Delaware business trust is remote.
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In addition to the requirements under Delaware law, the Declaration of
Trust of the Delaware Trust provides that shareholders of a series may bring a
derivative action on behalf of the series only if the following conditions are
met: (a) shareholders eligible to bring such derivative action under Delaware
law who hold at least 10% of the outstanding shares of the series, or 10% of the
outstanding shares of the class to which such action relates, shall join in the
request for the Trustees to commence such action; and (b) the Trustees must be
afforded a reasonable amount of time to consider such shareholder request and to
investigate the basis and to employ other advisers in considering the merits of
the request and shall require an undertaking by the shareholders making such
request to reimburse the series for the expense of any such advisers in the
event that the Trustees determine not to bring such action.
The Declaration of Trust of the Delaware Trust further provides that the
Trustees will not be liable for error of judgment or mistakes of fact or law,
but nothing in the Declaration of Trust protects a Trustees against liability to
which he or she would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his or her office.
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 Fund. In accordance with
procedures adopted by the Trustees of the Trust, the net asset value per share
of each class of the Fund is calculated by determining the value of the net
assets attributable to each class of the 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 the Prospectus).
For the purpose of calculating the net asset value of the Fund, investments
are valued under valuation procedures established by the Trustees. Portfolio
securities, other than money market instruments, for which accurate market
quotations are readily available are valued on the basis of dealer-supplied bid
quotations or bid quotations from a nationally recognized pricing service (e.g.,
Merrill Lynch, J.J. Kenny, Muller Data Corp., Bloomberg, EJV, Reuters or
Standards & Poor's. The prices derived by a pricing agent reflect broker/dealer-
supplied valuations and electronic data processing techniques. Options and
futures contracts are valued at the last sale price on the market where any such
option or futures contract is principally traded. Forward foreign currency
exchange contracts are valued at the mean between the last bid and asked
quotations supplied by a dealer in such contracts. Portfolio securities for
which accurate market
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quotations are not readily available and other assets are valued at fair value
based upon valuation models that take into account daily spread and yield
changes on U.S. treasury securities (i.e., matric pricing). Money market
instruments held by the Fund with a remaining maturity of sixty days or less
will be valued by the amortized cost method, which 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 Fund calculates its 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 would be made.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Fund. 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 Fund. 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 the Fund, is a separate taxable
entity. The Fund intends to elect to be treated and 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) the Fund derive at least 90% of its
annual gross income (including tax-exempt interest) from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stocks or securities, or foreign currencies or other income
(including but not limited to
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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) the Fund derive less than 30% of its annual gross income from
the sale or other disposition of any of the following which was held for less
than three months: (i) stock or securities, (ii) options, futures or forward
contracts (other than options, futures or forward contracts on foreign
currencies) and (iii) foreign currencies and foreign currency options, futures
and forward contracts that are not directly related to the Fund's principal
business of investing in stocks or securities or options and futures with
respect to such stocks or securities (the "short-short test"); and (c) the 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, U.S. Government Securities, securities of other
regulated investment companies and other securities limited in respect of any
one issuer to an amount not greater in value than 5% of the value of the Fund's
total assets and to not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total (gross) assets
is invested in the securities of any one issuer (other than U.S. Government
Securities and securities of other regulated investment companies) or two or
more issuers controlled by the Fund and engaged in the same, similar or related
trades or businesses. Gains from the sale or other disposition of foreign
currencies (or options, futures or forward contracts on foreign currencies) that
are not directly related to the 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 the 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 the Fund's portfolio or
anticipated to be acquired may not qualify as "directly related" under these
tests.
As a regulated investment company, the 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
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capital gain in excess of net long-term capital loss, and any other taxable
income other than "net capital gain" as defined below and is reduced by
deductible expenses) and at least 90% of the excess of its gross tax-exempt
interest income over certain disallowed deductions ("net tax-exempt interest").
The Fund may retain for investment its "net capital gain" (which consists of the
excess of its net long-term capital gain over its net short-term capital loss).
However, if the 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 the Fund retains any net capital gain, the Fund may designate the
retained amount as undistributed net capital gain in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by the Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For U.S.
federal income tax purposes, the tax basis of shares owned by a shareholder of
the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. The Fund intends to distribute at least annually to its shareholders all
or substantially all of its investment company taxable income, net capital gain
and any net tax-exempt interest. Exchange control or other foreign laws,
regulations or practices may restrict repatriation of investment income, capital
or the proceeds of securities sales by foreign investors and may therefore make
it more difficult for the Fund to satisfy the distribution requirements
described above, as well as the excise tax distribution requirements described
below. However, the Fund generally expects to be able to obtain sufficient cash
to satisfy such requirements from new investors, the sale of securities or other
sources. If for any taxable year the 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, the Fund is permitted to carry
forward a net capital loss in any year to offset its own net capital gains, if
any, during the eight years following the year of the loss.
In order to avoid a 4% federal excise tax, the Fund must distribute or
be deemed to have distributed by December 31 of each calendar year at least 98%
of its taxable ordinary income for such year, at least 98% of the excess of its
realized capital gains over its realized capital losses (generally computed on
the basis of the one-year period ending on October 31 of such year) and 100% of
any
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taxable ordinary income and the excess of realized capital gains over realized
capital losses for the prior year that was not distributed during such year and
on which the Fund did not pay federal income tax. The Fund anticipates that it
will generally make timely distributions of income and capital gains in
compliance with these requirements so that it will generally not be required to
pay the excise tax.
For federal income tax purposes, dividends declared by the Fund in
October, November or December as of a record date in such a month which are
actually paid in January of the following year will be treated as if they were
paid by the Fund and received by shareholders on December 31 of the year
declared.
Gains and losses on the sale, lapse, or other termination of options
and futures contracts, options thereon and certain forward contracts (except
certain foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gains and losses. Certain of the futures
contracts, forward contracts and options held by the 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 the 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 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 the Fund, the Fund may be
required to defer the recognition of losses on futures or forward contracts and
options or underlying securities or foreign currencies to the extent of any
unrecognized gains on related positions held by the Fund and the
characterization of gains or losses as long-term or short-term may be changed.
The short-short test described above may limit the 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 the Fund's
distributions to shareholders. Certain tax elections may be available to the
Fund to mitigate some of the unfavorable consequences described in this
paragraph.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by the Fund. Under these rules,
foreign exchange gain or loss realized by the 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
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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 the Fund's investment company taxable income (computed without regard to
such loss) for a taxable year, the resulting loss would not be deductible by the
Fund or its shareholders in future years. Net loss, if any, from certain foreign
currency transactions or instruments could exceed net investment income
otherwise calculated for accounting purposes with the result being either no
dividends being paid or a portion of the 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.
The Fund may be subject to foreign taxes on income (possibly
including, in some cases, capital gains) from foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes in some cases. It is not expected that the Fund will qualify or elect to
pass through to shareholders the foreign taxes paid by the Fund. The Fund will,
however, be entitled to deduct such taxes in computing its income subject to tax
(if any).
If the Fund acquires stock (including, under proposed regulations, an
option to acquire stock such as is inherent in a convertible bond) in certain
non-U.S. corporations that receive at least 75% of their annual gross income
from passive sources (such as interest, dividends, rents, royalties or capital
gain) or hold at least 50% of their assets in investments producing such passive
income ("passive foreign investment companies"), the Fund could be subject to
federal income tax and additional interest charges on "excess distributions"
received from such companies or gain from the sale of such stock in such
companies, even if all income or gain actually received by the Fund is timely
distributed to its shareholders. The Fund would not be able to pass through to
its shareholders any credit or deduction for such a tax. Certain elections may,
if available, ameliorate these adverse tax consequences, but any such election
would require the Fund to recognize taxable income or gain without the
concurrent receipt of cash. The Fund may limit and/or manage its holdings in
passive foreign investment companies to minimize its tax liability or maximize
its return from these investments.
The Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds, PIK bonds, or other securities bearing
original issue discount or, if the Fund elects to include market discount in
income currently, market discount, as well as any "mark-to-market" gain from
certain options, futures or forward contracts, as described above, will
generally cause it to realize income or gain prior to the receipt of cash
payments with respect to these securities or contracts. In order to distribute
this income or gain, maintain its
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qualification as a regulated investment company and avoid federal income or
excise taxes, the Fund may be required to liquidate portfolio securities that it
might otherwise have continued to hold.
The federal income tax rules applicable to [mortgage dollar rolls],
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and the 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.
Investment in debt obligations that are at risk of or in default
presents special tax issues for the Fund. Tax rules are not entirely clear about
issues such as when the Fund may cease to accrue interest, original issue or
market discount, when and to what extent deductions may be taken for bad debts
or worthless securities, how payments received on obligations in default should
be allocated between principal and income, and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by the Fund in order to seek to ensure that it distributes sufficient
income to preserve its status as a regulated investment company and avoids
becoming subject to federal income or excise tax.
TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
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. Distributions from the
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 the Fund have been held.
It is expected that distributions made by the Fund will ordinarily not
qualify to any material extent for the dividends-received deduction for
corporations, because qualifying distributions may be made only from the Fund's
dividend income that it receives from stock in U.S. domestic corporations. The
dividends-received deduction, if available, is reduced to the extent the shares
with respect to which the dividends are received are treated as debt-financed
under the federal income tax law and is eliminated if the shares are deemed to
have been held for less than a minimum period. 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 the Fund's current and accumulated earnings
and profits, as computed for federal income tax purposes,
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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.
Shareholders receiving a distribution in the form of newly issued
shares will be treated for U.S. federal income tax purposes as receiving a
distribution in an amount equal to the amount of cash that they would have
received had they elected to receive cash and will have a cost basis in the
shares received equal to such amount.
TAXABLE U.S. SHAREHOLDERS -- SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed
of, the shareholder will generally recognize gain or loss equal to the
difference between the shareholder's adjusted tax basis in the shares and the
cash, or fair market value of any property, received. Assuming the shareholder
holds the shares as a capital asset at the time of such sale or other
disposition, such gain or loss should be capital in character, and long-term if
the shareholder has a tax holding period for the shares of more than one year,
otherwise short-term. All or a portion of a sales charge paid in purchasing
Class A shares of the 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 the Fund or another fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. Any disregarded portion of such charge will
result in an increase in the shareholder's tax basis in the shares subsequently
acquired. If a shareholder received a capital gain dividend with respect to
shares and such shares have a tax holding period of six months or less at the
time of the sale or redemption, then any loss the shareholder realizes on the
sale or redemption will be treated as a long-term capital loss to the extent of
such capital gain dividend. Additionally, any loss realized on a sale or
redemption of shares of the 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.
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
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accorded to accounts maintained as qualified retirement plans. Shareholders
should consult their tax advisers for more information.
BACKUP WITHHOLDING
The Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish the Fund with their correct taxpayer identification number and with
certain required certifications or if the Service or a broker notifies the Fund
that the number furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding as a result of failure to report
interest or dividend income. The 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 the
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 the 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
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United States for 183 days or more during the taxable year and certain other
conditions are met.
Any gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of the Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish the 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 the Fund.
STATE AND LOCAL TAXES
The 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 the
Fund and its shareholders under such laws may differ from their treatment under
federal income tax laws, and investment in the Fund may have tax consequences
for shareholders different from those of a direct investment in the Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
The 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. The 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.
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Distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share on the last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price applicable to the relevant
class (i.e., net asset value in the case of each class other than Class A) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption (and in the case
of Class B Shares payment of any contingent deferred sales charge) at the end of
the period. This calculation assumes a complete redemption of the investment.
It also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price per share with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period.
Thirty-day yield, distribution rate and average annual total return
are calculated separately for each class of shares in existence of the Fund.
Each class of shares of the Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A or Class B Shares which is based upon the Fund's net asset value per share
would be reduced if a sales charge were taken into account.
Occasionally statistics may be used to specify the Fund's volatility
or risk. Measures of volatility or risk are generally used to compare the
Fund's net asset value or performance relative to a market index. One measure
of volatility is beta. Beta is the volatility of the 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.
The 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
- ---
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York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- ---------- ----------------- -------------------------------- -----
The Fund may 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 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
LEHMAN HIGH YIELD BOND INDEX,] 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 the Fund's benchmark investments are not identical to,
and in some cases may be very different from, those of the Fund's portfolio.
These indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by the 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 the 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 the Fund.
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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
the 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, and distribution
rate will vary based on changes in market conditions, portfolio expenses,
portfolio investments and other factors. The value of the 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 the Fund's holdings available to investors upon request.
OTHER INFORMATION
The Trust assumed its current name on March 22, 1991. Prior thereto, the
Trust's name was "Goldman Sachs -- Short-Intermediate Government Fund." Goldman
Sachs licensed the name "Goldman Sachs" and derivatives thereof to the Trust
(and the Fund) on a royalty-free basis and Goldman Sachs has reserved to itself
the right to grant the non-exclusive right to use the name "Goldman Sachs" to
any other person. At such time as the Investment Management Agreement for the
Fund is no longer in effect, the Trust on behalf of the Fund has agreed that the
Fund will (to the extent it lawfully can) cease using the name "Goldman Sachs."
The Fund will redeem shares solely in cash up to the lesser of $250,000 or
1% of its net asset value of the Fund during any 90-day period for any one
shareholder. The Fund, however, reserves the right to pay redemptions exceeding
$250,000 or 1% of the net asset value of the Fund at the time of redemption by a
distribution in kind of securities (instead of cash) from the Fund. The
securities distributed in kind would be readily marketable and would be valued
for this purpose using the same method employed in calculating the
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<PAGE>
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 the
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 the Fund to dispose of securities owned by it
or fairly to determine the value of its net assets; or for such other period as
the SEC may by order permit for the protection of shareholders of the Fund.
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectus. Certain
portions of the Registration Statement have been omitted from the Prospectus and
this Additional Statement pursuant to the rules and regulations of the SEC. The
Registration Statement including the exhibits filed therewith may be examined at
the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The Fund's annual financial statements will be audited by [ ]
independent public accountants. A copy of the Fund's annual report, when
available, may be obtained without charge by writing Goldman, Sachs & Co., 4900
Sears Tower, Chicago, Illinois 60606 or by calling Goldman, Sachs & Co., at the
telephone number on the inside cover of this Additional Statement.
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<PAGE>
APPENDIX A
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 the Fund's portfolio;
. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, Standard & Poor's 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.
A-1
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS/1/
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Securities in which the Fund may primarily invest will include those in the
following categories:
BA: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often
________________________
/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 Rating Group at the date of this Additional Statement for the securities
listed. Rating are generally given to securities at the time of issuance.
while the rating agencies may from time to time revise such ratings, they
undertake no obligation to do so, and the ratings indicated no not necessarily
represent rating which will be given to these securities on the date of the
Fund's fiscal year end.
B-1
<PAGE>
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
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
believe 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
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<PAGE>
maturity in excess of nine months, and (2) backed by commercial banks. Notes
bearing the designation P-1 have a superior capacity for repayment. Notes
bearing the designation P-2 have a strong capacity for repayment.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
Securities in which the Fund may primarily invest will include those in the
following categories:
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominately speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. 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 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 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.
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<PAGE>
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 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 CC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
CC: The rating CC is typically applied to bonds that are subordinated to
senior debt assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to bonds 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 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 "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
UNRATED: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligations as a matter of policy.
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
Manager's judgment, analysis and experience in the evaluation of such bonds.
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<PAGE>
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.
Standard & Poor'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 Standard & Poor's is regarded as having the
greatest capacity for timely payment. Commercial paper rated A-1 is described
as having an overwhelming or very strong degree of safety regarding timely
payment. Commercial paper rated A-2 by Standard & Poor's is described as having
a strong degree of safety regarding timely payment.
FITCH INVESTORS SERVICE, CORP.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A: Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
B-5
<PAGE>
BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA Category covering 12-36 months.
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than issues rated
"F-1+".
DUFF & PHELPS
-------------
Commercial Paper/Certificates of Deposits
- -----------------------------------------
Category 1: Top Grade
Duff 1 plus: Highest certainty of timely payment. Short-term
liquidity including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
Duff 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors. Risk factors
are minor.
Notes: Bonds which are unrated may expose the investor to risks with
respect to capacity to pay interest or repay principal which are similar to the
risks of lower-rated bonds. The Fund is dependent on the Investment Manager's
judgment, analysis and experience in the evaluation of such bonds.
B-6
<PAGE>
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.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that
are not rated as a manner of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgement to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa and A and Baa groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1 and Baa1.
Description of Moody's Investors Service, Inc.'s
Preferred Stock Ratings
-----------------------
AAA: Preferred stock rated aaa is considered the highest grade of
preferred stock. This rating applies to preferred stock which has a good asset
protection and the least risk of dividend payment impairment.
AA: Preferred stock which is rated aa is considered high-grade preferred
stock. Preferred stock rated aa offers reasonable assurance that earnings and
asset protection will be maintained for the foreseeable future.
A: Preferred stock which is rated a is considered upper-medium-grade
preferred stock and carries somewhat greater risks than higher rated preferred
stock. The capacity to pay dividends and the quality of asset protection are,
nevertheless, expected to be maintained at adequate levels.
B-7
<PAGE>
BAA: Preferred stock which is rated baa is considered to be a medium-grade
preferred stock which is neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but long-term maintenance of its
current position may be questionable.
BA: Preferred stock which is rated ba is considered as having speculative
elements and an uncertain future. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods.
B: Preferred stock rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over long time periods may be small.
CAA: The designation applies to preferred stock which is likely to be in
arrears but does not indicate the future status of dividend payments.
CA: Preferred stock rated ca is considered to be highly speculative. This
classification applies to preferred stock which is likely to be in arrears on
dividends with little likelihood of eventual payment.
C: Preferred stock rated c comprises the lowest class of preferred stock
and its prospects of ever attaining real investment standing are extremely poor.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from aaa through c in its preferred stock rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking, and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of Standard & Poor's Rating Group's
Preferred Stock Ratings
-----------------------
AAA: Preferred stock rated AAA represents the highest grade of preferred
----
stock. This classification applies to preferred stock with an extremely strong
capacity to meet its dividend and other preferred stock payment obligations.
AA: Preferred stock rated AA is also considered a high-quality fixed-
income security. This designation indicates a strong capacity to pay dividend
and other preferred stock payment obligations and differs from higher rated
securities only to a small degree.
B-8
<PAGE>
A: Preferred stock rated A is sound with respect to its capacity to pay
dividend and other preferred stock payment obligations but may be vulnerable to
adverse effects of changes in circumstances and economic conditions.
BBB: Preferred stock rated BBB is considered to have adequate capacity to
pay its dividend and other preferred stock payment obligations. This category
of preferred stock differs from class A preferred stock to the extent that
adverse economic capacity to meet payment obligations.
Preferred stock rated "BB," "B," or "CCC" is regarded as speculative with
respect to the capacity to meet preferred stock payment obligations. Preferred
stock classified BB indicates the lowest degree of speculation and preferred
stock classified CCC the highest degree of speculation. While these preferred
stocks are likely to possess some quality and protective characteristics, these
protective measures are outweighed by the high level of uncertainty or risk
exposure to adverse conditions.
CC: This rating applies to preferred stock which is in arrears on
dividend or sinking fund payments but is currently making some payments.
C: Preferred stock rated C is a non-paying issue with the issuer in
default on debt instruments.
D: Preferred stock rated D is non-paying issue with the issuer in
default on debt instruments.
B-9
<PAGE>
APPENDIX C
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we serve
our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is always
encouraged, we have found that team effort often produces the best results. We
have no room for those who put their personal interests ahead of the interests
of the firm and its clients.
INTEGRITY AND HONESTY ARE AT THE HEART OF OUR BUSINESS. We expect our people to
maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
C-1
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms, with
assets exceeding $____ billion and partners capital and subordinated liabilities
of over $____ billion as of November 24, 1996.
. With thirty-three offices around the world, Goldman Sachs employs over
8,000 professionals focused on opportunities in major markets.
. An equity research budget of $126 million for 1997.
. Premier lead manager of negotiated municipal bond offerings over the past
five years (1989-1994), aggregating $114 billion.
. The number one lead manager of U.S. common stock offerings for the past six
years (1989-1994), with 18% of the total dollar volume.*
* Source: Securities Data Corporation. Ranking
-----------------------------------
excludes REFITS, Trusts, Rights and closed-end fund offerings.
C-2
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the
first talking film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1970 London office opens
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1990 Provides advisory services for the largest privatization
in the region of the sale of Telefonos de Mexico
1992 Dow Jones Industrial Average breaks 3000
1993 Goldman Sachs is lead manager in taking Allstate public,
largest equity offering to date ($2.4 billion)
1995 Dow Jones Industrial Average breaks 4000
C-3
<PAGE>
Subject to Completion: dated January 3, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
ANY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE
A PROSPECTUS.
PART B
STATEMENT OF ADDITIONAL INFORMATION
___________ __, 1997
SERVICE SHARES
GOLDMAN SACHS HIGH YIELD FUND
(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 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 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>
<S> <C>
Introduction............................................... B-
Other Investments and Practices............................ B-
Investment Restrictions.................................... B-
Management................................................. B-
Portfolio Transactions..................................... B-
Shares of the Trust........................................ B-
Net Asset Value............................................ B-
Taxation................................................... B-
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Performance Information..................................... B-
Other Information........................................... B-
Financial Statements........................................ B-
Service Plan................................................ B-
Appendix A.................................................. 1-A
Appendix B.................................................. 1-B
Appendix C.................................................. 1-C
</TABLE>
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
INVESTMENT MANAGER DISTRIBUTOR
ONE NEW YORK PLAZA 85 BROAD STREET
NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE (IN U.S.) .......800-621-2550
<PAGE>
SERVICE PLAN
The 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 its customers who are or may become beneficial owners of such
Shares. Pursuant to the Plan, the 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 the Fund, (c) answer questions and handle correspondence
from customers regarding their accounts, (d) process customer orders to
purchase, redeem and exchange Service Shares of the 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 the 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 the Fund,
including obtaining information from the Fund, working with the Fund to correct
errors and resolve problems and providing statistical and other information to
the Fund. As compensation for such services, the 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 the 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.
The Fund has adopted its Plan pursuant to Rule 12b-1 under the Act in order
to avoid any possibility that payments to the Service Organizations pursuant to
the Service Agreements might violate the Act. Rule 12b-1, which was adopted by
the SEC under the Act, regulates the circumstances under which an investment
company or series thereof may bear expenses associated with the distribution of
its shares. In particular, such an investment company or series thereof cannot
engage directly or indirectly in financing any activity which is primarily
intended to result in the sale of shares issued by the company unless it has
adopted a plan pursuant to, and complies with the other requirements of, such
Rule. The Trust believes that fees paid for the services provided in the Plan
and described above are not expenses incurred primarily for effecting the
distribution of Service Shares. However, should such payments be deemed by a
court or the SEC to be distribution expenses, such payments would be duly
authorized by the Plan.
-[ ]-
<PAGE>
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling or
distributing securities, although institutions such as national banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. In addition, under some state securities laws, banks and other
financial institutions purchasing Service Shares on behalf of their customers
may be required to register as dealers. Should future legislative or
administrative action or judicial or administrative decisions or interpretations
prohibit or restrict the activities of one or more of the Service Organizations
in connection with the Fund, such Service Organizations might be required to
alter materially or discontinue the services performed under their Service
Agreements. If one or more of the Service Organizations were restricted from
effecting purchases or sales of Service Shares automatically pursuant to pre-
authorized instructions, for example, effecting such transactions on a manual
basis might affect the size and/or growth of the Fund. Any such alteration or
discontinuance of services could require the Board of Trustees to consider
changing the Fund's method of operations or providing alternative means of
offering Service Shares of the Fund to customers of such Service Organizations,
in which case the operation of the Fund, its size and/or its growth might be
significantly altered. It is not anticipated, however, that any alteration of
the 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 the Fund in connection with the investment of fiduciary
assets in Service Shares of the 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 Fund.
The Plan was approved by [________________________] as the sole shareholder
of Service Shares of the 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 Plan or the related Service
Agreements, initially approved the Plan and Service Agreements at a meeting
called for the purpose of voting on the Plan and Service Agreements on
[____________]. The Plan and Service Agreement will remain in effect until
[____________] and will continue in effect thereafter only if such continuance
is specifically approved annually by a vote of the Board of Trustees in the
-[ ]-
<PAGE>
manner described above. The Plan may not be amended to increase materially the
amount to be spent for the services described therein without approval of the
Service Shareholders of the Fund, and all material amendments of the Plan must
also be approved by the Board of Trustees in the manner described above. The
Plan may be terminated at any time by a majority of the Board of Trustees as
described above or by vote of a majority of the outstanding Service Shares of
the Fund. The Service Agreements may be terminated at any time, without payment
of any penalty, by vote of a majority of the Board of Trustees as described
above or by a vote of a majority of the outstanding Service Shares of the 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 Plan is 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 the Plan
will benefit the Fund and its holders of Service Shares. In the Board of
Trustees' quarterly review of the Plan and Service Agreements, the Board will
consider their continued appropriateness and the level of compensation provided
therein.
-[ ]-
<PAGE>
Subject to Completion: dated January 3, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
ANY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE
A PROSPECTUS.
PART B
STATEMENT OF ADDITIONAL INFORMATION
_________ ___, 1997
CLASS A SHARES
CLASS B SHARES
GOLDMAN SACHS HIGH YIELD FUND
(A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is
not a prospectus. This Additional Statement should be read in conjunction with
the prospectus for the Class A Shares and Class B Shares of Goldman Sachs 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>
<S> <C>
Introduction............................................................ B-
Other Investments and Practices......................................... B-
Investment Restrictions................................................. B-
Management.............................................................. B-
Portfolio Transactions.................................................. B-
Shares of the Trust..................................................... B-
Net Asset Value......................................................... B-
Taxation................................................................ B-
Performance Information................................................. B-
Other Information....................................................... B-
Financial Statements.................................................... B-
Other Information Regarding Purchases, Redemptions,
Exchanges and Dividends............................................... B-
Distribution and Authorized Dealer Service Plans........................ B-
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Appendix A.......................................................... 1-A
Appendix B.......................................................... 1-B
Appendix C.......................................................... 1-C
</TABLE>
<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 GOLDMAN, SACHS & CO.
INVESTMENT MANAGER TRANSFER AGENT
ONE NEW YORK PLAZA 4900 SEARS TOWER
NEW YORK, NEW YORK 10004 CHICAGO, ILLINOIS 60606
TOLL FREE .......800-526-7384
<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 Fund"
and "Dividends." Please see the Prospectus for more complete information.
OTHER PURCHASE INFORMATION
==========================
If shares of the 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, not by the Fund and its Transfer Agent. Since the Fund
will have no record of the beneficial owner's transactions, a beneficial owner
should contact the Authorized Dealer to purchase, redeem or exchange shares, to
make changes in or give instructions concerning the account or to obtain
information about the account. The transfer of shares in a "street name"
account to an account with another dealer or to an account directly with the
Fund involves special procedures and will require the beneficial owner to obtain
historical purchase information about the shares in the account from the
Authorized Dealer.
RIGHT OF ACCUMULATION - (CLASS A)
=================================
A Class A shareholder qualifies for cumulative quantity discounts if
the current purchase price of the new investment plus the shareholder's current
holdings of existing Class A Shares (acquired by purchase or exchange) of the
Fund and Class A Shares of any other Goldman Sachs Portfolio (as defined in the
Prospectus) total the requisite amount for receiving a discount. For example,
if a shareholder owns shares with a current market value of $65,000 and
purchases additional Class A Shares of the 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 Fund may not be aggregated with Class A Shares purchased subject to a
sales charge. Class A Shares of the Fund and any other Goldman Sachs Portfolio
purchased (i) by an individual, his spouse and his minor children, and (ii) by a
trustee, guardian or other fiduciary of a single trust estate or a single
fiduciary account, will be combined for the purpose of determining whether a
purchase will qualify for such right of accumulation and, if qualifying, the
applicable sales charge level. For purposes of applying the right of
accumulation, shares of the Fund and any other Goldman Sachs Portfolio purchased
by an existing client of the Private Client Services Division of
-[ ]-
<PAGE>
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 Fund and Class A Shares of any other
Goldman Sachs Portfolio purchased by partners, directors, officers or employees
of the same business organization or by groups of individuals represented by and
investing on the recommendation of the same accounting firm or other similar
organization (collectively, "eligible persons") may be combined for the purpose
of determining whether a purchase will qualify for the right of accumulation
and, if qualifying, the applicable sales charge level. This right of
accumulation is subject to the following conditions: (i) the business
organization's or firm's agreement to cooperate in the offering of the Fund's
shares to eligible persons; and (ii) notification to the Fund at the time of
purchase that the investor is eligible for this right of accumulation.
STATEMENT OF INTENTION - (CLASS A)
==================================
If a shareholder anticipates purchasing at least $100,000 of Class A
Shares of the Fund alone or in combination with Class A Shares of any other
Goldman Sachs Portfolio within a 13-month period, the shareholder may purchase
shares of the Fund at a reduced sales charge by submitting a Statement of
Intention (the "Statement"). Shares purchased pursuant to a Statement will be
eligible for the same sales charge discount that would have been available if
all of the purchases had been made at the same time. The shareholder or his
Authorized Dealer must inform Goldman Sachs that the Statement is in effect each
time shares are purchased. There is no obligation to purchase the full amount of
shares indicated in the Statement. A shareholder may include the value of all
Class A Shares on which a sales charge has previously been paid as an
"accumulation credit" toward the completion of the Statement, but a price
readjustment will be made only on Class A Shares purchased within ninety (90)
days before submitting the Statement. The Statement authorizes the Transfer
Agent to hold in escrow a sufficient number of shares which can be redeemed to
make up any difference in the sales charge on the amount actually invested. For
purposes of satisfying the amount specified on the Statement, the gross amount
of each investment, exclusive of any appreciation on shares previously
purchased, will be taken into account.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
=================================================
A Fund shareholder should obtain and read the prospectus relating to
any Goldman Sachs Portfolio or ILA Portfolio (as defined in the Prospectus) and
its shares or units and consider its investment objective, policies and
applicable fees before electing cross-reinvestment into that fund or Portfolio.
The election to cross-reinvest dividends and capital gain distributions will not
-[ ]-
<PAGE>
affect the tax treatment of such dividends and distributions, which will be
treated as received by the shareholder and then used to purchase shares of the
acquired fund. Such reinvestment of dividends and distributions in shares of
other Goldman Sachs Portfolios or in units of ILA Portfolios is available only
in states where such reinvestment may legally be made.
AUTOMATIC EXCHANGE PROGRAM
==========================
The 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. The Fund shareholder should obtain and read the prospectus relating
to any other Goldman Sachs Portfolio and its shares and consider its investment
objective, policies and applicable fees and expenses before electing an
automatic exchange into that Goldman Sachs Portfolio.
SYSTEMATIC WITHDRAWAL PLAN
==========================
A systematic withdrawal plan (the "Systematic Withdrawal Plan") is
available to shareholders of the 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 Fund at net asset value. The Transfer Agent acts as agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the systematic withdrawal payment. The Systematic Withdrawal Plan may
be terminated at any time. Goldman Sachs reserves the right to initiate a fee
of up to $5 per withdrawal, upon thirty (30) days written notice to the
shareholder. Withdrawal payments should not be considered to be dividends, yield
or income. If periodic withdrawals continuously exceed new purchases and
reinvested dividends and capital gains distributions, the shareholder's original
investment will be correspondingly reduced and ultimately exhausted. The
maintenance of a withdrawal plan concurrently with purchases of additional Class
A or Class B shares would be disadvantageous because of the sales charge imposed
on purchases of Class A shares or the imposition of a CDSC on redemptions of
Class A and Class B shares. The CDSC applicable to Class B shares redeemed
under a systematic withdrawal plan may be waived. See "How to Invest--Waiver or
Reduction of Contingent Deferred Sales Charge" in the Prospectus. In addition,
each withdrawal
-[ ]-
<PAGE>
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 the Fund are sold at a maximum sales charge of 4.5%.
Using the offering price at commencement of operations, the maximum offering
price of the Class A shares of the Fund's shares would be as follows:
<TABLE>
<CAPTION>
Net Asset Maximum Offering Price
Value Sales Charge to Public
----- ------------ --------------
<S> <C> <C> <C>
High Yield $ $ $
</TABLE>
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
CLASS A DISTRIBUTION PLAN. As described in the Prospectus, the Trust with
respect to the Class A Shares of the Fund has adopted a distribution plan (the
"Class A Plan") pursuant to Rule 12b-1 under the Act. See "Distribution and
Authorized Dealer Service Plans" in the Prospectus.
The Class A Plan was initially approved on [_________] by a majority
vote of the Trustees of the Trust, 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 A Plan, cast in person at a meeting called for the purpose
of approving the Plan. The Plan was approved by the sole initial shareholder of
Class A Shares on [____________].
The compensation payable under the Class A Plan may not exceed 0.25%
per annum of the Fund's average daily net assets attributable to its Class A
Shares. Currently, Goldman Sachs is not imposing any fee under the Class A Plan
applicable to the Fund. Goldman Sachs has no current intention of modifying or
discontinuing such arrangement, but may do so in the future at its discretion.
Goldman Sachs may pay up to the entire amount of such fee under the
Plan to Authorized Dealers for providing services in connection with the sale of
the 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
-[ ]-
<PAGE>
accordance with the Plan of distributing a Fund's shares. If such fee exceeds
its expenses, Goldman Sachs may realize a profit from these arrangements.
The Plan is a compensation plan which provides for the payment of a
specified fee without regard to the expenses actually incurred by Goldman Sachs.
If the 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 the Plan at a rate that
materially exceeds the rate of compensation received under the Plan.
Under the Class A Plan, Goldman Sachs, as distributor of the 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 Plan and
the purposes for which such services were performed and expenditures were made.
The Class A Plan will remain in effect until [____________] 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 Plan. The 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 Fund. All
material amendments of the Class A Plan must also be approved by the Trustees of
the Trust in the manner described above. The 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 Fund. So long as the 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 Plan will benefit the Fund and its Class A Shareholders.
AUTHORIZED DEALER SERVICE PLAN. As described in the Prospectus, the
Trust with respect to the Fund has adopted a non- Rule 12b-1 Authorized Dealer
Service Plan (the "Service Plan") with respect to Class A Shares and Class B
Shares. See "Distribution and Authorized Dealer Service Plans" in the
Prospectus.
The compensation under the Service Plan may not exceed 0.25% per annum
of the average daily net assets attributable to the class
-[ ]-
<PAGE>
of shares to which the Plan relates. Up to the entire amount of the fee under
the Service Plan may be paid to Authorized Dealers for providing personal and
account maintenance services in connection with the Fund's shares. Under the
Service Plan, 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 Plan.
The Service Plan applicable to Class A Shares was approved on
[__________]. The Service Plan applicable to Class B Shares was approved on
[__________]. In each case, the Service Plan was approved by a majority of the
Board of Trustees of the Trust. The Service Plans will remain in effect until
[_________] and from year to year thereafter, provided that such continuance is
approved annually by a majority vote of the Trustees, including a majority of
the non-interested Trustees who have no direct or indirect financial interest in
the Service Plans.
CLASS B DISTRIBUTION PLAN. As described in a Prospectus, the Trust has
adopted on behalf of the Fund a distribution plan (the "Class B Plan") pursuant
to Rule 12b-1 under the Act with respect to Class B Shares. See "Distribution
and Authorized Dealer Service Plan" in the Prospectus.
The Class B Plan was initially approved on [__________] by a majority
vote of the Trustees of the Trust, including a majority of the Trustees who are
not interested persons of the Trust and have no direct or indirect financial
interest in the Class B Plan (the "non-interested Trustees"), cast in person at
a meeting called for the purpose of approving the Class B Plan. The Plan was
approved by the sole initial shareholder of Class B shares on [_____________].
The compensation payable under the Class B Plan is equal to 0.75% per
annum of the average daily net assets attributable to Class B Shares of the
Fund. The fees received by Goldman Sachs under the Class B Plan and contingent
deferred sales charges 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 Fund's Class B Shares. If such fee
exceeds its expenses, Goldman Sachs may realize a profit from these
arrangements.
The Class B Plan is a compensation plan which provides for the payment
of a specified distribution fee without regard to the distribution expenses
actually incurred by Goldman Sachs. If the Class B Plan were terminated by the
Trust's Board of Trustees and no successor plan were adopted, the Fund would
cease to make
-[ ]-
<PAGE>
distribution payments to Goldman Sachs and Goldman Sachs would be unable to
recover the amount of any of its unreimbursed distribu tion expenditures.
Under the Class B Plan, Goldman Sachs, as distributor of the Fund's
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 Plan and the purposes for which such
services were performed and expenditures were made.
The Class B Plan will remain in effect until [_________] and from year
to year, provided that each such continuance is approved annually by a majority
vote of the Board of Trustees, including a majority of the non-interested
Trustees who have no direct or indirect financial interest in the Class B Plan.
The Class B 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 B Shares of the 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. The Class B Plan may be terminated at any time without payment
of any penalty by a vote of the majority of the non-interested Trustees or by
vote of a majority of the outstanding voting securities of the Class B Shares of
the Fund. So long as the Class B Plan is in effect, the selection and nomination
of non-interested Trustees shall be committed to the discretion of the non-
interested Trustees. The Trustees have determined that in their judgment there
is a reasonable likelihood that the Class B Plan will benefit the Fund and its
Class B shareholders.
-[ ]-
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial Statements
Not Applicable
(b) Exhibits
The following exhibits are incorporated herein by reference to Registrant's
Registration Statement on form N-1A as initially filed (Reference A), to Pre-
Effective Amendment No. 1 to such Registration Statement (Reference B), or to
Post-Effective 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 (Reference T), or to Post-Effective Amendment No. 20
to such Registration Statement (Reference U), or to Post-Effective Amendment No.
21 to such Registration Statement (Reference V), or to Post-Effective Amendment
No. 24 to such Registration Statement (Reference Y), or to Post-Effective
Amendment No. 25 to such Registration Statement (Reference Z) or to Post-
Effective Amendment No. 26 to such Registration Statement (Accession No.
0000950130-95-002856.
1(a). Amendment No. 2 to the Agreement and Declaration of Trust of the
Registrant. (Reference B)
1(b). Amendment to the Agreement and Declaration of Trust of the
Registrant. (Reference G)
1(c). Amended and Restated Agreement and Declaration of Trust.
(Reference I).
1(d). Amendment to the Amended and Restated Declaration of Trust of the
Registrant dated August 19, 1992. (Reference K)
1(e). Amendment to Amended and Restated Agreement and Declaration of
Trust. (Reference L)
1(f). Amendment to the Amended and Restated Agreement and Declaration
of Trust (Reference S)
<PAGE>
2. By-law of the Registrant. (Reference B)
5(a). Advisory Agreement between Registrant on behalf of GS Short-Term
Government Agency Fund and Goldman, Sachs & Co. (Reference P)
5(b). Advisory Agreement between Registrant on behalf of Goldman Sachs
Global Income Fund and Goldman Sachs Asset Management.
(Reference P)
5(c). Subadvisory Agreement between Registrant on behalf of Goldman
Sachs Global Income Fund and Goldman Sachs Asset Management
International Limited. (Reference P)
5(d). Advisory Agreement between Registrant on behalf of GS Adjustable
Rate Government Agency Fund and Goldman Sachs Asset Management.
(Reference P)
5(e). Advisory Agreement between Registrant on behalf of GS Short
Duration Tax-Free Fund and Goldman, Sachs & Co. (Reference P)
5(g). Advisory Agreement between Registrant on behalf of Goldman Sachs
Government Income Fund and Goldman Sachs Asset Management.
(Reference P)
5(i). Advisory Agreement between Registrant on behalf of Goldman Sachs
Municipal Income Fund and Goldman Sachs Asset Management.
(Reference P)
5(h). Administration Agreement between the Registrant on behalf of
Goldman Sachs Municipal Income Fund and Goldman Sachs Asset
Management. (Reference P)
5(k). Administration Agreement between Registrant on behalf of Goldman
Sachs Global Income Fund and Goldman Sachs Asset Management.
(Reference P)
5(m). Administration Agreement between Registrant on behalf of Goldman
Sachs Government Income Fund and Goldman Sachs Asset Management.
(Reference P)
5(n). Advisory Agreement between Registrant on behalf of GS Core Fixed
Income Fund and Goldman Sachs Asset Management. (Reference T)
6(a). Distribution Agreement between Registrant and Goldman, Sachs &
Co. (Reference P)
8(a). Custodian Agreement between Registrant and State Street Bank and
Trust Company. (Reference P)
2
<PAGE>
8(b). Form of Wiring Agreement among State Street Bank and Trust
Company, Goldman, Sachs & Co. and The Northern Trust Company.
(Reference B)
8(c). Fee schedule relating to the Custodian Agreement between
Registrant and State Street Bank and Trust Company. (Reference C)
8(d). Form of Letter Agreement between Registrant and State Street Bank
and Trust pertaining to the latter's designation of Security
Pacific National Bank as its sub-custodian and certain other
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)
10. Opinion of Counsel (filed with Notice on Form 24f-2)
13. Subscription Agreement with Goldman, Sachs & Co. (Reference B)
15(a). Distribution Plan pursuant to Rule 12b-1 for Goldman Sachs
Municipal Income Fund. (Reference P)
15(c). Distribution Plan pursuant to Rule 12b-1 for Goldman Sachs
Government Income Fund (Reference O)
15(d). Distribution Plan pursuant to Rule 12b-1 for Goldman Sachs Global
Income Fund. (Reference O)
15(f). Distribution Plan Pursuant to Rule 12b-1 for GS Adjustable Rate
Government Agency Fund-Class A Shares. (Reference Y)
15(h). Administration Plan and Service Plan of the Trust. (Reference X)
17(a). Transfer Agency Agreement between Registrant and Goldman, Sachs &
Co. (Reference P)
17(b). Fee schedule relating to the Transfer Agency Agreement between
Registrant and Goldman, Sachs & Co. (Reference B)
17(c). Power of Attorney of Ms. Beck. (Reference N)
3
<PAGE>
17(d). Powers of Attorney of Messrs. Armellino, Bakhru, Mayo, Nagel,
Shuch, Smart, Springer, Strubel, Gilman, Hopkins, Mosior,
Richman, Mmes. Mucker and Taylor. (Reference O)
17(e). Power of Attorney Messr. Ford. (Reference W)
18. Form of Plan entered into by Registrant pursuant to Rule 18f-3
(Reference Z) .
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
-------------------------------------------------------------
Not Applicable.
4
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
-------------------------------
Number of
Title of Class Record Holders
- -------------- --------------
GS Short Duration Government Fund
Institutional Shares 779
GS Short Duration Government Fund
Administration Shares 33
GS Short Duration Government Fund
Service Shares 3
GS Adjustable Rate Government Fund
Institutional Shares 2383
GS Adjustable Rate Government Fund
Administration Shares 76
GS Adjustable Rate Government Fund
Service Shares 1
GS Adjustable Rate Government Fund
Class A Shares 339
GS Short Duration Tax-Free Fund
Institutional Shares 463
GS Short Duration Tax-Free Fund
Administration Shares 15
GS Short Duration Tax-Free Fund
Service Shares 69
GS Core Fixed Income Fund
Institutional Shares 164
GS Core Fixed Income Fund
Administration Shares 31
GS Core Fixed Income Fund
Service Shares 2
Goldman Sachs Global Income Fund
Institutional Shares 35
Goldman Sachs Global Income Fund
Service Shares
5
<PAGE>
Goldman Sachs Global Income Fund
Class A Shares 2,496
Goldman Sachs Global Income Fund
Class B Shares 29
Goldman Sachs Government Income Fund
Class A Shares 709
Goldman Sachs Government Income Fund
Class B Shares 20
Goldman Sachs Municipal Income Fund
Class A Shares 1,541
Goldman Sachs Municipal Income Fund
Class B Shares 15
(Information supplied as of November 29, 1996)
ITEM 27. INDEMNIFICATION
---------------
Article VI of the Registrant's Amended and Restated Agreement and Declaration of
Trust provides for indemnification of the Registrant's trustees and officers
under certain circumstances. A copy of each Amended and Restated Agreement and
Declaration of Trust is filed as Exhibit 1(f) in Post Effective Amendment No. 7
(Reference I).
Paragraph 7 of the Advisory Agreement dated March 28, 1988 between the
Registrant on behalf of GS Short-Term Government Agency Fund and Goldman, Sachs
& Co., paragraph 7 of the Advisory Agreement dated as of July 15, 1991 between
the Registrant on behalf of Goldman Sachs Global Income Fund and Goldman Sachs
Asset Management, paragraph 7 of the Advisory Agreement dated as of July 15,
1991 between GS Adjustable Rate Government Agency Fund and Goldman Sachs Asset
Management, and paragraph 7 of the Advisory Agreement dated September 25, 1992
between the Registrant on behalf of GS Short Duration Tax-Free Fund and Goldman
Sachs & Co., paragraph 7 of the Advisory Agreement dated November 23, 1993
between the Registrant on behalf of GS Government Agency Portfolio and Goldman,
Sachs & Co., paragraph 7 of the Advisory Agreement dated February 1, 1993
between the Registrant on behalf of each of GS Adjustable Rate Mortgage Fund and
Goldman Sachs Government Income Fund and Goldman Sachs Asset Management, and
paragraph 7 of the Advisory Agreement dated July 16, 1993 between the Registrant
on behalf of Goldman Sachs Municipal Income Fund and Goldman Sachs Asset
Management and paragraph 7 of the Advisory Agreement between the Registrant on
behalf of GS Core Fixed Income Fund and Goldman Sachs Asset Management and
paragraph 7 of the Advisory Agreement dated October 27, 1993 between the
registrant on behalf of each of Goldman Sachs California
6
<PAGE>
Municipal Income Fund and Goldman Sachs New York Municipal Income Fund and
Goldman Sachs Asset Management, provide for indemnification of Goldman, Sachs &
Co., Goldman Sachs Asset Management or, in lieu thereof, contribution by the
Registrant under certain circumstances. Copies of such Agreements were filed as
Exhibits 5(a), (b), (d), (e), (f), (g), (h), (i), (n), (o), and (p),
respectively, to Registrant's Registration Statement.
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, 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 Goldman Money
Market Trust, Trust for Credit Unions and for shares of Goldman Sachs Trust and
Goldman Sachs Equity Portfolios, Inc. Goldman, Sachs & Co., or a division
thereof currently serves as administrator and distributor of the units or shares
of The Benchmark Funds and The Commerce Funds.
(b). Set forth below is certain information pertaining to the Managing
Directors of Goldman, Sachs & Co., Registrant's principal underwriter. Each of
the following persons is a Managing Directors of Goldman, Sachs & Co. and,
except for Messrs. Shuch and Ford, does not hold a position with Registrant.
Messrs. Shuch and Ford are Trustees of Registrant.
7
<PAGE>
GOLDMAN SACHS MANAGING DIRECTORS
Name and Principal Name and Principal
Business Address Business Address
---------------- ----------------
Jon Corzine, Chairman (1)(2)
Henry M Paulson, Jr., Chairman (1)(2)
Roy J. Zuckerberg (1)(2) Hideo Ishihara (10)
David M. Silfen (1)(2)
Richard M. Hayden (2)
Robert J. Hurst (2) Armen A. Avanessians (2)
Paul M. Achleitner (7) Howard C. Katz (2)
Joel S. Beckman (2) Peter K. Barker (9)
Eric S. Dobkin (2) David W. Blood (7)
Willard J. Overlock, Jr. (2) Henry M. Paulson, Jr. (1)(2)
Jonathan L. Cohen (2) Zachariah Cobrinik (7)
Frederic B. Garonzik (7) Kevin W. Kennedy (2)
William C. Landreth (11) Daniel M. Neidich (2)
Gary D. Cohn (7) Edward Spiegel (2)
Fischer Black (5) Christopher A. Cole (2)
Robert F. Cummings, Jr. (2) Henry Cornell (13)
Angelo De Caro (7) Robert V. Delaney (2)
Steven G. Einhorn (2) Joseph Del LaRosa (2)
J. Michael Evans (7) David B. Ford (2)
David M. Leuschen (2) Lawton W. Fitt (2)
Michael R. Lynch (2) Michael D. McCarthy (2)
Donald C. Opatrny, Jr. (7) Joseph D. Gatto (2)
Peter C. Gerhard (2) Thomas E. Tuft (2)
Robert J. Katz (2) Michael P. Mortara (2)
Nomi P. Ghez (2) Lloyd C. Blankfein (2)
David T. Hamamoto (2) John P. Curtin, Jr. (2)
Gavyn Davies (7) Dexter D. Earle (2)
John Ehara (10) Christopher Flowers (2)
Gary Gensler (2) Walter H. Haydock (15)
Charles T. Harris, III (2) Thomas J. Healey (2)
Stephen Hendel (2) Robert E. Higgins (2)
Ernest S. Liu (2) David L. Henle (2)
Eff W. Martin (11) Charles B. Mayer, Jr. (2)
Michael J. O'Brien (7) Mark Schwartz (2)
Stephen M. Semlitz (2) Robert K. Steel (7)
Francis J. Ingrassia (2) John A. Thain (1)(2)
John L. Thornton (7) Scott B. Kapnick (7)
Bracebridge H. Young, Jr. (10) Joseph R. Zimmel (2)
Barry L. Zubrow (2) Gary L. Zwerling (2)
Jon R. Aisbitt (7) Andrew M. Alper (2)
William J. Buckley (2) Frank L. Coulson, Jr. (2)
Connie Duckworth (8) Richard A. Friedman (2)
Alan R. Gillespie (7) Joseph H. Gleberman (2)
Jacob D. Goldfield (2) Steven M. Heller (2)
8
<PAGE>
Ann F. Kaplan (2) Robert S. Kaplan (10)
John P. McNulty (5)
Peter D. Kiernan, III (2) Kevin M. Kelly (2)
T. Willem Mesdag (7) Gaetano J. Muzio (2)
Robin Neustein (2) Timothy J. O'Neill (2)
Scott M. Pinkus (2) John J. Powers (2)
Stephen D. Quinn (2) Arthur J. Reimers,III (7)
James P. Riley, Jr. (2) Richard A. Sapp (7)
John C. Keinert (2) Donald F. Textor (2)
Thomas B. Walker, III (2) Patrick J. Ward (10)
Jeffrey M. Weingarten (7) Jon Winkelried (2)
Richard E. Witten (2) Gregory K. Palm (7)
Carlos A. Cordeiro (7) John O. Downing (7)
W. Mark Evans (7) Michael D. Fascitelli (2)
Sylvain M. Hefes (7) Reuben Jeffrey, III (2)
Lawrence H. Linden (2) Jun Makihara (9)
Masanori Mochida (10) Robert B. Morris,III (11)
Philip D. Murphy (14) Suzanne M. Johnson (9)
Terence M. O'Toole (2) Carl G.E. Palmstierna (7)
Michael G. Rantz (2) J. David Rogers (10)
Joseph Sassoon (7) Peter Savitz (10)
Charles B. Seelig, Jr. (2) Ralph F. Severson (11)
Gene T. Sykes (9) Gary A. Syman (10)
Leslie C. Tortora (2) John L. Townsend, III (2)
Lee G. Vance (7) David A. Viniar (2)
John S. Weinberg (2) Peter A. Weinberg (2)
Laurence M. Weiss (2) George W. Wellde, Jr. (2)
Jaime E. Yordan (2) Sharmin Mossavar-
Jonathan L. Kolatch (2) Rahmani (5)
Peter S. Kraus (2) Robert Litterman (2)
Jonathan M. Lopatin (2) Thomas J. Macirowski (2)
Peter G. Mallinson (13) Oki Matsumoto (10)
E. Scott Mead (7) Eric M. Mindich (2)
Steven T. Mnuchin (2) Thomas K. Montag (2)
Edward A. Mule (2) Kipp M. Nelson (7)
Christopher K. Norton (14) Robert J. O'Shea (2)
Wiet H. Pot (7) Jack L. Salzman (2)
Eric S. Schwartz (2) Michael F. Schwerin (2)
Richard S. Sharp (7) Richard G. Sherlund (2)
Michael S. Sherwood (7) Cody J. Smith (2)
Daniel W. Stanton (2) Esta E. Stecher (2)
Frederic E. Steck (11) Byron D. Trott (8)
Barry S. Volpert (2) Peter S. Wheeler (13)
Anthony G. Williams (7) Gary W. Williams (2)
Tracy R. Wolstencroft (4) Danny O. Yee (13)
Michael J. Zamkow (2) Mark A. Zurack (2)
Jim O'Neill (2) Peter D. Sutherland (7)
(1) Executive Committee
(2) 85 Broad Street, New York, NY 10004
(3) Mellon Bank Center, 1735 Market Street, 26th Floor,
Philadelphia, PA 19103
9
<PAGE>
(4) 100 Crescent Court, Suite 1000, Dallas, TX 75201
(5) One New York Plaza, New York, NY 10004
(6) 1000 Louisiana Street, Suite 550, Houston, TX 77002
(7) Peterborough Court, 133 Fleet Street, London EC4A 2BB,
England
(8) 4900 Sears Tower, Chicago, IL 60606
(9) 333 South Grand Avenue, Suite 1900, Los Angeles, CA 90071
(10) ARK Mori Bldg.,10th Floor, 12-32 Akasaka, 1-chome, Minato-
ku, Tokyo 107, Japan
(11) 555 California Street, 31st Floor, San Francisco, CA 94104
(12) Exchange Place, 53 State Street, 13th Floor, Boston, MA
02109
(13) Asia Pacific Finance Tower, 35th Floor, Citibank Plaza, 3
Garden Road, Hong Kong
(14) Finanz GmbH, MesseTurm, 60308 Frankfurt am Main 1, Germany
(15) Munsterhof 4, 8022, Zurich, Switzerland
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
--------------------------------
The Amended and Restated Agreement and Declaration of Trust, By-laws and minute
books of the Registrant are in the physical possession of Goldman Sachs Asset
Management, One New York Plaza, New York, New York 10004. All other accounts,
books and other documents required to be maintained under Section 31(a) of the
Investment Company Act of 1940 and the Rule promulgated 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 Fund's Annual Report contain performance information and are available
to any recipient of the Prospectus upon request and without charge by writing to
Goldman, Sachs & Co., 4900 Sears Tower, Chicago, Illinois 60606.
10
<PAGE>
(b) With respect to Goldman Sachs High Yield Fund, the Registrant undertakes to
file a post-effective amendment, using financial statements which need not
be certified, within four to six months from the effective date of the
Post-Effective Amendment to the Registrant's Registration Statement
relating to shares of such Fund.
11
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 28 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
2nd day of January, 1997.
GOLDMAN SACHS TRUST
By:_________________________
Michael J. Richman
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 28 to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------ --------------------- -----------------
<S> <C> <C>
*Douglas C. Grip President and Trustee December 31, 1996
- ------------------------
Douglas C. Grip
*Scott M. Gilman Principal Accounting December 31, 1996
- ------------------------
Scott M. Gilman Officer And Principal
Financial Officer
*David B. Ford Trustee December 31, 1996
- ------------------------
David B. Ford
*Ashok N. Bakhru Trustee December 31, 1996
- ------------------------
Ashok N. Bakhru
*Alan A. Shuch Trustee December 31, 1996
- ------------------------
Alan A. Shuch
*Jackson W. Smart Trustee December 31, 1996
- ------------------------
Jackson W. Smart, Jr.
*William H. Springer Trustee December 31, 1996
- ------------------------
William H. Springer
</TABLE>
12
<PAGE>
*Richard P. Strubel Trustee December 31, 1996
- ---------------------
Richard P. Strubel
*By: Michael J. Richman December 31, 1996
-------------------
Michael J. Richman,
Attorney-In-Fact
* Pursuant to a power of attorney previously filed.
13
