<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
GOLDMAN SACHS MUNICIPAL INCOME FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS HIGH YIELD FUND
(EACH A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is
not a prospectus. This Additional Statement should be read in conjunction with
the prospectus for the Class A, Class B and Class C Shares of Goldman Sachs
Adjustable Rate Government Fund, Goldman Sachs Short Duration Government Fund,
Goldman Sachs Short Duration Tax-Free Fund, Goldman Sachs Government Income
Fund, Goldman Sachs Municipal Income Fund, Goldman Sachs Core Fixed Income Fund,
Goldman Sachs Global Income Fund and Goldman Sachs High Yield Fund dated August
15, 1997, as amended and/or supplemented from time to time, which may be
obtained without charge from Goldman, Sachs & Co. by calling the telephone
number, or writing to one of the addresses, listed below. Goldman Sachs
Adjustable Rate Government Fund currently does not offer Class B or Class C
Shares.
TABLE OF CONTENTS
Introduction B-3
Other Investments and Practices B-11
Investment Restrictions B-58
Management B-61
Portfolio Transactions B-77
Shares of the Trust B-80
Net Asset Value B-86
Taxation B-88
Performance Information B-100
Other Information B-112
Financial Statements B-113
Other Information Regarding Purchases, Redemptions,
Exchanges and Dividends B-114
Distribution and Authorized Dealer Service Plans B-118
Appendix A 1-A
Appendix B 1-B
The date of this Additional Statement is August 15, 1997.
<PAGE>
GOLDMAN SACHS TRUST GOLDMAN, SACHS & CO.
4900 SEARS TOWER DISTRIBUTOR
CHICAGO, ILLINOIS 60606 85 BROAD STREET
NEW YORK, NY 10004
GOLDMAN SACHS ASSET MANAGEMENT
ADVISER TO GOLDMAN SACHS MUNICIPAL
INCOME FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
GOLDMAN SACHS SHORT DURATION TAX FREE
FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS HIGH YIELD FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN,SACHS & CO.
MANAGEMENT, L.P. TRANSFER AGENT
ADVISER TO GOLDMAN SACHS 4900 SEARS TOWER
ADJUSTABLE RATE GOVERNMENT FUND CHICAGO, ILLINOIS 60606
AND SHORT DURATION GOVERNMENT FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET MANAGEMENT
INTERNATIONAL
ADVISER TO GOLDMAN SACHS
GLOBAL INCOME FUND
133 PETERBOROUGH COURT
LONDON EC4A 2BB ENGLAND
TOLL FREE .......800-526-7384
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") was formed under the laws of the
state of Delaware on January 28, 1997. The Trust is a successor to a
Massachusetts business trust that was merged with the Trust on April 30, 1997.
The Trust assumed its current name on March 22, 1991. The Trustees of the Trust
have authority under the Declaration of Trust to create and classify shares into
separate series and to classify and reclassify any series of shares into one or
more classes without further action by shareholders. Pursuant thereto, the
Trustees have created the following series, among others: Goldman Sachs
Adjustable Rate Government Fund ("Adjustable Rate Fund"), Goldman Sachs Core
Fixed Income Fund ("Core Fund"), Goldman Sachs Global Income Fund ("Global
Income Fund"), Goldman Sachs Government Income Fund ("Government Income Fund"),
Goldman Sachs Municipal Income Fund ("Municipal Income Fund"), Goldman Sachs
Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund"), Goldman Sachs
Short Duration Government Fund ("Short Duration Government Fund") and Goldman
Sachs High Yield Fund ("High Yield Fund") and 27 other series of shares.
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund, Short Duration Government
Fund and High Yield Fund are each sometimes referred to herein as a "Fund" and
collectively as the "Funds." Short Duration Government Fund, Short Duration
Tax-Free Fund and Core Fund are each authorized to issue six classes of shares:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares. Adjustable Rate Fund is authorized to issue
four classes of shares: Institutional Shares, Administration Shares, Service
Shares and Class A Shares. Government Income Fund, Municipal Income Fund,
Global Income Fund and High Yield Fund are authorized to issue five classes of
shares: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. Additional series may be added in the future from time to time.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Government Income Fund, Municipal Income Fund, Short Duration Tax-
Free Fund and High Yield Fund. Goldman Sachs Asset Management International
("GSAMI"), an affiliate of Goldman Sachs, serves as investment adviser to the
Global Income Fund. Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate
of Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI and GSFM are each sometimes
referred to herein as the "Adviser" and collectively herein as the "Advisers."
In addition, Goldman Sachs serves as each Fund's distributor and transfer agent.
Each Fund's custodian is State Street Bank and Trust Company.
Because each Fund's shares may be redeemed upon request of a
shareholder on any business day at net asset value, the Funds offer greater
liquidity than many competing investments, such as certificates of deposit and
direct investments in certain securities in which the respective Fund may
invest. However,
B-3
<PAGE>
unlike certificates of deposits, shares of the Funds are not insured by the
Federal Deposit Insurance Corporation.
The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of each Fund's investment objective and policies.
Investing in the Funds entails certain risks and there is no assurance that a
Fund will achieve its objective.
EXPERIENCED MANAGEMENT. Successfully creating and managing a
----------------------
diversified portfolio of securities requires professionals with extensive
experience. Goldman Sachs' highly skilled portfolio management team brings
together many years of experience in the analysis, valuation and trading of U.S.
and foreign fixed-income securities.
ADJUSTABLE RATE FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Fund and Short Duration Government Fund are both
designed for investors who seek a high level of high current income, relative
stability of principal and the high credit quality of securities issued or
guaranteed by the U.S. government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and accounting
burdens involved in direct investment.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short Duration Government Fund differently than the investments
normally purchased by such investors. Relative to U.S. Treasury and non-
fluctuating money market instruments, the market value of adjustable rate
mortgage securities in which Adjustable Rate and Short Duration Government Funds
may invest may be adversely affected by increases in market interest rates.
Conversely, decreases in market interest rates may result in less capital
appreciation for adjustable rate mortgage securities in relation to U.S.
Treasury and money market investments.
HIGH CURRENT INCOME. Adjustable Rate and Short Duration Government
-------------------
Funds seek a higher current yield than a money market fund or than that offered
by bank certificates of deposit and money market accounts. However, the
Adjustable Rate and Short Duration Government Funds do not maintain a constant
net asset value per share and are subject to greater fluctuations in the value
of their shares than a money market fund. Unlike bank certificates of deposit
and money market accounts, investments in shares of the Funds are not insured or
guaranteed by any government agency. Each of the Adjustable Rate and Short
Duration Government Funds seeks to provide such high current income without
sacrificing credit quality.
RELATIVE LOW VOLATILITY OF PRINCIPAL. Adjustable Rate Fund seeks to
-------------------------------------
minimize net asset value fluctuations by investing primarily in adjustable rate
mortgage pass-through securities and
B-4
<PAGE>
other mortgage securities with periodic interest rate resets, maintaining a
maximum duration of two years and a target duration equal to that of a six-month
to one-year U.S. Treasury security, and utilizing certain active management
techniques to seek to hedge interest rate risk. Short Duration Government Fund
seeks to minimize net asset value fluctuations by utilizing certain interest
rate hedging techniques and by maintaining a maximum duration of not more than
three years. The duration target of the Short Duration Government Fund is that
of the 2-year U.S. Treasury Security plus or minus .5 years. There is no
assurance that these strategies for the Adjustable Rate Fund and Short Duration
Government Fund will always be successful.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
-------------------------------------------
securities of the Government National Mortgage Association ("Ginnie Mae") and
other mortgage-backed securities may prefer professional management and
administration of their mortgage-backed securities portfolios. A well-
diversified portfolio of such securities emphasizing minimal fluctuation of net
asset value requires significant active management as well as significant
accounting and administrative resources. Members of Goldman Sachs' highly
skilled portfolio management team bring together many years of experience in the
analysis, valuation and trading of U.S. fixed-income securities.
GOVERNMENT INCOME FUND
Government Income Fund is designed for investors who seek the
relatively high current income, relative safety of principal and the high credit
quality of securities issued by the U.S. government or its agencies,
instrumentalities or sponsored enterprises, without incurring the administrative
and account burdens involved in direct investment.
Government Income Fund's overall returns are generally likely to move
in the same direction as interest rates. Therefore, when interest rates
decline, Government Income Fund's return is also likely to decline. In exchange
for accepting a higher degree of share price fluctuation, investors have the
potential to achieve a higher return from the Government Income Fund than from
shorter-term investments.
High Current Income. Government Income Fund is designed to have a
-------------------
higher current yield than a money market fund, since it can invest in longer-
term, higher yielding securities, and may utilize certain investment techniques
not available to a money market fund. Similarly, Government Income Fund's yield
is expected to exceed that offered by bank certificates of deposit and money
market accounts. However, Government Income Fund does not maintain a constant
net asset value per share and is subject to greater fluctuation in the value of
its shares than a money market fund. Unlike bank certificates of deposit and
money market accounts, investments in shares of Government Income Fund are not
insured or guaranteed by any government agency. Government Income Fund seeks
B-5
<PAGE>
to provide high current income without, however, sacrificing credit quality.
Liquidity. Because Government Income Fund's shares may be redeemed upon
---------
request of a shareholder on any business day at net asset value, Government
Income Fund offers greater liquidity than many competing investments such as
certificates of deposit and direct investments in certain securities in which
Government Income Fund may invest.
A Sophisticated Investment Process. Government Income Fund's
----------------------------------
investment process starts with a review of trends for the overall economy as
well as for different sectors of the U.S. government and mortgage-backed
securities markets. Goldman Sachs' portfolio managers then analyze yield
spreads, implied volatility and the shape of the yield curve. In planning the
Government Income Fund's portfolio investment strategies, the Adviser is able to
draw upon the economic and fixed-income research resources of Goldman Sachs.
The Adviser will use a sophisticated analytical process involving Goldman Sachs'
proprietary mortgage prepayment model and option-adjusted spread model to
structure and maintain the Government Income Fund's investment portfolio. In
determining the Government Income Fund's investment strategy and making market
timing decisions, the Adviser will have access to information from Goldman
Sachs' economists, fixed-income analysts and mortgage specialists.
Convenience of a Fund Structure. Government Income Fund eliminates
-------------------------------
many of the complications that direct ownership of U.S. government and mortgage-
backed securities entails. Government Income Fund automatically reinvests all
principal payments within the Fund and distributes only current income each
month, thereby conserving principal and eliminating the investor's need to
segregate and reinvest the principal portion of each payment on his own.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS
Short Duration Tax-Free Fund and Municipal Income Fund (the "Tax Exempt
Funds") are not money market funds. Each is designed for investors who seek the
tax benefits associated with investing in municipal securities and who are able
to accept greater risk with the possibility of higher returns than investors in
municipal money market funds. While municipal money market funds almost always
maintain a constant net asset value, they must meet stringent high quality
credit standards, their portfolios must be broadly diversified and their
portfolio securities must have remaining maturities of 397 days or less. An
example of an "eligible" investment for the Tax Exempt Funds is auction rate
municipal securities, which generally have higher yields than money market
municipal securities, but which typically are not eligible investments for
municipal money market funds.
In addition, unlike a municipal money market fund, the Tax Exempt
Funds' increased investment flexibility permits their portfolios to be more
easily adjusted to reflect the shape of the
B-6
<PAGE>
current yield curve as well as to respond to anticipated developments that might
affect the shape of the yield curve.
Investors who wish to invest in municipal securities may find that a
mutual fund structure offers some important advantages when compared to
investing in individual municipal securities, including:
. The ratings given to municipal securities by the rating
organizations are difficult to evaluate. For example, some
municipal securities with relatively low credit ratings have yields
comparable to municipal securities with much higher ratings. The
credit research professionals at Goldman Sachs closely follow
market events and are well positioned to judge current and expected
credit conditions of municipal issuers;
. Because of the relative inefficiency of the secondary market in
municipal securities, the value of an individual municipal security
is often difficult to determine. As such, investors may obtain a
wide range of different prices when asking for quotes from
different dealers. In addition, a dealer may have a large
inventory of a particular issue that it wants to reduce.
Obtaining the best overall prices can require extensive
negotiation, which is a function performed by the portfolio
manager;
. Market expertise is also an important consideration for municipal
investors, and because the Tax Exempt Funds take relatively large
positions in different securities, the Tax Exempt Funds may be able
to obtain more favorable prices in the municipal securities market
than investors with relatively small positions; and
. Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
designed to provide this diversification.
CORE FUND
Core Fund is designed for investors seeking a total return consisting
of both income and capital appreciation that exceeds the total return of the
Lehman Brothers Aggregate Bond Index, without incurring the administrative and
accounting burdens involved in direct investment. Such investors also prefer
liquidity, experienced professional management and administration, a
sophisticated investment process, and the convenience of a mutual fund
structure. Core Fund may be appropriate as part of a balanced investment
strategy consisting of stocks, bonds and cash or as a complement to positions in
other types of fixed-income investments.
B-7
<PAGE>
Core Fund's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fund's return is likely to increase. Conversely, when interest rates
increase, Core Fund's return is likely to decline. However, the Adviser
believes that, given the flexibility of managers to invest in a diversified
portfolio of securities, Core Fund's return is not likely to decline as quickly
as that of other fixed-income funds with a comparable average portfolio
duration. In exchange for accepting a higher degree of potential share price
fluctuation, investors have the opportunity to achieve a higher return from Core
Fund than from shorter-term investments.
A number of investment strategies will be used to achieve the Core
Fund's investment objective, including market sector selection, determination of
yield curve exposure, and issuer selection. In addition, the Adviser will
attempt to take advantage of pricing inefficiencies in the fixed-income markets.
Market sector selection is the underweighting or overweighting of one or more of
the five market sectors (i.e., U.S. Treasuries, U.S. government agencies,
corporate securities, mortgage-backed securities and asset-backed securities) in
which the Fund primarily invests. The decision to overweight or underweight a
given market sector is based on expectations of future yield spreads between
different sectors. Yield curve exposure strategy consists of overweighting or
underweighting different maturity sectors to take advantage of the shape of the
yield curve. Issuer selection is the purchase and sale of corporate securities
based on a corporation's current and expected credit standing. To take
advantage of price discrepancies between securities resulting from supply and
demand imbalances or other technical factors, the Fund may simultaneously
purchase and sell comparable, but not identical, securities. The Adviser will
have access to the research of, and proprietary technical models developed by,
Goldman Sachs and will apply quantitative and qualitative analysis in
determining the appropriate allocations among the categories of issuers and
types of securities.
A SOPHISTICATED INVESTMENT PROCESS. Core Fund will attempt to control
----------------------------------
its exposure to interest rate risk, including overall market exposure and the
spread risk of particular sectors and securities, through active portfolio
management techniques. Core Fund's investment process starts with a review of
trends for the overall economy as well as for different sectors of the fixed-
income securities markets. Goldman Sachs' portfolio managers then analyze
yield spreads, implied volatility and the shape of the yield curve. In planning
Core Fund's portfolio investment strategies, the Adviser is able to draw upon
the economic and fixed-income research resources of Goldman Sachs. The Adviser
will use a sophisticated analytical process including Goldman Sachs' proprietary
mortgage prepayment model and option-adjusted spread model to assist in
structuring and maintaining Core Fund's investment portfolio. In determining
Core Fund's investment strategy and making market timing decisions, the Adviser
will have
B-8
<PAGE>
access to input from Goldman Sachs' economists, fixed-income analysts and
mortgage specialists.
GLOBAL INCOME FUND
Global Income Fund is designed for investors seeking a combination of
high income, capital appreciation, stability of principal, experienced
professional management, flexibility and liquidity. However, investing in the
Fund involves certain risks and there is no assurance that the Fund will achieve
its investment objective.
In selecting securities for the Fund, portfolio managers consider such
factors as the security's duration, sector and credit quality rating as well as
the security's yield and prospects for capital appreciation. In determining the
countries and currencies in which the Fund will invest, the Fund's portfolio
mangers form opinions based primarily on the views of Goldman Sachs' economists
as well as information provided by securities dealers, including information
relating to factors such as interest rates, inflation, monetary and fiscal
policies, taxation, and political climate. The portfolio managers apply the
Black-Litterman Model (the "Model") to their views to develop a portfolio that
produces, in the view of the Adviser, the optimal expected return for a given
level of risk. The Model factors in the opinions of the portfolio managers,
adjusting for their level of confidence in such opinions, with the views implied
by an international capital asset pricing formula. The Model is also used to
maintain the level of portfolio risk within the guidelines established by the
Adviser.
High Income. Global Income Fund's portfolio managers will seek out
-----------
the highest yielding bonds in the global fixed-income market that meet the
Global Income Fund's credit quality standards and certain other criteria.
Capital Appreciation. Investing in the foreign bond markets offers
--------------------
the potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic strength.
However, there is a risk of capital depreciation as a result of unanticipated
interest rate and currency fluctuations.
Portfolio Management Flexibility. Global Income Fund is actively
--------------------------------
managed. The Fund's portfolio managers invest in countries that, in their
judgment, meet the Fund's investment guidelines and often have strong currencies
and stable economies and in securities that they believe offer favorable
performance prospects.
Relative Stability of Principal. Global Income Fund may be able to
-------------------------------
reduce principal fluctuation by investing in foreign countries with economic
policies or business cycles different from
B-9
<PAGE>
those of the United States and in foreign securities markets that do not
necessarily move in the same direction or magnitude as the U.S. market.
Investing in a broad range of U.S. and foreign fixed-income securities and
currencies reduces the dependence of the Fund's performance on developments in
any particular market to the extent that adverse events in one market are offset
by favorable events in other markets. The Fund's policy of investing primarily
in high quality securities may also reduce principal fluctuation. However,
there is no assurance that these strategies will always be successful.
Professional Management. Individual U.S. investors may prefer
-----------------------
professional management of their global bond and currency portfolios because a
well-diversified portfolio requires a large amount of capital and because the
size of the global market requires access to extensive resources and a
substantial commitment of time.
HIGH YIELD FUND
High Yield Fund's Investment Process. GSAM starts the investment
-------------------------------------
process with economic analysis based on research generated by the Goldman Sachs
Global Economic Research Group and others to determine broad growth trends,
industry-specific events and market forecasts. The market value of non-
investment grade fixed income securities tends to reflect individual
developments within a company to a greater extent than higher rated corporate
debt or Treasury bonds that react primarily to fluctuations in interest rates.
Therefore, determining the creditworthiness of issuers is critical. To that
end, the High Yield Fund's portfolio managers have access to Goldman, Sachs &
Co.'s highly regarded Credit Research and Global Investment Research
Departments, as well as analysis from the firm's High Yield Research Group, a
dedicated group of 14 professionals in the high yield and emerging market
corporate bond research area, consisting of industry and regional market
specialists. In addition, the Fund's portfolio managers may review the opinions
of the two largest independent credit rating agencies, Standard & Poor's Ratings
Group and Moody's Investors Services, Inc. High Yield Fund's portfolio managers
and credit analysts also conduct their own in-depth analysis of each issue
considered for inclusion in the Fund's portfolio. The portfolio managers and
credit analysts evaluate such factors as a company's competitive position, the
strength of its balance sheet, its ability to withstand economic downturns and
its potential to generate ample cash flow to service its debt. The ability to
accurately analyze a company's future cash flow by correctly anticipating the
impact of economic, industry-wide and specific events are critical to successful
high yield investing. GSAM's goal is to identify companies with the potential
to strengthen their balance sheets by increasing their earnings, reducing their
debt or effecting a turnaround. GSAM analyzes trends in a company's debt
picture (i.e., the level of its interest coverage) as well as new developments
in its capital structure on an ongoing basis. GSAM believes that this constant
reassessment is more
B-10
<PAGE>
valuable than relying on a "snapshot" view of a company's ability to service
debt at one or two points in time.
High Yield Fund's portfolio is diversified among different sectors and
industries on a global basis in an effort to reduce overall risk. While GSAM
will avoid excessive concentration in any one industry, the Fund's specific
industry weightings are the result of individual security selection. Emerging
market debt considered for the High Yield Fund's portfolio will be selected by
specialists knowledgeable about the political and economic structure of those
economies.
Return on and Risks of High Yield Securities. Over the past decade,
---------------------------------------------
high yield bonds have delivered consistently higher yields and total return (and
higher volatility) than either investment grade corporate bonds or U.S. Treasury
bonds. However, because these non-investment grade securities involve higher
risks in return for higher income, they are best suited to long-term investors
who are financially secure enough to withstand volatility and the risks
associated with such investments. See "Other Investments and Practices."
Different types of fixed income securities may react differently to changes in
the economy. High yield bonds, like stocks, tend to perform best when the
economy is strong, inflation is low and companies experience healthy profits,
which can lead to higher stock prices and higher credit ratings. Government
bonds are likely to appreciate more in a weaker economy when interest rates are
declining. In certain types of markets, adding some diversification in the high
yield asset class may help to increase returns and decrease overall portfolio
risk.
For high yield, non-investment grade securities, as for most
investments, there is a direct relationship between risk and return. Along with
their potential to deliver higher yields and greater capital appreciation than
most other types of fixed income securities, high yield securities are subject
to higher risk of loss, greater volatility and are considered speculative by
traditional investment standards. The most significant risk associated with
high yield securities is credit risk: the risk that the company issuing a high
yield security may have difficulty in meeting its principal and/or interest
payments on a timely basis. As a result, extensive credit research and
diversification are essential factors in managing risk in the high yield arena.
To a lesser extent, high yield bonds are also subject to interest rate risk:
when interest rates increase, the value of fixed income securities tends to
decline.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. government securities ("U.S. Government
Securities"), which are obligations issued or guaranteed by the U.S. government
and its agencies, instrumentalities or sponsored enterprises. Some U.S.
Government Securities (such as
B-11
<PAGE>
Treasury bills, notes and bonds, which differ only in their interest rates,
maturities and times of issuance) are supported by the full faith and credit of
the United States of America. Others, such as obligations issued or guaranteed
by U.S. government agencies, instrumentalities or sponsored enterprises, are
supported either by (a) the full faith and credit of the U.S. government (such
as securities of the Small Business Administration), (b) the right of the issuer
to borrow from the Treasury (such as securities of Federal Home Loan Banks), (c)
the discretionary authority of the U.S. government to purchase the agency's
obligations (such as securities of Federal National Mortgage Association
("Fannie Mae")) or (d) only the credit of the issuer (such as securities of the
Financing Corporation). The U.S. government is under no legal obligation, in
general, to purchase the obligations of its agencies, instrumentalities or
sponsored enterprises. No assurance can be given that the U.S. government will
provide financial support to the U.S. government agencies, instrumentalities or
sponsored enterprises in the future.
U.S. Government Securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, or its agencies, instrumentalities or sponsored
enterprises. U.S. Government Securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a substantial secondary market, such participations are regarded as illiquid.
Each Fund may also purchase U.S. Government Securities in private placements,
subject to the Fund's limitation on investment in illiquid securities.
The Funds may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the separate trading of registered
interest and principal of securities program ("STRIPS").
CUSTODIAL RECEIPTS
Each Fund may acquire custodial receipts in respect of U.S. Government
Securities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). For certain securities law purposes, custodial receipts
are not considered U.S. Government Securities.
B-12
<PAGE>
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
Adjustable Rate, Short Duration Government, Core, Global Income, High
Yield and Government Income Funds (collectively, the "Taxable Funds") may each
invest in mortgage loans and mortgage pass-through securities and other
securities representing an interest in or collateralized by adjustable and
fixed-rate mortgage loans ("Mortgage-Backed Securities").
GENERAL CHARACTERISTICS. Each mortgage pool underlying Mortgage-
-----------------------
Backed Securities consists of mortgage loans evidenced by promissory notes
secured by first mortgages or first deeds of trust or other similar security
instruments creating a first lien on owner occupied and non-owner occupied one-
unit to four-unit residential properties, multi-family (i.e., five or more)
properties, agriculture properties, commercial properties and mixed use
properties (the "Mortgaged Properties"). The Mortgaged Properties may consist
of detached individual dwelling units, multi-family dwelling units, individual
condominiums, townhouses, duplexes, triplexes, fourplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
The Mortgaged Properties may also include residential investment properties and
second homes.
The investment characteristics of adjustable and fixed rate Mortgage-
Backed Securities differ from those of traditional fixed-income securities. The
major differences include the payment of interest and principal on Mortgage-
Backed Securities on a more frequent (usually monthly) schedule, and the
possibility that principal may be prepaid at any time due to prepayments on the
underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed-income securities. As a result, a faster than expected
prepayment rate will reduce both the market value and the yield to maturity from
those which were anticipated. A prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity and market value.
To the extent that the Funds invest in Mortgage-Backed Securities, the Advisers
will seek to manage these potential risks by investing in a variety of Mortgage-
Backed Securities and by using certain hedging techniques.
ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). ARMs generally provide for a
---------------------------------------
fixed initial mortgage interest rate for a specified period of time.
Thereafter, the interest rates (the "Mortgage Interest Rates") may be subject to
periodic adjustment based on changes in the applicable index rate (the "Index
Rate"). The adjusted rate would be equal to the Index Rate plus a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some
mortgagors may find difficult to make. However, certain ARMs may provide that
the Mortgage Interest Rate may not be adjusted to a rate above an applicable
lifetime maximum rate or below an
B-13
<PAGE>
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-month or one-year
London Interbank Offered Rate, the prime rate of a specific bank or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury
rate, closely mirror changes in market interest rate levels. Others, such as
the 11th District Federal Home Loan Bank Cost of Funds index, tend to lag behind
changes in market rate levels and tend to be somewhat less volatile. The degree
of volatility in the market value of each Taxable Fund's portfolio and therefore
in the net asset value of each Taxable Fund's shares will be a function of the
length of the interest rate reset periods and the degree of volatility in the
applicable indices.
FIXED-RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans
-------------------------
included in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple
interest at fixed annual rates and have original terms to maturity ranging from
5 to 40 years. Fixed-Rate
B-14
<PAGE>
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
Taxable Funds may invest. These regulations may impair the ability of a
mortgage lender to enforce its rights under the mortgage documents. These
regulations may adversely affect the Funds' investments in Mortgage-Backed
Securities (including those issued or guaranteed by the U.S. government, its
agencies or instrumentalities) by delaying the Funds' receipt of payments
derived from principal or interest on mortgage loans affected by such
regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
-----------
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate proceeds of the sale of foreclosed property may not equal the
amounts owed on the Mortgage-Backed Securities.
Furthermore, courts in some cases have imposed general equitable principles
upon foreclosure generally designed to relieve the borrower from the legal
effect of default and have required lenders to undertake affirmative and
expensive actions to determine the causes for the default and the
likelihood of loan reinstatement.
2. Rights of Redemption. In some states, after foreclosure of a mortgage
--------------------
loan, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property, which right may diminish the
mortgagee's ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may
also reduce the monthly payments due under such mortgage loan, change the
rate of interest, reduce the principal balance of the loan to the then-
current appraised value of the related mortgaged property, alter the
mortgage loan repayment schedule and grant priority of certain liens over
the lien of the mortgage loan. If a court relieves a borrower's obligation
to repay amounts otherwise due on a mortgage loan, the mortgage loan
servicer will not be required to advance such amounts, and any loss may be
borne by the
B-15
<PAGE>
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 Taxable Funds are permitted to invest in other
types of Mortgage-Backed Securities that may be available in the future to the
extent consistent with their respective investment policies and objectives.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States authorized to guarantee the timely payment
of the principal of and interest on certificates that are based on and backed
by a pool of mortgage loans insured by the Federal Housing Administration ("FHA
Loans"), or guaranteed by the Veterans Administration ("VA Loans"), or by pools
of other eligible mortgage loans. In order to meet its obligations, Ginnie Mae
is authorized to borrow from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the U.S. Congress. Each Fannie Mae Certificate is
issued and guaranteed by Fannie Mae and represents an undivided interest in a
pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool consists of
residential mortgage loans ("Mortgage Loans") either previously owned by Fannie
Mae or purchased by it in connection with the formation of the Pool. The
Mortgage Loans may be either conventional Mortgage Loans (i.e., not insured or
guaranteed by any U.S. government agency) or
B-16
<PAGE>
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.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one- to four-family residential properties
or multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac
Certificate group may include whole loans, participation interests in whole
loans, undivided interests in whole loans and participations comprising another
Freddie Mac Certificate group.
CONVENTIONAL MORTGAGE LOANS. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-
rate mortgage loans with original terms to maturity of between five and thirty
years. Substantially all of these mortgage loans are secured by first liens on
one- to four-family residential properties or multi-family projects. Each
B-17
<PAGE>
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 Taxable Funds may invest in
--------------------------------
government guaranteed mortgage pass-through securities ("Mortgage Pass-
Throughs"), that are fixed or adjustable rate Mortgage-Backed Securities which
provide for monthly payments that are a "pass-through" of the monthly interest
and principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans, net of any fees or other amounts paid to
any guarantor, administrator and/or servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in one
---------------------------
or more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate.
Generally, each certificate will evidence the specified interest of the holder
thereof in the payments of principal or interest or both in respect of the
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of
B-18
<PAGE>
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. Each Taxable Fund may invest in multiple class securities
- -----------
including collateralized mortgage obligations ("CMOs") and REMIC Certificates
issued by U.S. government agencies, instrumentalities (such as Fannie Mae) and
sponsored enterprises (such as Freddie Mac) or, in the case of Core, Global and
Government Income Funds, by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class Mortgage-Backed
Securities represent direct ownership interests in, a pool of mortgage loans or
Mortgage-Backed Securities the payments on which are used to make payments on
the CMOs or multiple class Mortgage-Backed Securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class Mortgage-Backed Securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed Mortgage-Backed Securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a
B-19
<PAGE>
"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
highest priority on each payment date after interest due has been paid to all
classes entitled to receive interest currently. Shortfalls, if any, are added to
the amount payable on the next payment date. The PAC Certificate payment
schedule is taken into account in calculating the final distribution date of
each class of PAC. In order to create PAC tranches, one or more tranches
generally must be created that absorb most of the volatility in the underlying
Mortgage Assets. These tranches tend to have market prices and yields that are
much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The Taxable Funds may invest in
-----------------------------------
Stripped Mortgage-Backed Securities ("SMBS"), which are derivative multi-class
mortgage securities, issued or guaranteed by
B-20
<PAGE>
the U.S. government, its agencies or instrumentalities. Core Fund, Government
Income Fund and Global 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 each
Fund's limitation on investments in illiquid securities. The Adviser may
determine that SMBS which are U.S. Government Securities are liquid for purposes
of each Fund's limitation on investments in illiquid securities in accordance
with procedures adopted by the Board of Trustees. The market value of the class
consisting entirely of principal payments generally is unusually volatile in
response to changes in interest rates. The yields on a class of SMBS that
receives all or most of the interest from Mortgage Assets are generally higher
than prevailing market yields on other Mortgage-Backed Securities because their
cash flow patterns are more volatile and there is a greater risk that the
initial investment will not be fully recouped.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
RATINGS. The ratings assigned by a rating organization to Mortgage Pass-
-------
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things,
payment guarantees, letters of credit, pool insurance, subordination, or any
combination thereof.
B-21
<PAGE>
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due 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
B-22
<PAGE>
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
Core, Government Income, High Yield and Global Income Funds may invest in
asset-backed securities. Such securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During
periods of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, a Fund's ability to
maintain positions in such securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to
B-23
<PAGE>
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.
LOAN PARTICIPATIONS
The High Yield Fund may invest in loan participations. Usually, neither
the co-lender nor any other participant guarantees the participations in any
way. As a result, the principal credit risk associated with acquiring
participation interests is the credit risk associated with the underlying
corporate borrower. The High Yield Fund may incur additional credit risk,
however, when a Fund is in the position of participant rather than a co-lender
because the High Yield Fund must assume the risk of insolvency of the co-lender
from which the participation interest was acquired and that of any person
interpositioned between the Fund and the co-lender.
Typically, the High Yield Fund will look to the agent bank to collect
principal of and interest on a participation interest, to monitor compliance
with loan covenants, to enforce all credit remedies, such as foreclosures on
collateral, and to notify co-lenders of any adverse change in the borrower's
financial condition or declaration of insolvency. The agent bank is compensated
for these services by the borrower pursuant to the terms of the loan agreement.
The High Yield Fund does not believe that price quotations currently
obtainable from banks, dealers or pricing services consistently represent the
market values of participation interests. Therefore, the Adviser will,
following guidelines established by the board of trustees of the Trust (the
"Board of Trustees") value the participation interests held by the High Yield
Fund at fair value, which approximates market value. In valuing a participation
interest, the Adviser may consider the factors it deems appropriate, including:
(i) the characteristics of the participation interest, including the cost, size,
interest rate, period until next interest rate reset, maturity and base lending
rate of the participation interest, the terms and conditions of the loan and any
related agreements and the position of the loan in the borrower's debt
structure; (ii) the nature, adequacy and value of the collateral,including the
High Yield Fund's rights, remedies and interest with respect to the collateral;
(iii) the creditworthiness of the borrower, based on an evaluation of its
financial condition, financial statements and information about the borrower's
business, cash flows, capital structure and future prospects; (iv) the market
for the participation interest, including price quotations for and trading in
the participation interest and similar participation interests or instruments
and the market environment and investor
B-24
<PAGE>
attitudes towards the participation interest or participation interests
generally; (v) the quality and creditworthiness of any intermediate
participants; and (vi) general economic or market conditions.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, deferred interest and capital
appreciation bonds and pay-in-kind ("PIK") securities. Zero coupon, deferred
interest and capital appreciation bonds are debt securities issued or sold at a
discount from their face value and which do not entitle the holder to any
periodic payment of interest prior to maturity or a specified date. The
original issue discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, the liquidity of the security and
the perceived credit quality of the issuer. These securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interests in such stripped debt obligations or coupons. The market prices of
zero coupon, deferred interest, capital appreciation bonds and PIK securities
generally are more volatile than the market prices of interest bearing
securities and are likely to respond to a greater degree to changes in interest
rates than interest bearing securities having similar maturities and credit
quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds and deferred interest bonds, PIK securities are designed to give an
issuer flexibility in managing cash flow. PIK securities that are debt
securities can either be senior or subordinated debt and generally trade flat
(i.e., without accrued interest). The trading price of PIK debt securities
generally reflects the market value of the underlying debt plus an amount
representing accrued interest since the last interest payment.
Zero coupon, deferred interest, capital appreciation and PIK securities
involve the additional risk that, unlike securities that periodically pay
interest to maturity, a Fund will realize no cash until a specified future
payment date unless a portion of such securities is sold and, if the issuer of
such securities defaults, a Fund may obtain no return at all on its investment.
In addition, even though such securities do not provide for the payment of
current interest in cash, the Funds are nonetheless required to accrue income on
such investments for each taxable year and generally are required to distribute
such accrued amounts (net of deductible expenses, if any) to avoid being subject
to tax. Because no cash is generally received at the time of the accrual, a
Fund may be required to liquidate other portfolio securities to obtain
sufficient cash to satisfy federal tax distribution requirements applicable to
the Fund. See "Taxation."
B-25
<PAGE>
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which each Fund may
invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at predesignated
periods in response to changes in the market rate of interest on which the
interest rate is based. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation. The absence of an unconditional
demand feature on variable and floating rate municipal securities exercisable
within seven days would, and the failure of the issuer or a third party to honor
its obligations under a demand or put feature might, require a variable or
floating rate obligation to be treated as illiquid for purposes of the Tax
Exempt Funds' limitation on illiquid investments.
Each Fund may invest in "leveraged" inverse floating rate debt instruments
("inverse floaters"), including "leveraged inverse floaters." The interest rate
on inverse floaters resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse floater, the greater
the volatility of its market value. Accordingly, the duration of an inverse
floater may exceed its stated final maturity. Certain inverse floaters may be
deemed to be illiquid securities for purposes of each Fund's limitation on
illiquid investments.
CORPORATE DEBT OBLIGATIONS
Core, Global Income, Government Income and High Yield Funds may invest in
corporate debt obligations, including obligations of industrial, utility and
financial issuers. Corporate debt obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
HIGH YIELD SECURITIES. Bonds rated BB or below by Standard & Poor's
---------------------
Ratings Group (Standard & Poor's) or Ba or below by Moody's Investor Service,
Inc. ("Moody's") (or comparable rated and unrated securities) are commonly
referred to as "junk bonds" and are considered speculative; the ability of their
issuers to make principal and interest payments may be questionable. In some
cases, such bonds may be highly speculative, have poor prospects 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
B-26
<PAGE>
AAA, AA, A or BBB by Standard and Poor's or Aaa, Aa, A or Baa by Moody's).
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of a
Fund to achieve its investment objective may, to the extent of its investments
in high yield securities, be more dependent upon such creditworthiness analysis
than would be the case if the Fund were investing in higher quality securities.
See Appendix B for a description of the corporate bond and preferred stock
ratings by Standard & Poor's, Moody's, Fitch Investors Service Corp. and Duff &
Phelps.
The amount of high yield, fixed income securities proliferated in the 1980s
and early 1990s as a result of increased merger and acquisition and leveraged
buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tends to reflect
those individual corporate developments to a greater extent than do those of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Issuers of such high yield securities may not be able
to make use of more traditional methods of financing and their ability to
service debt obligations may be more adversely affected than issuers of higher
rated securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These non-
investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the junk bond
market and investor perceptions regarding lower-rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which High Yield Fund
invests, the yields and prices of such securities may tend to fluctuate more
than those for higher-rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income 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
B-27
<PAGE>
such securities but will be reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace such
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if the High Yield Fund experiences unexpected net
redemptions of the High Yield Fund's
B-28
<PAGE>
shares, it may be forced to sell its higher-rated securities, resulting in a
decline in the overall credit quality of the High Yield Fund's portfolio and
increasing the exposure of the High Yield Fund to the risks of high yield
securities. The High Yield Fund may also incur additional expenses to the
extent that it is required to seek recovery upon a default in the payment of
principal or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Funds may each invest
in obligations issued or guaranteed by United States and foreign banks
(Government Income Fund may only invest in U.S. dollar denominated securities).
Bank obligations, including without limitation time deposits, bankers'
acceptances and certificates of deposit, may be general obligations of the
parent bank or may be obligations only of the issuing branch pursuant to the
terms of the specific obligations or government regulation.
Banks are subject to extensive governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. Foreign banks are subject to different regulations and are
generally permitted to engage in a wider variety of activities than U.S. banks.
In addition, the profitability of the banking industry is largely dependent upon
the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
B-29
<PAGE>
MUNICIPAL SECURITIES
Core, Municipal Income, High Yield and Short Duration Tax-Free Funds may
invest in bonds, notes and other instruments issued by or on behalf of states,
territories and possessions of the United States (including the District of
Columbia) and their political subdivisions, agencies or instrumentalities
("Municipal Securities"), the interest on which is exempt from regular federal
income tax (i.e., excluded from gross income for federal income tax purposes but
not necessarily exempt from the federal alternative minimum tax or from the
income taxes of any state or local government). In addition, Municipal
Securities include participation interests in such securities the interest on
which is, in the opinion of bond counsel or counsel selected by the Adviser,
excluded from gross income for federal income tax purposes. The Core, Municipal
Income, High Yield and Short Duration Tax-Free Funds may revise their definition
of Municipal Securities in the future to include other types of securities that
currently exist, the interest on which is or will be, in the opinion of such
counsel, excluded from gross income for federal income tax purposes, provided
that investing in such securities is consistent with each Fund's investment
objective and policies.
Municipal Securities are often issued to obtain funds for various public
purposes including refunding outstanding obligations, obtaining funds for
general operating expenses, and obtaining funds to lend to other public
institutions and facilities. Municipal Securities also include certain
"private activity bonds" or industrial development bonds, which are issued by or
on behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest, although the characteristics and enforcement of general obligations
may vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer, and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer of a
revenue obligation may be backed by a letter of credit, guarantee or insurance.
General obligations and revenue obligations may be issued in a variety of forms,
including commercial paper, fixed, variable and floating rate securities, tender
option bonds, auction rate bonds and zero coupon bonds, deferred interest bonds
and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a
variety of hybrid and special types of Municipal
B-30
<PAGE>
Securities. There are also numerous differences in the security of Municipal
Securities both within and between these two principal classifications.
For the purpose of applying a Fund's investment restrictions, the
identification of the issuer of a Municipal Security which is not a general
obligation is made by the Adviser based on the characteristics of the Municipal
Security, the most important of which is the source of funds for the payment of
principal and interest on such securities.
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as Short Duration Tax-Free, Municipal
Income, High Yield and Core Funds. Thus, the issue may not be said to be
publicly offered. Unlike some securities that are not publicly offered, a
secondary market exists for many Municipal Securities that were not publicly
offered initially and such securities may be readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
MUNICIPAL LEASES, CERTIFICATES OF PARTICIPATION AND OTHER PARTICIPATION
-----------------------------------------------------------------------
INTERESTS. The Core, High Yield, Municipal Income, and Short-Duration Tax-Free
- ---------
Funds may invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Municipal leases
frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject
to the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or
B-31
<PAGE>
utilizing the leased equipment. Although the obligations may be secured by the
leased equipment or facilities, the disposition of the property in the event of
non-appropriation or foreclosure might prove difficult, time consuming and
costly, and result in a delay in recovering or the failure to fully recover a
Fund's original investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation may
be deemed to be illiquid for the purpose of the Funds' limitation on investments
in illiquid securities. Other municipal lease obligations and certificates of
participation acquired by a Fund may be determined by the Adviser, pursuant to
guidelines adopted by the Trustees of the Trust, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades or quotes
for the obligation; and (4) the nature of the marketplace trades. In addition,
the Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance to the issuer of the
property covered by the lease and the likelihood that the marketability of the
obligation will be maintained throughout the time the obligation is held by a
Fund.
The Core, High Yield, Municipal Income and Short Duration Tax-Free Funds
may purchase participations in Municipal Securities held by a commercial bank or
other financial institution. Such participations provide a Fund with the right
to a pro rata undivided interest in the underlying Municipal Securities. In
addition, such participations generally provide a Fund with the right to demand
payment, on not more than seven days' notice, of all or any part of such Fund's
participation interest in the underlying Municipal Security, plus accrued
interest. A Fund will only invest in such participations if, in the opinion of
bond counsel, counsel for the issuers of such participations or counsel selected
by the Adviser, the interest from such participations is exempt from regular
federal income tax.
MUNICIPAL NOTES. Municipal Securities in the form of notes generally are
---------------
used to provide for short-term capital needs, in anticipation of an issuer's
receipt of other revenues or financing, and typically have maturities of up to
three years. Such instruments may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and revenue
B-32
<PAGE>
anticipation notes and construction loan notes. Tax anticipation notes are
issued to finance the working capital needs of governments. Generally, they are
issued in anticipation of various tax revenues, such as income, sales, property,
use and business taxes, and are payable from these specific future taxes.
Revenue anticipation notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under federal revenue sharing
programs. Bond anticipation notes are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the long-term bonds
then provide the funds needed for repayment of the notes. Tax and revenue
anticipation notes combine the funding sources of both tax anticipation notes
and revenue anticipation notes. Construction Loan Notes are sold to provide
construction financing. These notes are secured by mortgage notes insured by
the FHA; however, the proceeds from the insurance may be less than the economic
equivalent of the payment of principal and interest on the mortgage note if
there has been a default. The obligations of an issuer of municipal notes are
generally secured by the anticipated revenues from taxes, grants or bond
financing. An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or that
refinancing will be otherwise unavailable.
TAX-EXEMPT COMMERCIAL PAPER. Issues of commercial paper typically
---------------------------
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by state and local governments and their agencies to finance working
capital needs of municipalities or to provide interim construction financing and
are paid from general revenues of municipalities or are refinanced with long-
term debt. In most cases, tax-exempt commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
PRE-REFUNDED MUNICIPAL SECURITIES. The principal of and interest on pre-
---------------------------------
refunded Municipal Securities are no longer paid from the original revenue
source for the securities. Instead, the source of such payments is typically
an escrow fund consisting of U.S. Government Securities. The assets in the
escrow fund are derived from the proceeds of refunding bonds issued by the same
issuer as the pre-refunded Municipal Securities. Issuers of Municipal
Securities use this advance refunding technique to obtain more favorable terms
with respect to securities that are not yet subject to call or redemption by the
issuer. For example, advance refunding enables an issuer to refinance debt at
lower market interest rates, restructure debt to improve cash flow or eliminate
restrictive covenants in the indenture or other governing instrument for the
pre-refunded Municipal Securities. However, except for a change in the revenue
source from which principal and interest payments are made, the pre-refunded
Municipal Securities remain outstanding on their original terms until they
mature or are redeemed by the issuer. Pre-refunded Municipal Securities are
B-33
<PAGE>
usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free, Municipal Income, High
----------------------
Yield, and Core Funds may each invest in certain types of Municipal Securities,
generally referred to as industrial development bonds (and referred to under
current tax law as private activity bonds), which are issued by or on behalf of
public authorities to obtain funds to provide privately operated housing
facilities, airport, mass transit or port facilities, sewage disposal, solid
waste disposal or hazardous waste treatment or disposal facilities and certain
local facilities for water supply, gas or electricity. Other types of
industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such
issues. A Tax Exempt Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fund's distributions of any tax-exempt interest it receives
from any source will be taxable for regular federal income tax purposes.
TENDER OPTION BONDS. A tender option bond is a Municipal Security
-------------------
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term, tax-exempt rates. The bond is typically issued with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, which grants the security holders the option, at periodic
intervals, to tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the securities,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults or a significant downgrade in the credit
rating assigned to the issuer of the bond. The liquidity of a tender option bond
is a function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Fund's credit quality
requirements, to be inadequate and the bond would not otherwise be readily
marketable. The Tax Exempt Funds intend to invest in tender option bonds the
interest on which will, in the opinion of bond counsel, counsel for the issuer
of interests therein or counsel selected by the Adviser, be exempt from regular
federal income tax. However, because there can be no assurance that the
Internal Revenue Service (the "Service") will agree with such counsel's
B-34
<PAGE>
opinion in any particular case, there is a risk that a Tax Exempt Fund will not
be considered the owner of such tender option bonds and thus will not be
entitled to treat such interest as exempt from such tax. Additionally, the
federal income tax treatment of certain other aspects of these investments,
including the proper tax treatment of tender option bonds and the associated
fees in relation to various regulated investment company tax provisions is
unclear. The Tax Exempt Funds intend to manage their portfolio in a manner
designed to eliminate or minimize any adverse impact from the tax rules
applicable to these investments.
AUCTION RATE SECURITIES. The Core, High Yield, Municipal Income and Short
-----------------------
Duration Tax-Free Funds may invest in auction rate securities. Auction rate
securities consist of auction rate Municipal Securities and auction rate
preferred securities issued by closed-end investment companies that invest
primarily in Municipal Securities (collectively, "auction rate securities").
Provided that the auction mechanism is successful, auction rate securities
usually permit the holder to sell the securities in an auction at par value at
specified intervals. The dividend is reset by "Dutch" auction in which bids are
made by broker-dealers and other institutions for a certain amount of securities
at a specified minimum yield. The dividend rate set by the auction is the
lowest interest or dividend rate that covers all securities offered for sale.
While this process is designed to permit auction rate securities to be traded at
par value, there is some risk that an auction will fail due to insufficient
demand for the securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Code.
A Fund's investments in auction rate securities of closed-end funds are
subject to the limitations prescribed by the Act and certain state securities
regulations. The Funds will indirectly bear their proportionate share of any
management and other fees paid by such closed-end funds in addition to the
advisory fees payable directly by the Funds.
INSURANCE. The Funds may invest in "insured" tax-exempt Municipal
---------
Securities. Insured Municipal Securities are securities for which scheduled
payments of interest and principal are guaranteed by a private (nongovernmental)
insurance company. The insurance only entitles a Fund to receive the face or
par value of the securities held by the Fund. The insurance does not guarantee
the market value of the Municipal Securities or the value of the shares of a
Fund.
The Funds may utilize new issue or secondary market insurance. A new issue
insurance policy is purchased by a bond issuer who wishes to increase the credit
rating of a security. By paying a
B-35
<PAGE>
premium and meeting the insurer's underwriting standards, the bond issuer is
able to obtain a high credit rating (usually, Aaa from Moody's or AAA from
Standard & Poor's) for the issued security. Such insurance is likely to
increase the purchase price and resale value of the security. New issue
insurance policies are non-cancelable and continue in force as long as the bonds
are outstanding.
A secondary market insurance policy is purchased by an investor (such as a
Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. The Funds may purchase bonds
which have already been insured under a secondary market insurance policy by a
prior investor, or the Funds may directly purchase such a policy from insurers
for bonds which are currently uninsured.
An insured Municipal Security acquired by a Fund will typically be covered
by only one of the above types of policies. All of the insurance policies used
by a Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by Standard & Poor's. The Municipal Securities
invested in by the High Yield Fund will not be subject to this requirement.
STANDBY COMMITMENTS. In order to enhance the liquidity of Municipal
-------------------
Securities, the Tax Exempt Funds may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a "standby commitment" or liquidity put, depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
a Tax Exempt Fund. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by a Tax Exempt Fund. In considering whether a security meets a Tax Exempt
Fund's quality standards, the particular Tax Exempt Fund will look to the
creditworthiness of the party providing the Fund with the right to sell as well
as the quality of the security itself.
The Tax Exempt Funds value Municipal Securities which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining a Tax Exempt
Fund's net asset value. The cost of a standby commitment is carried as
unrealized depreciation from the time of purchase until it is exercised or
expires. Since the value of a standby commitment is dependent on the ability of
the standby commitment writer to meet its obligation to repurchase, a Tax Exempt
Fund's policy is to enter into standby
B-36
<PAGE>
commitment transactions only with banks, brokers or dealers which present a
minimal risk of default.
The Adviser understands that the Service has issued a favorable revenue
ruling to the effect that, under specified circumstances, a registered
investment company will be the owner of tax-exempt municipal obligations
acquired subject to a put option. The Service has subsequently announced that it
will not ordinarily issue advance ruling letters as to the identity of the true
owner of property in cases involving the sale of securities or participation
interests therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax Exempt Funds intend to take the position that they are the owner
of any Municipal Securities acquired subject to a standby commitment or acquired
or held with certain other types of put rights and that tax-exempt interest
earned with respect to such Municipal Securities will be tax-exempt in their
hands. There is no assurance that standby commitments will be available to the
Tax Exempt Funds nor have the Tax Exempt Funds assumed that such commitments
would continue to be available under all market conditions.
CALL RISK AND REINVESTMENT RISK. Municipal Securities may include "call"
-------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in a Fund's portfolio are called prior
to the maturity, the Fund will be required to reinvest the proceeds on such
securities at an earlier date and may be able to do so only at lower yields,
thereby reducing the Fund's return on its portfolio securities.
FOREIGN INVESTMENTS
Core, High Yield and Global Income Funds may invest in securities of
foreign issuers and in fixed-income securities quoted or denominated in a
currency other than U.S. dollars. Investing in the securities of foreign
issuers involves certain special considerations, including those set forth
below, which are not typically associated with investing in U.S. issuers. Since
investments in the securities of foreign issuers may involve currencies of
foreign countries, and since Core, High Yield and Global Income Funds may
temporarily hold funds in bank deposits in foreign currencies during completion
of investment programs, Core, High Yield and Global Income Funds may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations and may incur costs in connection with conversions between various
currencies.
Foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. In addition, there may be less publicly available
information about a foreign company than about a comparable U.S. company.
Volume and
B-37
<PAGE>
liquidity in most foreign bond markets are less than in the United States
markets and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Commissions on foreign
securities exchanges are often fixed and generally are higher than negotiated
commissions or dealer mark-ups in the U.S. markets, although each Fund endeavors
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of securities markets
and exchanges, brokers, dealers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlement of portfolio transactions or loss of certificates for portfolio
securities.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of Core Fund, High Yield Fund or Global
Income Fund is uninvested and no return is earned thereon. The inability of
Core Fund, High Yield Fund or Global Income Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to Core Fund, High Yield Fund
or Global Income Fund due to subsequent declines in value of the portfolio
securities, or, if Core Fund, High Yield Fund or Global Income Fund has entered
into a contract to sell the securities, could result in possible liability to
the purchaser. In addition, with respect to certain foreign countries, there is
the possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could adversely affect Core, High
Yield or Global Income Funds' investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources self-sufficiency and balance of payments
position.
INVESTING IN EMERGING COUNTRIES
MARKET CHARACTERISTICS. Debt securities of most emerging markets issuers
----------------------
may be less liquid and are generally subject to greater price volatility than
securities of issuers in the U.S. and other developed countries. The markets
for securities of emerging markets may have substantially less volume than the
market for similar securities in the U.S. and may not be able to absorb, without
price disruptions, a significant increase in trading volume or trade size.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The less liquid the market, the more
difficult it may be for the Fund to accurately price its portfolio securities or
to
B-38
<PAGE>
dispose of such securities at the times determined to be appropriate. The risks
associated with reduced liquidity may be particularly acute to the extent that a
Fund needs cash to meet redemption requests, to pay dividends and other
distributions or to pay its expenses.
Securities markets of emerging markets may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and settlement
could result in temporary periods when a portion of the Fund's assets is
uninvested and no return is earned thereon. Inability to make intended security
purchases could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in
emerging markets may be higher than in the U.S. and other developed securities
markets. As legal systems in emerging markets develop, foreign investors may be
adversely affected by new or amended laws and regulations. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
ECONOMIC, POLITICAL AND SOCIAL FACTORS. Emerging markets may be subject to
--------------------------------------
a greater degree of economic, political and social instability than the U.S.,
Japan and most Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes or attempted changes
in government through extra-constitutional means; (ii) popular unrest associated
with demands for improved economic, political and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection and conflict. Many emerging
markets have experienced in the past, and continue to experience, high rates of
inflation. In certain countries inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate environment and
sharply eroding the value of outstanding financial assets in those countries.
The economies of many emerging markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging markets may differ unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
RESTRICTIONS ON INVESTMENT AND REPATRIATION. Certain emerging markets
-------------------------------------------
require governmental approval prior to investments by foreign persons or limit
investments by foreign persons to only a
B-39
<PAGE>
specified percentage of an issuer's outstanding securities or a specific class
of securities which may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. Repatriation of
investment income and capital from certain emerging markets is subject to
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect the operation
of a Fund.
SOVEREIGN DEBT OBLIGATIONS
Investments in sovereign debt obligations involves special risks not
present in corporate debt obligations. The issuer of the sovereign debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and a Fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and a Fund's net asset value, may be more
volatile than prices of debt obligations of U.S. issuers. In the past, the
governments of certain emerging markets have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core, High Yield and Global
-------------------------------------------
Income Funds may enter into forward foreign currency exchange contracts for
hedging purposes and to seek to increase total return. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
At the maturity of a forward contract, Global Income Fund, High Yield Fund
and Core Fund may either accept or make delivery of
B-40
<PAGE>
the currency specified in the contract or, at or prior to maturity, enter into a
closing purchase transaction involving the purchase or sale of an offsetting
contract. Closing purchase transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract.
Global Income, High Yield or Core Funds may enter into forward foreign
currency exchange contracts in several circumstances. First, when Global
Income, High Yield or Core Funds enter into a contract for the purchase or sale
of a security quoted or denominated in a foreign currency, or when Global
Income, High Yield or Core Funds anticipate the receipt in a foreign currency of
a dividend or interest payment on such a security which it holds, Global Income,
High Yield or Core Funds may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for the purchase or sale,
for a fixed amount of U.S. dollars, of the amount of foreign currency involved
in the underlying transactions, Global Income, High Yield or Core Funds will
attempt to protect themselves against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of foreign currency approximating the value of some or all of a Fund's
portfolio securities quoted or denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of a Fund's foreign
assets.
Global Income, High Yield and Core Funds may engage in cross-hedging by
using forward contracts in one currency to hedge against fluctuations in the
value of securities denominated or quoted in a different currency if the
Advisers determine that there is a pattern of correlation between the two
currencies. The Global Income, High Yield and Core Funds may also purchase and
sell forward contracts to seek to increase total return when the Advisers
anticipate that the foreign currency will appreciate or
B-41
<PAGE>
depreciate in value, but securities quoted or denominated in that currency do
not present attractive investment opportunities and are not held in a Fund's
portfolio.
Global Income, High Yield and Core Funds' custodian will place cash or
liquid assets, into a segregated account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contracts requiring the Fund to purchase foreign
currencies and forward contracts entered into to seek to increase total return.
If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Fund's commitments
with respect to such contracts. The segregated accounts will be marked-to-
market on a daily basis. Although the contracts are not presently regulated by
the Commodity Trading Futures Commission ("CFTC"), the CFTC may in the future
assert authority to regulate these contracts. In such event, a Fund's ability to
utilize forward foreign currency exchange contracts may be restricted. The
Global Income, Core and High Yield Funds will not enter into a forward contract
with a term of greater than one year.
While Global Income, Core and High Yield Funds may enter into forward
contracts to seek to reduce currency exchange rate risks, transactions in such
contracts involve certain other risks. Thus, while Global Income, Core and
High Yield Funds may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for a Fund than if it
had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by
Global Income, Core and High Yield Funds. Such imperfect correlation may cause
the Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
INTEREST RATE SWAPS, MORTGAGE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS,
FLOORS AND COLLARS
Each Fund may enter into interest rate swaps, caps, floors and collars. In
addition, Core, Adjustable Rate, Government Income, Short Duration Government,
Global Income and High Yield Funds may
B-42
<PAGE>
enter into mortgage swaps and Core, High Yield and Global Income Funds may also
enter into currency swaps. Each Fund may enter into swap transactions for
hedging purposes or to seek to increase total return. Interest rate swaps
involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed-rate
payments for floating rate payments. Mortgage swaps are similar to interest
rate swaps in that they represent commitments to pay and receive interest. The
notional principal amount, however, is tied to a reference pool or pools of
mortgages. Currency swaps involve the exchange of the parties' respective
rights to make or receive payments in specified currencies. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payment of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling the interest
rate floor. An interest rate collar is the combination of a cap and a floor
that preserves a certain return within a predetermined range of interest rates.
Since interest rate, mortgage and currency swaps and interest rate caps, floors
and collars are individually negotiated, each Fund expects to achieve an
acceptable degree of correlation between its portfolio investments and its swap,
cap, floor and collar positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each interest rate or currency swap will
be accrued on a daily basis and an amount of cash or liquid assets, having an
aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by a Fund's custodian. Inasmuch as these
transactions are entered into for hedging purposes or are offset by cash or
liquid assets, as permitted by applicable law, maintained in a segregated
account the Funds and the Advisers believe that swaps do not constitute senior
securities under the Act and, accordingly, will not treat them as being subject
to a Fund's borrowing restriction.
B-43
<PAGE>
The Funds will not enter into any swap transactions unless the unsecured
commercial paper, senior debt or claims-paying ability of the other party is
rated either AA or A-1 or better by Standard & Poor's or Aa or P-1 or better by
Moody's or their equivalent ratings. If there is a default by the other party
to such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
The staff of the Securities and Exchange Commission (the "SEC") currently takes
the position that swaps, caps, floors and collars are illiquid for purposes of
a Fund's limitation on illiquid investments.
The use of interest rate, mortgage and currency swaps, as well as interest
rate caps, floors and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a Fund would be less favorable than it would have been if this
investment technique were not used.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
-----------------------
options on any securities in which it may invest or on any securities index
based on securities in which it may invest. A Fund may purchase and write such
options on securities that are listed on national domestic securities exchanges
or foreign securities exchanges or traded in the over-the-counter market. A
call option written by a Fund obligates the Fund to sell specified securities to
the holder of the option at a specified price if the option is exercised at any
time before the expiration date. All call options written by a Fund are
covered, which means that the Fund will own the securities subject to the option
so long as the option is outstanding or use the other methods described below.
The purpose of a Fund in writing covered call options is to realize greater
income than would be realized in portfolio securities transactions alone.
However, in writing covered call options for additional income, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. The purpose of writing such
options is to generate additional income. However, in return for the option
premium, the Fund accepts the 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.
B-44
<PAGE>
All call and put options written by a Fund are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid assets, as
permitted by applicable law, either of which, in the case of Global Income Fund,
Core Fund or High Yield Fund, may be quoted or denominated in any currency, in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position.
A Fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases
are referred to as "closing purchase transactions."
Each Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
The Funds may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by their respective custodian) upon conversion or exchange of
other securities in its portfolio. The Funds may also cover call and put
options on a securities index by maintaining cash or liquid assets, as permitted
by applicable law, with a value equal to the exercise price in a segregated
account with their custodian or by using the other methods described above.
PURCHASING OPTIONS. Each Fund may also purchase put and call options on
------------------
any securities in which it may invest or on any securities index composed of
securities in which it may invest. A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options it had purchased.
A Fund would normally purchase call options in anticipation of an increase,
or put options in anticipation of a decrease ("protective puts") in the market
value of securities of the type in which it may invest. The purchase of a call
option would entitle a Fund, in return for the premium paid, to purchase
specified securities at a specified price during the option period. A Fund would
ordinarily realize a gain on the purchase of a call
B-45
<PAGE>
option if, during the option period, the value of such securities exceeded the
sum of the exercise price, the premium paid and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the call option.
The purchase of a put option would entitle a Fund, in exchange for the premium
paid, to sell specified securities at a specified price during the option
period. The purchase of protective puts is designed to offset or hedge against a
decline in the market value of a Fund's securities. Put options may also be
purchased by a Fund for the purpose of affirmatively benefiting from a decline
in the price of securities which it does not own. A Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
securities decreased below the exercise price sufficiently to cover the premium
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the put option. Gains and losses on the purchase of put
options may be offset by countervailing changes in the value of the underlying
portfolio securities.
A Fund may purchase put and call options on securities indices for the same
purposes as it may purchase options on securities. Options on securities indices
are similar to options on securities, except that the exercise of securities
index options requires cash payments and does not involve the actual purchase or
sale of securities. In addition, securities index options are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security.
Transactions by a Fund in options on securities and securities indices will
be subject to limitations established by each of the exchanges, boards of trade
or other trading facilities on which such options are traded governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which a
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Advisers. An exchange, board of trade
or other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Core, Global Income
----------------------------------------------------
and High Yield Funds may write covered put and call options and purchase put and
call options on foreign currencies in an attempt to protect against declines in
the dollar value of portfolio securities and against increases in the dollar
cost of securities to be acquired. Global Income, Core and High Yield Funds may
use options on currency to cross-hedge, which involves writing or purchasing
options on one currency to seek to hedge against changes in exchange rates for a
different currency with a pattern of correlation. In addition, Global Income,
Core and High
B-46
<PAGE>
Yield Funds may purchase call options on currency to seek to increase total
return when the Advisers anticipate that the currency will appreciate in value,
but the securities denominated or quoted in that currency do not present
attractive investment opportunities and are not included in the Fund's
portfolios.
A call option written by Core, Global Income and High Yield Funds obligates
the Fund to sell specified currency to the holder of the option at a specified
price if the option is exercised at any time before the expiration date. A put
option written by a Fund obligates the Fund to purchase specified currency from
the option holder at a specified price if the option is exercised at any time
before the expiration date. The writing of currency options involves a risk
that a Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase currency subject to a put at a price that exceeds the
currency's market value.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one written. Such purchases are referred
to as "closing purchase transactions." A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
purchased options.
Core, Global Income and High Yield Funds would normally purchase call
options in anticipation of an increase in the U.S. dollar value of currency in
which securities to be acquired by the Fund are denominated or quoted. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified currency at a specified price during the option period. A
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
Core, Global Income and High Yield Funds would normally purchase put
options in anticipation of a decline in the U.S. dollar value of currency in
which securities in its portfolio are denominated or quoted ("protective puts").
The purchase of a put option would entitle Core, Global Income and High Yield
Funds, in exchange for the premium paid, to sell specified currency at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the U.S. dollar value of
a Fund's portfolio securities due to currency exchange rate fluctuations. A
Fund would ordinarily realize a gain if, during the option period, the value of
the underlying currency decreased below the exercise price sufficiently to more
than cover the premium and transaction costs; otherwise the Fund would realize
either no gain or a loss on the purchase of the put option. Gains and losses on
the purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency.
B-47
<PAGE>
In addition to using options for the hedging purposes described above,
Core, Global Income and High Yield Funds may use options on currency to seek to
increase total return. Global Income Fund, High Yield Fund and Core Fund may
write (sell) covered put and call options on any currency in an attempt to
realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Global Income, High Yield and Core Funds may forego the opportunity to
profit from an increase in the market value of the underlying currency. Also,
when writing put options, Global Income, High Yield and Core Funds accept, in
return for the option premium, the risk that it may be required to purchase the
underlying currency at a price in excess of the currency's market value at the
time of purchase.
Global Income, High Yield and Core Funds would normally purchase call
options to seek to increase total return in anticipation of an increase in the
market value of a currency. Global Income, High Yield and Core Funds would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the call option. Put
options may be purchased by the Global Income, High Yield and Core Funds for
the purpose of benefiting from a decline in the value of currencies which it
does not own. Global Income, High Yield and Core Funds would ordinarily realize
a gain if, during the option period, the value of the underlying currency
decreased below the exercise price sufficiently to more than cover the premium
and transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the put option.
YIELD CURVE OPTIONS. Each Fund may enter into options on the yield
-------------------
"spread," or yield differential between two securities. Such options are
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. For example, a Fund may purchase a call option on the yield spread
between two securities if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. A Fund may also purchase or write
yield curve options for other than hedging purposes (i.e., in an attempt to
increase its current income) if, in the judgment of the Adviser, the Fund will
be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks
B-48
<PAGE>
associated with the trading of other types of options. In addition, however,
such options present a risk of loss even if the yield of one of the underlying
securities remains constant, or if the spread moves in a direction or to an
extent which was not anticipated.
Yield curve options written by a Fund must be "covered." A call (or put)
option is covered if the Fund holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or liquid assets, as permitted by applicable law, sufficient to
cover the Fund's net liability under the two options. Therefore, a Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter, and because they
have been only recently introduced, established trading markets for these
options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
B-49
<PAGE>
A Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the SEC changes its position, the Funds will treat
purchased over-the counter options and all assets used to cover written over-the
counter options as illiquid securities, except that with respect to options
written with primary dealers in U.S. Government Securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to a formula
approved by the SEC.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options for
hedging purposes depends in part on the applicable Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
- --------------------------------------------------
To seek to increase total return or to hedge against changes in interest
rates or securities prices or, in the case of Core, High Yield and Global Income
Funds, currency exchange rates, each Fund may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. Each Fund may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), securities indices, foreign currencies in the case of Global
Income, Core and High Yield Funds and any other financial instruments and
indices. A Fund will engage in futures and related options transactions only
for bona fide hedging purposes as defined below or for purposes of seeking to
increase total return to the extent permitted by regulations of the CFTC. All
futures contracts entered into by a Fund are traded on U.S. exchanges or boards
of trade that are licensed and regulated by the CFTC or on foreign exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
When interest rates are rising or securities prices are falling, a Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a Fund, through the purchase of futures contracts,
can attempt to secure better rates or prices than might later be available in
the market when it effects anticipated purchases. Core, Global Income
B-50
<PAGE>
and High Yield Funds may each seek to offset anticipated changes in the value of
a currency in which its portfolio securities, or securities that it intends to
purchase, are quoted or denominated by purchasing and selling futures contracts
on such currencies.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currency are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
------------------
establish with more certainty than would otherwise be possible the effective
price or rate of return on portfolio securities or securities that a Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are quoted or denominated. A Fund may, for example, take a "short"
position in the futures market by selling futures contracts to seek to hedge
against an anticipated rise in interest rates or a decline in market prices or
foreign currency rates that would adversely affect the U.S. dollar value of the
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by a Fund or securities with
characteristics similar to those of a Fund's portfolio securities. Similarly,
Core Fund, High Yield Fund and Global Income Fund may each sell futures
contracts on any currencies in which its portfolio securities are quoted or
denominated or in one currency to seek to hedge against fluctuations in the
value of securities denominated in a different currency if there is an
established historical pattern of correlation between the two currencies. If,
in the opinion of the Advisers, there is a sufficient degree of correlation
between price trends for a Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Funds may also enter into such futures contracts as part of its hedging
strategy. Although under some circumstances prices of securities in a Fund's
portfolio may be more or less volatile than prices of such futures contracts,
the Advisers will attempt to estimate the extent of this volatility difference
based on historical patterns and compensate for any such differential by having
a Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting a
Fund's portfolio securities. When hedging of this character is successful, any
depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position. On the other hand, any
unanticipated appreciation in the value of a Fund's portfolio securities would
be substantially offset by a decline in the value of the futures position.
B-51
<PAGE>
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium,
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that a Fund intends to
purchase. However, a Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Funds will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Each Fund will engage in futures and related options
--------------------
transactions only for bona fide hedging or to seek to increase total return as
permitted by CFTC regulations which permit principals of an investment company
registered under the Act to engage in such transactions without registering as
commodity pool operators. Each Fund will determine that the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
securities or instruments which it expects to purchase. Except as stated below,
each Fund's futures transactions will be entered into for traditional hedging
purposes -- i.e., futures contracts will be sold to protect against a decline in
the price of securities (or the currency in which they are quoted or
denominated) that a Fund
B-52
<PAGE>
owns or futures contracts will be purchased to protect a Fund against an
increase in the price of securities (or the currency in which they are quoted or
denominated) it intends to purchase. As evidence of this hedging intent, each
Fund expects that on 75% or more of the occasions on which it takes a long
futures or option position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities (or assets denominated in the related currency) in
the cash market at the time when the futures or option position is closed out.
However, in particular cases, when it is economically advantageous for a Fund to
do so, a long futures position may be terminated or an option may expire without
the corresponding purchase of securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation permits the Funds to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish positions
to seek to increase total return in futures contracts and options on futures
will not exceed 5% of the net asset value of a Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Funds will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") for maintaining their
qualifications as regulated investment companies for federal income tax
purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
assets, as permitted by applicable law, in an amount equal to the underlying
value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no
B-53
<PAGE>
futures contracts based upon individual securities, except certain U.S.
Government Securities. The only futures contracts available to hedge a Fund's
portfolio are various futures on U.S. Government Securities, securities indices
and foreign currencies.
MORTGAGE DOLLAR ROLLS
- ---------------------
The Taxable Funds (other than High Yield Fund) may enter into mortgage
"dollar rolls" in which a Fund sells securities for delivery in the current
month and simultaneously contracts with the same counterparty to repurchase
similar (same type, coupon and maturity), but not identical securities on a
specified future date. During the roll period, a Fund loses the right to
receive principal and interest paid on the securities sold. However, a Fund
would benefit to the extent of any difference between the price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. Unless such benefits exceed the income, capital appreciation and gain
or loss due to mortgage prepayments that would have been realized on the
securities sold as part of the mortgage dollar roll, the use of this technique
will diminish the investment performance of a Fund compared with what such
performance would have been without the use of mortgage dollar rolls. All cash
proceeds will be invested in instruments that are permissible investments for
the applicable Fund. Each Fund will hold and maintain in a segregated account
until the settlement date cash or liquid assets, as permitted by applicable law,
in an amount equal to its forward purchase price.
For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions; one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if
the broker-dealer to whom a Fund sells the security becomes insolvent, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
CONVERTIBLE SECURITIES
- ----------------------
Convertible securities include corporate notes or preferred stock but are
ordinarily long-term debt obligation of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline.
B-54
<PAGE>
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price
of the common stock underlying a convertible security exceeds the conversion
price, the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities in which the Core Fund and High Yield Fund invest will be
subject to the same rating criteria as its other investments in fixed-income
securities.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions, such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents, letters of credit or U.S. Government Securities maintained on a
current basis in an amount at least equal to the market value of the securities
loaned. Cash collateral may be invested in cash equivalents. A Fund has the
right to call a loan and obtain the securities loaned at any time on five days'
notice. For the duration of a loan, a Fund continues to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned and
also receives compensation from investment of the collateral. A Fund would not
have the right to vote any securities having voting rights during the existence
of the loan, but a Fund would call the loan in anticipation of an important vote
to be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovering, or even loss of
rights in, the collateral should the borrower of the securities fail
financially. However, the loans are made only to firms deemed by the applicable
Adviser to be of good standing, and when, in the judgment of the applicable
Adviser, the consideration which can be earned currently from securities loans
of this type justifies the attendant risk. If an Adviser determines to make
securities loans, the value of the securities loaned will not exceed one-third
of the value of the total assets of each Fund.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
However, a Fund will not invest more than 15% of its net assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate, currency and mortgage swaps, interest rate caps, floors and
collars, certain SMBS, municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted
B-55
<PAGE>
Securities, unless the Board of Trustees determines, based upon a continuing
review of the trading markets for the specific Restricted Securities, that such
Restricted Securities are liquid. Certain commercial paper issued in reliance
on Section 4(2) of the 1933 Act is treated like Rule 144A Securities. The
Trustees have adopted guidelines and delegated to the Advisers the daily
function of determining and monitoring the liquidity of the Funds' portfolio
securities. The Board of Trustees, however, will retain sufficient oversight and
be ultimately responsible for the determinations. Since it is not possible to
predict with assurance exactly how the market for Restricted Securities sold and
offered under Rule 144A or Section 4(2) will develop, the Trustees will
carefully monitor the Funds' investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these Restricted Securities.
The purchase price and subsequent valuation of Restricted Securities
normally reflect a discount from the price at which such securities trade when
they are not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the Restricted Securities and prevailing
supply and demand conditions.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. The Funds will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, the Funds may dispose of or negotiate a
commitment after entering into it. A Fund also may sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Funds may realize a capital gain or loss in connection
with these transactions. For purposes of determining each Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. Each Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to settlement date,
cash or liquid assets, in an amount sufficient to meet the purchase price.
Alternatively, each Fund may enter into offsetting contracts for the forward
sale
B-56
<PAGE>
of other securities that it owns. Securities purchased or sold on a when-issued
or forward commitment basis involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date or if the value of the
security to be sold increases prior to the settlement date.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets,
calculated at the time of purchase, in the securities of other investment
companies, but may not invest more than 5% of its total assets in the securities
of any one investment company or acquire more than 3% of the voting securities
of any other investment company. Pursuant to an exemptive order obtained from
the SEC, the Funds may invest in money market funds for which the Adviser or any
of its affiliates serves as investment adviser. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that a Fund invests in a money
market fund for which the Adviser acts as adviser, the management fees payable
by the Fund to the Adviser will be reduced by an amount equal to the Fund's
proportionate share of the management fees paid by such money market fund to the
Adviser or any of its affiliates.
The Core, High Yield and Global Income Funds may also purchase shares of
investment companies investing primarily in foreign securities, including
"country funds." Country funds have portfolios consisting primarily of
securities of issuers located in one foreign country or region. The Core, High
Yield and Global Income Funds may invest in World Equity Benchmark Shares
("WEBS") and similar securities that invest in securities included in foreign
securities indices.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected broker-
dealers, banks or other financial institutions. A repurchase agreement is an
arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities will be maintained by each Fund's custodian. The
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the security subject to the repurchase agreement.
For purposes of the Act and, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as
B-57
<PAGE>
being collateral for a loan by a Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and a Fund
has not perfected a security interest in the security, the Fund may be required
to return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Fund would be at risk of
losing some or all of the principal and interest involved in the transaction.
As with any unsecured debt instrument purchased for each Fund, the
applicable Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
security. Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the security subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), each Fund will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price. Certain repurchase agreements which provide for
settlement in more than seven days can be liquidated before the nominal fixed
term on seven days or less notice. Such repurchase agreements will be regarded
as liquid instruments.
In addition, the Funds, together with other registered investment companies
having management agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the affected Fund. The
investment objective of each Fund and all other investment policies or practices
of the Funds, except for Short Duration Tax-Free Fund's and Municipal Income
Fund's policy to invest under normal market conditions 80% of its net assets in
Municipal Securities, are considered by the Trust not to be fundamental and
accordingly may be changed without shareholder approval. See "INVESTMENT
OBJECTIVES AND POLICIES" in the Prospectuses. As defined in the Act, "a
majority of the outstanding voting securities" of a Fund means the vote (a) of
67% or more of the shares of the Fund present at a meeting, if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy or (b) more than 50% of the outstanding shares of the Fund, whichever
is less.
B-58
<PAGE>
For the purposes of the limitations (except for the asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, a Fund. With respect to the Tax
Exempt Funds, the identification of the issuer of a Municipal Security that is
not a general obligation is made by the Adviser based on the characteristics of
the Municipal Security, the most important of which is the source of funds for
the payment of principal and interest on such securities.
AS A MATTER OF FUNDAMENTAL POLICY, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in municipal securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other municipal securities. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations.
B-59
<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% or its total assets (including the amount borrowed), (b)
the Fund may, to the extent permitted by applicable law borrow up to
an additional 5% of its total assets for temporary purposes, (c) the
Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities, (d) the
Fund may purchase securities on margin to the extent permitted by
applicable law and (e) the Fund may engage in transactions in
mortgage dollar rolls which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted by
applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be an
underwriting.
(6)(a) for each Fund other than Core Fund, purchase, hold or deal in real
estate, although a Fund may purchase and sell securities that are
secured by real estate or interests therein, securities of real
estate investment trusts and mortgage-related securities and may
hold and sell real estate acquired by a Fund as a result of the
ownership of securities.
(6)(b) in the case of the Core Fund, purchase, hold or deal in real estate
(including real estate limited partnerships) or oil, gas or mineral
leases, although the Fund may purchase and sell securities that are
secured by real estate or interests therein, may purchase mortgage-
related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts that
are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same fundamental investment
objectives, restrictions and policies as the Fund.
B-60
<PAGE>
In addition, as non-fundamental policies, a Fund may not:
(1) Invest in companies for the purpose of exercising control or
management.
(2) Invest more than 15% of the Fund's net assets in illiquid
investments including repurchase agreements maturing in more than
seven days, securities which are not readily marketable and
restricted securities not eligible for resale pursuant to Rule 144A
under the 1933 Act.
(3) Purchase additional securities if the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
MANAGEMENT
TRUSTEES AND OFFICERS
- ---------------------
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees and Officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
Ashok N. Bakhru, Age 53, 1325 Avenue of the Americas, 34th Floor, New York, New
York 10019. Chairman and Trustee. Executive Vice President-Finance and
--------------------
Administration and Chief Financial Officer, Coty Inc. (since April 1996);
President, ABN Associates, Inc. (June 1994 through March 1996); Senior Vice
President, Scott Paper Company (until June 1994); Director, Arkwright Mutual
Insurance Company; Trustee, International House of Philadelphia; Member of
Cornell University Council; Trustee of Walnut Street Theater.
David B. Ford,* Age 51, One New York Plaza, New York, New York 10004. Trustee.
-------
Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs,
(1986-1996); Co-Head of GSAM since December 1994.
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Vice President, Goldman Sachs since May 1996; President,
- ---------------------
MFS Retirement Services Inc., of Massachusetts Financial Services prior thereto.
John P. McNulty,* Age 44, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
B-61
<PAGE>
Mary P. McPherson, Age 60, Taylor Hall, Bryn Mawr College, Bryn Mawr, PA
19010. Trustee. President of Bryn Mawr College since 1978; Director of Josiah
-------
Macy, Jr. Foundation since 1977; Director of the Philadelphia Contributionship
since 1985; Director of Amherst College since 1986; Director of Dayton Hudson
Corporation since 1988; Director of the Spencer Foundation since 1993; and
member of PNC Advisory Board since 1993.
Alan A. Shuch,* Age 48, One New York Plaza, New York, New York 10004. Trustee.
-------
Limited Partner, Goldman Sachs (since 1994); Director and Vice President,
Goldman Sachs Funds Management, Inc. from April 1990 to November 1994; President
and Chief Operating Officer, GSAM from September 1988 to November 1994; Limited
Partner, Goldman Sachs since December 1994.
Jackson W. Smart, Jr., Age 66, One Northfield Plaza, #218, Northfield, Illinois
60093. Trustee. Chairman, Executive Committee, First Commonwealth, Inc. (a
-------
managed dental care company, since January 1996); Chairman and Chief Executive
Officer, MSP Communications Inc. (a company engaged in radio broadcasting) since
November 1988; Director, Federal Express Corporation since 1976; Evanston
Hospital Corporation (since 1980) and First Commonwealth,Inc. (since 1988) and
North American Private Equity Group (a venture capital fund).
William H. Springer, Age 67, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman and Chief Financial and Administrative Officer,
- -------
Ameritech (a telecommunications holding company) from February 1987 to
retirement in June 1992; Director, Walgreen Co. (a retail drugstore business);
and Baker, Fentress & Co. (a closed-end non-diversified management investment
company) April 1992 to present.
Richard P. Strubel, Age 57, 70 West Madison Street, Suite 1400, Chicago,
Illinois 60602. Trustee. Managing Director, Tandem Partners, Inc. (since
-------
1990); President and Chief Executive Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and connectors) from January 1984 to October
1994.
Nancy L. Mucker,* Age 47, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
Scott M. Gilman,* Age 37, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990.
B-62
<PAGE>
John M. Perlowski,* Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 36, 85 Broad Street, New York, New York 10004.
Secretary. Associate General Counsel of GSAM since February 1994; Vice
- ---------
President and Assistant General Counsel of Goldman Sachs; Counsel to the Funds
Group, GSAM since June 1992; Partner, Hale and Dorr from September 1991 to June
1992.
Howard B. Surloff,* Age 31, 85 Broad Street, New York, New York 10004. Assistant
Secretary. Vice President and Assistant General Counsel, Goldman Sachs since
- ---------
November 1993 and May 1994, respectively; Counsel to the Funds Group, GSAM since
November 1993; Associate of Shereff, Friedman, Hoffman & Goodman, LLP prior
thereto.
Valerie A. Zondorak,* Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Vice President, Goldman Sachs (since March 1997); Counsel
- --------------------
to the Funds Group, GSAM (since March 1997); Associate of Shereff, Friedman,
Hoffman & Goodman, LLP (prior thereto).
Steven E. Hartstein*, Age 33, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs since June 1993;
- -------------------
Funds Compliance Officer, Citibank Global Asset Management from August 1991 to
June 1993); Legal Assistant, Brown & Wood prior thereto.
Deborah A. Farrell*, Age 25, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman Sachs since January
- -------------------
1994. Formerly at Cleary, Gottlieb, Stein and Hamilton.
Kaysie Uniacke*, Age 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Senior Portfolio Manager, GSAM since
- -------------------
1988.
Elizabeth D. Anderson*, Age 27, One New York Plaza, New York, New York 10004.
Assistant Secretary. Portfolio Manager, GSAM since April 1996; Junior Portfolio
- -------------------
Manager, Goldman Sachs 1995-1996. Funds Trading Assistant, GSAM 1993-1995.
Compliance Analyst, Prudential Insurance, from 1991 to 1993.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or GSFM is the
investment adviser, administrator and/or distributor. As of July 24, 1997, the
Trustees and officers as a group owned less than 1% of the outstanding shares of
beneficial interest of each Fund.
B-63
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended October
31, 1996:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Funds
from the as of Part of (including
Funds/1 / Trust's Expenses the Funds)/2 /
------------ ---------------- --------------
<S> <C> <C> <C>
Name of Trustees
Ashok N. Bakhru $4,109 $0 $77,375
Marcia L. Beck/3/ $ 0 $0 $ 0
David B. Ford $ 0 $0 $ 0
Douglas C. Grip $ 0 $0 $ 0
Paul C. Nagel, Jr./4/ $2,525 $0 $50,500
Alan A. Shuch $ 0 $0 $ 0
Jackson W. Smart $3,169 $0 $65,750
William H. Springer $3,169 $0 $65,750
Richard P. Strubel $3,169 $0 $65,750
</TABLE>
/1/ Reflects amount paid by Goldman Sachs Trust, a Massachusetts business
trust, during fiscal year ended October 31, 1996.
/2/ The Goldman Sachs Funds consisted of 29 mutual funds, including the seven
series of the Trust, on October 31, 1996.
/3/ Resigned as of May 1, 1996.
/4/ Retired as of June 30, 1996.
B-64
<PAGE>
INVESTMENT ADVISERS
- -------------------
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Municipal Income
Fund, Government Income Fund, Short Duration Tax-Free Fund, High Yield Fund and
Core Fund pursuant to a management agreement. GSFM, One New York Plaza, New
York, New York 10004, serves as the investment adviser to Adjustable Rate Fund
and Short Duration Government Fund pursuant to a management agreement. GSFM, a
Delaware limited partnership, is an affiliate of Goldman Sachs. GSAMI, 133
Peterborough Court, London EC4A 2BB, England, serves as investment adviser to
Global Income Fund pursuant to a management agreement. As a company with
unlimited liability under the laws of England, GSAMI is regulated by the
Investment Management Regulatory Organization Limited, a United Kingdom self-
regulatory organization, in the conduct of its investment advisory business.
See "MANAGEMENT" in the Funds' Prospectuses for a description of the applicable
Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24 hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico,
Milan, Montreal, Osaka, Paris, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs, whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching
$200 million, Goldman Sachs' Investment Research Department covers approximately
2,000 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers. The Advisers manage money for
some of the world's largest institutional investors.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry
B-65
<PAGE>
surveys conducted in the U.S. and abroad. Goldman Sachs is also among the
leading investment firms using quantitative analytics (now used by a growing
number of investors) to structure and evaluate portfolios. For example, Goldman
Sachs' options evaluation model analyzes each security's term, coupon and call
option, providing an overall analysis of the security's value relative to its
interest risk.
In planning the Tax Exempt Funds' strategies, the portfolio managers also
evaluate and monitor individual issues by using analytical techniques that have
traditionally been applied to corporate bonds and Mortgage-Backed Securities.
In particular, the Adviser's embedded option valuation model provides a picture
of an individual security's relative value and the portfolio's overall interest
rate risk. By constantly reviewing the positions of securities within the
portfolio, the Adviser looks for opportunities to enhance the Tax Exempt Funds'
yields by fine-tuning the portfolio, using quantitative tools designed for
municipal portfolio management. The Adviser, which managed approximately $3
billion in tax-free securities in 1996, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
In structuring Adjustable Rate Fund's and Short Duration Government Fund's
respective securities portfolio, the Adviser will review the existing overall
economic and mortgage market trends. The Adviser will then study yield spreads,
the implied volatility and the shape of the yield curve. The Adviser will then
apply this analysis to a list of eligible securities that meet the respective
Fund's investment guidelines. With respect to Adjustable Rate Fund, this
analysis is used to plan a two-part portfolio, which will consist of a "core"
portfolio of ARMs and a "relative value" portfolio of other mortgage assets that
can enhance portfolio returns and lower risk (such as investments in CMO
floating-rate tranches and interest only stripped Mortgage-Backed Securities).
With respect to Adjustable Rate Fund, Government Income Fund, Short
Duration Government Fund, High Yield Fund and Core Fund, the applicable Adviser
expects to utilize Goldman Sachs' sophisticated option-adjusted analytics to
help make strategic asset allocations within the markets for U.S. government,
Mortgage-Backed and other securities and to employ this technology periodically
to re-evaluate the Funds' investments as market conditions change. Goldman
Sachs has also developed a prepayment model designed to estimate mortgage
prepayments and cash flows under different interest rate scenarios. Because a
Mortgage-Backed Security incorporates the borrower's right to prepay the
mortgage, the Advisers use a sophisticated option-adjusted spread (OAS) model to
measure expected returns. A security's OAS is a function of the level and shape
of the yield curve, volatility and the applicable Adviser's expectation of how a
change in interest rates will affect prepayment levels. Since the OAS model
assumes a relationship between prepayments and interest rates, the Advisers
consider it a better way to measure a security's expected return and absolute
and relative values than yield to maturity. In using OAS
B-66
<PAGE>
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and prepayment
sensitivity. The Advisers will then analyze its value relative to alternative
investments and to its own investments. The Advisers will also measure a
security's interest rate risk by computing an option adjusted duration (OAD).
The Advisers believe a security's OAD is a better measurement of its price
sensitivity than cash flow duration, which systematically misstates portfolio
duration. The Advisers also evaluate returns for different mortgage market
sectors and evaluate the credit risk of individual securities. This
sophisticated technical analysis allows the Advisers to develop portfolio and
trading strategies using Mortgage-Backed Securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility
to meet the respective Fund's duration targets and cash flow pattern
requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to calculate projected
security returns under different, discrete interest rate scenarios, and Goldman
Sachs' proprietary prepayment model to generate yield estimates under these
scenarios. The OAS, scenario returns, expected returns, and yields of
securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The Advisers will use OAS analytics to choose what they believe is an
appropriate portfolio of investments for Adjustable Rate Fund, Government Income
Fund, Short Duration Government Fund and Core Fund from a universe of eligible
investments. In connection with initial portfolio selections, in addition to
using OAS analytics as an aid to meeting each Fund's particular composition and
performance targets, the Advisers will also take into account important market
criteria like the available supply and relative liquidity of various mortgage
securities in structuring the portfolio.
The Advisers also expect to use OAS analytics to evaluate the mortgage
market on an ongoing basis. Changes in the relative value of various Mortgage-
Backed Securities could suggest tactical trading opportunities for the Funds.
The Advisers will have access to both current market analysis as well as
historical information on the relative value relationships among different
Mortgage-Backed Securities. Current market analysis and historical information
is available in the Goldman Sachs database for most actively traded Mortgage-
Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive basis,
use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
B-67
<PAGE>
services to third parties or using such services as a basis for trading for its
own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments
in U.S. and foreign fixed-income markets, assesses the outlooks for various
sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed
Income Research Department is at the forefront in developing and using computer-
based tools for analyzing fixed-income securities and markets, developing new
fixed income products and structuring portfolio strategies for investment policy
and tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed-income research and credit research, the Advisers in
managing Global Income Fund are supported by Goldman Sachs' economics research.
The Economics Research Department, based in London, conducts economic, financial
and currency markets research which analyzes economic trends and interest and
exchange rate movements worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In allocating assets in the Global Income Fund's portfolio among
currencies, the Adviser will have access to the Global Asset Allocation Model.
The model is based on the observation that the prices of all financial assets,
including foreign currencies, will adjust until investors globally are
comfortable holding the pool of outstanding assets. Using the model, the
Adviser will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with Goldman Sachs' research
professionals' expectations to produce an optimal currency and asset allocation
for the level of risk suitable for the Fund's investment objective and criteria.
Each Fund's management agreement, (the "Management Agreements"), was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 23, 1997. The applicable Fund's
B-68
<PAGE>
Management Agreement was approved by the shareholders of Adjustable Rate Fund on
October 30, 1991, the shareholders of Short Duration Government Fund on March
27, 1989, the sole initial shareholder of Short Duration Tax-Free Fund on
September 25, 1992, the sole initial shareholder of Core Fund on October 29,
1993, and the shareholders of each other Fund on April 21, 1997. Each
Management Agreement will remain in effect until June 30, 1998 and will continue
in effect with respect to the applicable Fund from year to year thereafter
provided such continuance is specifically approved at least annually by (a) the
vote of a majority of the outstanding voting securities of such Fund or a
majority of the Trustees of the Trust, and (b) the vote of a majority of the
non-interested Trustees of the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
Each Management Agreement will terminate automatically if assigned (as
defined in the Act). Each Management Agreement is also terminable at any time
without penalty by the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund on 60 days' written notice to the
applicable Adviser or by the Adviser on 60 days' written notice of the Trust.
The Management Agreements provide that GSAM, GSFM and GSAMI, in their
capacity as advisers may each render similar services to others so long as the
services under the Management Agreements are not impaired thereby. Pursuant to
the Management Agreements, the Advisers are entitled to receive the fee set
forth below and the Advisers are currently limiting the fee to the rate set
forth below:
<TABLE>
<CAPTION>
Contractual Current
Fund Rate* Rate
- ---- ----------- -------
<S> <C> <C>
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .55% .40%
Core Fixed Income .55% .40%
High Yield .70% .65%
GSFM
Short Duration Government .65% .40%
Adjustable Rate Government .55% .40%
GSAMI
Global Income .90% .59%
- ----------------------------
</TABLE>
* The Contractual Rate is identical to the aggregate advisory and
administration fee rates payable by each Fund under the previous separate
advisory (including subadvisory in the case of Global Income Fund) and
administration agreements. For the fiscal year ended October 31, 1996, the
annual rate expressed is the combined advisory and administration fees paid
(after fee waivers). Such reduction or limits, if any, are calculated
B-69
<PAGE>
monthly on a cumulative basis and may be discontinued or modified by the
applicable Adviser at its discretion at any time, although they have no
current intention to do so.
For the fiscal years ended October 31, 1996, 1995 and 1994, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Adjustable Rate Fund $2,535,709 $2,947,492 $6,798,185
Short Duration Government 411,360 517,091 1,063,867
Fund/(1)/
Short Duration Tax-Free Fund 169,796 260,970 468,868
Core Fund/(2)/ 246,568 137,158 56,255
Global Income Fund/(3)(6)/ 1,117,226 706,460 1,518,814
Government Income Fund/(4)(6)/ 74,060 44,037 0
Municipal Income Fund/(5)(6)/ 211,283 154,707 35,494
</TABLE>
- -------------------------
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $514,200, $646,364 and $1,329,834,
respectively, for such years.
/(2)/ Core Fund commenced operations January 5, 1994.
/(3)/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of
$837,920, $1,412,921 and $3,037,627, respectively. If expense limitations
had not been in effect, Global Income Fund would have paid advisory and
subadvisory fees of $1,474,204 and $491,401, respectively, for the year
ended October 31, 1996 and $789,127 and $1,578,254, respectively, for the
year ended October 31, 1995.
/(4)/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $148,120, $101,737 and $65,604, respectively,
for such years.
/(5)/ Had expense limitations not been in effect for the years ended October 31,
1995 and 1994, Municipal Income Fund would have paid advisory fees of
$200,207 and $174,161, respectively, for such years.
/(6)/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
The fees and services under the Investment Advisory and Administration
Agreements are identical to the fees and services under the Management
Agreement.
Each Adviser performs administrative services for the applicable Funds
under the Management Agreement. Such
B-70
<PAGE>
administrative services include, subject to the general supervision of the
Trustees of the Trust, (a) providing supervision of all aspects of the Funds'
non-investment operations (other than certain operations performed by others
pursuant to agreements with the Funds), (b) providing the Funds, to the extent
not provided pursuant to the agreement with the Trust's custodian, transfer and
dividend disbursing agent or agreements with other institutions, with personnel
to perform such executive, administrative and clerical services as are
reasonably necessary to provide effective administration of the Funds, (c)
arranging, to the extent not provided pursuant to such agreements, for the
preparation, at the Funds' expense, of each Fund's tax returns, reports to
shareholders, periodic updating of the Funds' prospectuses and statements of
additional information, and reports filed with the SEC and other regulatory
authorities, (d) providing the Funds, to the extent not provided pursuant to
such agreements, with adequate office space and certain related office equipment
and services, and (e) maintaining all of the Funds' records other than those
maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
- ----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed-income markets, in each case on a proprietary basis and
for the accounts of customers. As such, Goldman Sachs and its affiliates are
actively engaged in transactions in the same securities, currencies, and
instruments in which the Funds invest. Such activities could affect the prices
and availability of the securities, currencies, and instruments in which the
Funds invest, which could have an adverse impact on each Fund's performance.
Such transactions, particularly in respect of proprietary accounts or customer
accounts other than those included in the Advisers' and their advisory
affiliates' asset management activities, will be executed independently of the
Funds' transactions and thus at prices or rates that may be more or less
favorable. When the Advisers and their advisory affiliates seek to purchase or
sell the same assets for their managed accounts, including the Funds, the assets
actually purchased or sold may be allocated among the accounts on a basis
determined in its good faith discretion of such entitles to be equitable. In
some cases, this system may adversely affect the size or the price of the assets
purchased or sold for the Funds.
B-71
<PAGE>
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which, or in securities of issuers for
which, the Advisers and/or their affiliates are performing services or when
position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs
B-72
<PAGE>
or their affiliated entities. As a result, the performance by these principals
and employees of their obligations to such other entities may be a consideration
of which investors in the Funds should be aware.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income, High Yield and Core Funds, currencies on behalf of
the applicable Funds in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Funds, and such party may
have no incentive to assure that the Funds obtain the best possible prices or
terms in connection with the transactions. Goldman Sachs and its affiliates may
also create, write or issue derivative instruments for customers of Goldman
Sachs or its affiliates, the underlying securities currencies or instruments of
which may be those in which the Funds invest or which may be based on the
performance of a Fund. The Funds may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter into transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the Funds. At times, these activities may cause
departments of the Firm to give advice to clients that may cause these clients
to take actions adverse to the interest of the client. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on a Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
B-73
<PAGE>
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust. Pursuant to the distribution agreement, after the Funds'
Prospectuses and periodic reports have been prepared, set in type and mailed to
shareholders, Goldman Sachs will pay for the printing and distribution of copies
thereof used in connection with the offering to prospective investors. Goldman
Sachs will also pay for other supplementary sales literature and advertising
costs. Goldman Sachs has entered into sales agreements with certain investment
dealers and financial service firms (the "Authorized Dealers") to solicit
subscriptions for Class A, Class B and Class C Shares of each of the Funds that
offer such classes of shares. Goldman Sachs receives a portion of the sales
load imposed on the sale, in the case of Class A Shares, or redemption in the
case of Class B and Class C Shares, of such Fund shares. No Class B Shares were
outstanding during the fiscal years ended October 31, 1994 and 1995. No Class C
Shares were outstanding during the fiscal years ended October 31, 1994, 1995 and
1996. Goldman Sachs retained approximately the following combined commissions
on sales of Class A and B shares during the following periods:
<TABLE>
<CAPTION>
1996** 1995* 1994
------- -------- --------
<S> <C> <C> <C>
Adjustable Rate Fund* $79,000 $40,000 N/A
Municipal Income Fund $24,900 $48,000 $ 76,000
Government Income Fund $17,300 $22,000 $ 5,000
Global Income Fund $52,600 $15,000 $350,000
- ---------------------
</TABLE>
* Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
** Prior to May 1, 1997, the Municipal, Government Income and Global Income
Funds did not offer Class B shares.
Goldman Sachs serves as the Trust's transfer and dividend disbursing agent.
Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken
with the Trust with respect to each Fund to (i) record the issuance, transfer
and redemption of shares, (ii) provide confirmations of purchases and
redemptions, and quarterly statements, as well as certain other statements,
(iii) provide certain information to the Trust's custodian and the relevant
subcustodian in connection with redemptions, (iv) provide dividend crediting and
certain disbursing agent services, (v) maintain shareholder accounts, (vi)
provide certain state Blue Sky and other information, (vii) provide shareholders
and certain regulatory authorities with tax-related information, (viii) respond
to shareholder inquiries, and (ix) render certain other miscellaneous services.
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer and dividend disbursing agent and the
B-74
<PAGE>
assumption by Goldman Sachs of the expenses related thereto, Goldman Sachs
received fees for the fiscal years ended October 31, 1996, 1995 and 1994 by each
Fund then in existence as follows:
<TABLE>
<CAPTION>
Fund 1996 1995 1994
- ---- ------- ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund 278,337 306,662 679,819
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 16,980 26,098 46,887
Core Fund/(1)/ 24,657 13,716 5,637
Global Income Fund 121,212 106,764 132,123
Municipal Income Fund 90,284 63,695 70,811
Government Income Fund 72,237 94,095 57,960
- ------------------------
</TABLE>
/(1)/ Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide that
Goldman Sachs may render similar services to others so long as the services each
provides thereunder to the Funds are not impaired thereby. Each such agreement
also provides that the Trust will indemnify Goldman Sachs against certain
liabilities.
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser, the fees and expenses of
the Trust's custodian, transfer agent fees, brokerage fees and commissions,
filing fees for the registration or qualification of the Trust's shares under
federal or state securities laws, expenses of the organization of the Trust,
fees and expenses incurred by the Trust in connection with membership in
investment company organizations, taxes, interest, costs of liability insurance,
fidelity bonds or indemnification, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal, tax and auditing fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
B-75
<PAGE>
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees (in the
case of Global Income Fund and High Yield Fund) and other extraordinary
expenses) to the following percentage of each Fund's average daily net assets:
Short Duration Government Fund 0.05%
Adjustable Rate Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fund 0.05%
Global Income Fund 0.06%
High Yield Fund 0.01%
Such reductions or limits are calculated monthly on a cumulative
basis. Although the Advisers have no current intention of modifying or
discontinuing such expense limitations or the limitations on the management
fees, described above under "Management -- Investment Advisers," each may do so
in the future at its discretion. For the fiscal year ended October 31, 1996,
October 31, 1995 and October 31, 1994, Other Expenses of each Fund were reduced
by the Advisers in the following amounts:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund 386,863 551,405 442,880
Short Duration
Government Fund 169,069 219,994 115,389
Short Duration
Tax-Free Fund 238,097 213,139 192,696
Core Fund* 233,065 176,469 141,815
Municipal Income Fund 238,203 196,265 198,806
Government Income Fund 219,091 242,036 224,285
Global Income Fund** 337,079 70,195 0
</TABLE>
- ----------------------
* Core Fund commenced operations on January 5, 1994.
** For the fiscal year ended October 31, 1994, there was no expense
limitation.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by the
Advisers in performing certain accounting services not being provided by the
Trust's custodian.
B-76
<PAGE>
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, 225 Franklin Street,
Boston, Massachusetts 02110, have been selected as auditors of the Trust. In
addition to audit services, Arthur Andersen LLP prepares the Trust's federal and
state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a dealer is dealing with a Fund as
principal and receives compensation equal to the spread between the dealer's
cost for a given security and the resale price of such security). In certain
foreign countries, debt securities in which the Global Income Fund, Core Fund
and High Yield Fund may invest are traded on exchanges at fixed commission
rates. In connection with portfolio transactions, the Management Agreement
provides that the Advisers shall attempt to obtain the best net price and the
most favorable execution. The Management Agreement provides that, on occasions
when an Adviser deems the purchase or sale of a security to be in the best
interests of a Fund as well as its other customers (including any other fund or
other investment company or advisory account for which the Advisers or an
affiliate act as investment adviser), a Fund, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution. In
such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the applicable Adviser in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to the applicable Fund and such other customers. In some instances,
this procedure may adversely affect the size and price of the position
obtainable for a Fund. The Management Agreement permits each Adviser, in its
discretion, to purchase and sell portfolio securities to and from dealers who
provide the Trust with brokerage or research services in which dealers may
execute brokerage transactions at a higher cost to the Fund. Brokerage and
research services furnished by firms through which the Fund's effect their
securities transactions may be used by the Advisers in servicing other accounts
and not all of these services may be used by the
B-77
<PAGE>
Adviser in connection with the specific Fund generating the brokerage credits.
The fees received under the Management Agreement are not reduced by reason of
the Adviser receiving such brokerage and research services. In addition, in
selecting brokers and dealers, the Advisers may take into account sales of
shares of the Funds and other funds in the Goldman Sachs Group of Funds by such
brokers and dealers.
For the fiscal years ended October 31, 1995 and 1994, the Funds then in
existence paid no brokerage commissions.
B-78
<PAGE>
For the fiscal year ended October 31, 1996, the Funds then in existence paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid/3/ Research
=========== ================= ======================= ==========
<S> <C> <C> <C> <C>
Fiscal Year Ended
October 31, 1996:
Adjustable Rate Fund $108,000 $108,000(100%)/1/ $2,121,317,579(100%)/2/ N/A$
Short Duration Government Fund 24,000 24,000(100%)/1/ 447,205,928(100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000(100%)/1/ 8,559,280(100%)/2/ N/A
Core Fixed Income Fund 4,000 4,000(100%)/1/ 43,548,299(100%)/2/ N/A
Government Income Fund 1,200 1,200(100%)/1/ 24,437,288(100%)/2/ N/A
Municipal Income Fund 2,750 2,750(100%)/1/ 51,101,625(100%)/2/ N/A
</TABLE>
_______________________________
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Refers to Market Value of Futures Contracts.
B-79
<PAGE>
During the fiscal year ended October 31, 1996, the Funds acquired and
sold securities of their regular broker-dealers: Chase Securities, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1996, Short Duration Tax-Free Fund, Global Income Fund
and Municipal Income Fund held no securities of their regular broker-dealers.
As of the same date, Short Duration Government Fund, Adjustable Rate Fund,
Government Income Fund and Core Fund held the following amounts of securities of
their regular broker-dealers, as defined in Rule 10b-1 under the 1940 Act, or
their parents ($ in thousands): Short Duration Government Fund: Lehman
Brothers, Inc. ($370), Nomura Securities ($280) and Bear Stearns ($280);
Adjustable Rate Fund: Lehman Brothers, Inc. ($4,531), Bear Stearns ($3,430) and
Nomura Securities ($3,430); Government Income Fund: Lehman Brothers, Inc.
($2,774), Nomura Securities (2,774) and Bear Stearns ($2,100); Nomura Securities
(2,774); Core Fund: Lehman Brothers, Inc. ($4,808), Nomura Securities ($3,640)
and Bear Stearns ($3,640).
SHARES OF THE TRUST
The Funds were reorganized from series of a Massachusetts business
trust as part of Goldman Sachs Trust, a Delaware business trust, by a
Declaration of Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees have authority to classify and reclassify any series of shares into one
or more classes of shares. As of the date of this Additional Statement, the
Trustees have authorized: (i) the issuance of six classes of shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares; (ii) the issuance of four classes of shares
of Adjustable Rate Fund: Institutional Shares, Administration Shares, Service
Shares and Class A Shares; and (iii) the issuance of five classes of shares of
Global Income Fund, Government Income Fund, Municipal Income Fund and High Yield
Fund: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. As of October 31, 1996, no Service Shares of the Adjustable
Rate Fund were outstanding; no Class A, Class B or Class C Shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund were
outstanding; no Class C Shares of Government Income Fund and Municipal Income
Fund were outstanding; and no shares of High Yield Fund were outstanding.
B-80
<PAGE>
Each Institutional Share, Administration Share, Service Share, Class A
Share, Class B Share and Class C Share of a Fund represents a proportionate
interest in the assets belonging to the applicable class of the Fund. All
expenses of a Fund are borne at the same rate by each class of shares, except
that fees under Administration and Service Plans are borne exclusively by
Administration and Service Shares, fees under Distribution and Authorized Dealer
Service Plans are borne exclusively by Class A, Class B or Class C Shares and
transfer agency fees are borne at different rates by Class A, Class B or Class C
Shares than Institutional, Administration and Service Shares. The Trustees may
determine in the future that it is appropriate to allocate other expenses
differently between classes of shares and may do so to the extent consistent
with the rules of the SEC and positions of the Internal Revenue Service. Each
class of shares may have different minimum investment requirements and be
entitled to different shareholder services. Currently, shares of a class may
only be exchanged for shares of the same or an equivalent class of another fund.
See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the institution's customers.
Administration Shares may be purchased for accounts held in the name
of an institution that provides certain account administration services to its
customers, including maintenance of account records and processing orders to
purchase, redeem and exchange Administration Shares. Administration Shares bear
the cost of account administration fees at the annual rate of up to 0.25% of the
average daily net assets of such Administration Shares.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge, through brokers
and dealers who are members of the National Association of Securities Dealers,
Inc. and certain other financial service firms that have sales agreements with
Goldman Sachs. Class A Shares of the Funds bear the cost of distribution (Rule
12b-1) fees at the aggregate rate of up to 0.25% of the average daily net assets
of such Class A Shares. Class A Shares also bear the cost of an Authorized
Dealer Service Plan at an annual rate of up to 0.25% of average daily net assets
attributable to Class A Shares.
B-81
<PAGE>
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge through brokers and dealers who are members of the National
Association of Securities Dealers, Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. Class B shares bear the
cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of
the average daily net assets attributable to Class B shares. Class B shares
also bear the cost of an Authorized Dealer Service Plan at an annual rate of up
to 0.25% of the average daily net assets attributable to Class B shares.
Class C Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 1.0% through brokers and dealers who are members of the
National Association of Securities Dealers Inc. and certain other financial
services firms that have sales arrangements with Goldman Sachs. Class C Shares
bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to
0.75% of the average daily net assets attributable to Class C Shares. Class C
Shares also bear the cost of an Authorized Dealer Service Plan at an annual rate
of up to 0.25% of the average daily net assets attributable to Class C Shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A, Class B and Class C Shares) to its customers and thus receive different
compensation with respect to different classes of shares of each Fund.
Dividends paid by each Fund, if any, with respect to each class of shares will
be calculated in the same manner, at the same time on the same day and will be
in the same amount, except for differences caused by the fact that the
respective account administration, service, authorized dealer service plan and
distribution fees relating to a particular class will be borne exclusively by
that class. Similarly, the net asset value per share may differ depending upon
the class of shares purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, each Fund's shares are fully paid and non-assessable by
the Trust. In the event of liquidation of a Fund, shareholders of that Fund are
entitled to share pro rata in the net assets of that Fund available for
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of July 24, 1997, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following Funds: Adjustable
Rate Fund -- First Trust of New York, N.A., Mr. Michael Loughlin, 100 Wall
Street, Suite 1600, New York, NY (12.15%); State Treasurer/Nebraska Investment
Council, Attn: Gayle Ducker, 941 "O" Street, Lincoln, NE 68508 (7.03%); Short
Duration Government Fund -- Central Carolina Bank & Trust Co., P.O.
B-82
<PAGE>
Box 30010, Durham, NC 27702 (7.60%); Richfield Bank & Trust Co., Kirchbak Co.,
Attn: Judith A. Ferguson, 6625 Lyndale Avenue South, Richfield, MN 55423
(7.36%); State Street Bank & Trust Co., 1 Enterprise Drive, North Quincy, MA
02171-2126 (31.49%); Short Duration Tax-Free Fund -- Donald R. Gant, Partner,
Goldman, Sachs & Co., 85 Broad Street, 22nd Floor, New York, NY 10004 (17.25%);
G-K-G, Inc., Bernard Gassin, 166 Oak Knoll Terrace, Highland Park, IL 60035
(10.18%); Indiana Trust & Investment Management Co., Attn: Tina Taylor, 3930
Edison Lakes Parkway, Suite 250, Mishawaka, IN 46545 (6.33%); Nelda Start,
Attn: Mr. Walte Riedel, P.O. Box 903, Orange, TX 77631-0909 (7.51%); Westport
Trust -- WEBAT & Co., c/o Westport Bank & Trust, P.O. Box 5177, Westport, CT
06881-5177 (7.82%); Government Income Fund -- Frontier Trust Co., Inc. TR, FBO
Dade County Public School, Attn: Agnes R. McMurray, Fringe Benefits Management
Co., 1720 S. Gadsden Street, Tallahassee, FL 32301-5547 (7.48); Charles Machine
Works, Inc., ESOP & Trust Asset Allocation Account, Mike Stodola, Trustee, P.O.
Box 66, 1959 West Fir Street, Perry, OK 73077-5803 (6.22%); Bob Smith MD
Foundation, 3811 Turtle Creek Centre #2150, Dallas, TX 75219-4454 (5.22%); Core
Fund --Local 234 Electric Workers Retirement Fund, Attn: Ronald D. Carpenter,
10300 Merritt Street, Castroville, CA 95012 (6.60%); Vinson and Elkins Pension
Plan, Attn: Mr. Mike Ross, c/o Banc One, 910 Travis Street, F16, Houston, TX
77002-5802 (9.79%); St. Barnabas, 1 New York Plaza, New York, NY 10004-1902
(19.33%); Vinson and Elkins Lawyers, Retirement Plan, Texas Commerce Bank N.A.,
P.O. Box 2558, Houston, TX (31.67%); Global Income Fund --First National Bank
North Dakota, Attn: Josie Wahl, P.O. Box 6001, Grand Forks, ND 58206-6001
(5.51%); State Street Bank and Trust, GS Profit Sharing Master Trust, Attn:
Louis Pereira, P.O. Box 1992, Boston, MA 02105-1992 (15.63%).
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act, applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company (such as
the Trust) shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of Trustees from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the election of Trustees (this method of voting being
referred to at "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the
B-83
<PAGE>
Trustees, series and classes of the Trust will vote separately from each other.
Shareholders of the Trust do not have cumulative voting rights in the election
of Trustees. Meetings of shareholders of the Trust, or any series or class
thereof, may be called by the Trustees, certain officers or upon the written
request of holders of 10% or more of the shares entitled to vote at such
meetings. The shareholders of the Trust will have voting rights only with
respect to the limited number of matters specified in the Declaration of Trust
and such other matters as the Trustees may determine or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for
any act or obligation of the series and satisfy any judgment thereon from the
assets of the series.
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
B-84
<PAGE>
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have
the right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of the Delaware Trust, all the powers and authorities of
Trustees under the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of a Fund. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
series or the Trustees. The Declaration of Trust provides for indemnification by
the relevant Fund for all loss suffered by a shareholder as a result of a
obligation of the series. The Declaration of Trust also provides that a series
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. In view of the above, the risk of personal liability of shareholders is
remote.
In addition to the requirement under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the series or class to which such action relates, shall join in the request for
the Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of other advisers in considering the merits of the request
and shall require an undertaking by the shareholders making such request to
B-85
<PAGE>
reimburse the Fund for the expense of any such advisers in the event that the
Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason or willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
NET ASSET VALUE
Under the Act, the Trustees of the Trust are responsible for
determining in good faith the fair value of securities of the Funds. In
accordance with procedures adopted by the Trustees of the Trust, the net asset
value per share of each class of each Fund is calculated by determining the
value of the net assets attributable to each class of that Fund (assets,
including securities at value, minus liabilities) and dividing by the number of
outstanding shares of that class. All securities are valued as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time) on each Business Day (as defined in each Fund's Prospectus).
For the purpose of calculating the net asset value of the Funds,
investments are valued under valuation procedures established by the Trustees.
Portfolio securities, other than money market instruments and with the exception
of Global Income Fund, for which accurate market quotations are readily
available are valued as follows: (a) via electronic feeds to the custodian bank
containing dealer-supplied bid quotations or bid quotations from a nationally
recognized pricing service; (b) securities for which the custodian bank is
unable to obtain an external price or with respect to which the Adviser believes
an external price does not reflect accurate market values, will be valued by the
Adviser in good faith based on valuation models that take into account daily
spread and yield changes on U.S. Treasury securities (i.e., matrix pricing); (c)
overnight repurchase agreements will be valued by the Adviser at cost; (d) term
repurchase agreements (i.e., those whose maturity exceeds seven days) and
interest rate swaps, caps, collars and floors will be valued at the average of
the bid quotations obtained daily from at least two dealers or, for term
repurchase agreements, recognized counterparties; (e) debt securities with a
remaining maturity of 60 days or less are valued by the Adviser at amortized
cost, which the Trustees have determined to approximate fair value; (f) spot and
forward foreign currency exchange contracts will be valued using a pricing
service such as Reuters then calculating then mean between the last bid and
asked quotations supplied by certain independent dealers in such contracts; (g)
exchange-traded options and futures contracts will be valued by the custodian
bank at the last sale price on the exchange where such contracts and options are
principally traded; and (h) over-the-counter options will be valued by an
independent
B-86
<PAGE>
unaffiliated broker identified by the portfolio manager/trader and contacted by
the custodian bank.
Portfolio securities of the Global Income Fund for which accurate
market quotations are available are valued as follows: (a) securities listed on
any U.S. or foreign stock exchange or on the National Association of Securities
Dealers Automated Quotations System ("NASDAQ") will be valued at the last sale
price on the exchange or system in which they are principally traded, on the
valuation date. If there is no sale on the valuation day, securities traded
principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean between
the closing bid and asked prices, and (ii) on a foreign exchange will be valued
at the official bid price. The last sale price and official bid price for
securities traded principally on a foreign exchange will be determined as of the
close of the London Foreign Exchange; (b) over-the-counter securities not quoted
on NASDAQ will be valued at the last sale price on the valuation day or, if no
sale occurs, at the mean between the last bid and asked prices; (c) options and
futures contracts will be valued at the last sale price in the market where such
contract is principally traded; and (d) forward foreign currency exchange
contracts will be valued at the mean between the last bid and asked quotations
supplied by a dealer in such contracts.
All other securities, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved by the Board of Trustees.
Money market instruments held by a Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which the
Trustees have determined approximates market value.
The value of all assets and liabilities expressed in foreign
currencies will be converted into U.S. dollar values at current exchange rates
of such currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the time the Global Income, Core and High
Yield Funds calculate their net asset value. Occasionally, events affecting the
values of such securities may occur between the times at which they are
determined and the calculation of net asset value which will not be reflected in
the computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value, in which case an adjustment
may be made.
B-87
<PAGE>
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies and financial institutions. Each prospective
shareholder is urged to consult his own tax adviser with respect to the specific
federal, state, local and foreign tax consequences of investing in the Funds.
This summary is based on the laws in effect on the date of this Additional
Statement, which are subject to change.
GENERAL
- -------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect to
be treated and intends to continue to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its gross
income (including tax-exempt interest) for its taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks or securities, or foreign currencies or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"); (b) a Fund derive less than 30% of its
gross income for its taxable year from the sale or other disposition of any of
the following which was held for less than three months: (i) stock or
securities, (ii) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies) and (iii) foreign currencies
and foreign currency options, futures and forward contracts that are not
directly related to the Fund's principal business of investing in stocks or
securities or options and futures with respect to stocks or securities (the
"short-short test"); and (c) a Fund diversify its holdings so that, at the close
of each quarter of its taxable year, (i) at least 50% of the market value of its
total (gross) assets is comprised of cash, cash items, United States Government
Securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (gross) assets is invested in the securities of any
one issuer (other than United States Government Securities and securities of
other regulated investment companies) or two or more issuers controlled by a
Fund and engaged in the same, similar or related trades or businesses. Gains
from the sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that
B-88
<PAGE>
are not directly related to Core Fund's or Global Income Fund's principal
business of investing in stock or securities or options and futures with respect
to stock or securities will be treated as gains from the sale of investments
held for less than three months under the short-short test (even though
characterized as ordinary income for some purposes) if such currencies or
instruments were held for less than three months. In addition, future Treasury
regulations could provide that qualifying income under the 90% gross income test
will not include gains from foreign currency transactions that are not directly
related to Core Fund's or Global Income Fund's principal business of investing
in stock or securities or options and futures with respect to stock or
securities. Using foreign currency positions or entering into foreign currency
options, futures and forward contracts for purposes other than hedging currency
risk with respect to securities in Core Fund's or Global Income Fund's portfolio
or anticipated to be acquired may not qualify as "directly related" under these
tests.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on the portion of its income and capital gains that it
distributes to its shareholders in any taxable year for which it distributes, in
compliance with the Code's timing and other requirements, at least 90% of its
"investment company taxable income" (which includes dividends, taxable interest,
taxable original issue discount income, market discount income, income from
securities lending, net short-term capital gain in excess of net long-term
capital loss, certain net realized foreign exchange gains, and any other taxable
income other than "net capital gain" as defined below and is reduced by
deductible expenses) and at least 90% of the excess of its gross tax-exempt
interest income over certain disallowed deductions ("net tax-exempt interest").
A Fund may retain for investment its "net capital gain" (which consists of the
excess of its net long-term capital gain over its net short-term capital loss).
However, if a Fund retains any investment company taxable income or net capital
gain, it will be subject to tax at regular corporate rates on the amount
retained. If a Fund retains any net capital gain, that Fund may designate the
retained amount as undistributed net capital gain in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by that Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For U.S.
federal income tax purposes, the tax basis of shares owned by a shareholder of
the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute for each taxable year to its
shareholders all or substantially all of its investment company taxable income
(if any), net capital gain and any net tax-exempt interest. Exchange control or
other foreign laws, regulations or practices may restrict repatriation of
investment income, capital or the proceeds
B-89
<PAGE>
of securities sales by foreign investors such as Global Income Fund or Core Fund
and may therefore make it more difficult for Global Income Fund or Core Fund to
satisfy the distribution requirements described above, as well as the excise tax
distribution requirements described below. However, Global Income Fund and Core
Fund generally expect to be able to obtain sufficient cash to satisfy such
requirements from new investors, the sale of securities or other sources. If
for any taxable year a Fund does not qualify as a regulated investment company,
it will be taxed on all of its investment company taxable income and net capital
gain at corporate rates, its net tax-exempt interest (if any) may be subject to
the alternative minimum tax, and its distributions to shareholders will be
taxable as ordinary dividends to the extent of its current and accumulated
earnings and profits.
For federal income tax purposes, each Fund is permitted to carry
forward a net capital loss in any year to offset its own capital gains, if any,
during the eight years following the year of the loss. At October 31, 1996, the
Funds had approximately the following amounts of capital loss carry forwards:
<TABLE>
<CAPTION>
Years of
Amount Expiration
----------- ----------
<S> <C> <C>
Adjustable Rate Fund $47,923,000 2000-2003
Short Duration
Government Fund $13,272,000 2002-2003
Short Duration
Tax-Free Fund $ 4,271,000 2002-2003
Core Fixed Income Fund $ 77,000 2004
Global Income Fund $ 4,472,000 2002
Municipal Income Fund $ 1,535,000 2002
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by the Code and applicable tax regulations.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year) and 100% of any taxable
ordinary income and the excess of capital gains over capital losses for the
prior year that were not distributed during such year and on which the Fund did
not pay federal income tax. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will
B-90
<PAGE>
be treated as if they were received by shareholders on December 31 of the year
declared.
The Tax Exempt Funds may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." The Tax Exempt Funds may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, the Tax
Exempt Funds may purchase beneficial interests in Municipal Securities held by
trusts, custodial arrangements or partnerships and/or combined with third-party
puts and other types of features such as interest rate swaps; those investments
may require the Fund to pay "tender fees" or other fees for the various features
provided.
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that tax-
exempt interest received by a regulated investment company with respect to such
obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax Exempt Funds intends to take
the position that it is the owner of any municipal obligations acquired subject
to a standby commitment or other third party put and that tax-exempt interest
earned with respect to such municipal obligations will be tax-exempt in its
hands. There is no assurance that the Service will agree with such position in
any particular case. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the treatment of tender fees paid
by these Funds, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Tax Exempt
Funds' portfolios in a manner designed to minimize any adverse impact from the
tax rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is,
B-91
<PAGE>
treated as having been sold at their fair market value on the last day of the
Fund's taxable year. These provisions may require a Fund to recognize income or
gains without a concurrent receipt of cash. Any gain or loss recognized on
actual or deemed sales of these futures contracts, forward contracts or options
will (except for certain foreign currency options, forward contracts, and
futures contracts) be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. As a result of certain hedging transactions
entered into by a Fund, that Fund may be required to defer the recognition of
losses on futures or forward contracts and options or underlying securities or
foreign currencies to the extent of any unrecognized gains on related positions
held by the Fund and the characterization of gains or losses as long-term or
short-term may be changed. The short-short test described above may limit each
Fund's ability to use options, futures and forward transactions as well as its
ability to engage in short sales. The tax provisions described above applicable
to options, futures and forward contracts may affect the amount, timing, and
character of a Fund's distributions to shareholders. Certain tax elections may
be available to the Funds to mitigate some of the unfavorable consequences
described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by Core Fund and Global Income
Fund. Under these rules, foreign exchange gain or loss realized by Core Fund or
Global Income Fund with respect to foreign currencies and certain futures and
options thereon, foreign currency-denominated debt instruments, foreign currency
forward contracts, and foreign currency-denominated payables and receivables
will generally be treated as ordinary income or loss, although in some cases
elections may be available that would alter this treatment. If a net foreign
exchange loss treated as ordinary loss under Section 988 of the Code were to
exceed a Fund's investment company taxable income (computed without regard to
such loss) for a taxable year, the resulting loss would not be deductible by
the Fund or its shareholders in future years. Net loss, if any, from certain
foreign currency transactions or instruments could exceed net investment income
otherwise calculated for accounting purposes with the result being either no
dividends being paid or a portion of Core Fund's, High Yield Fund's or Global
Income Fund's dividends being treated as a return of capital for tax purposes,
nontaxable to the extent of a shareholder's tax basis in his shares and, once
such basis is exhausted, generally giving rise to capital gains.
Core and Global Income, and High Yield Funds may be subject to foreign
taxes on income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes in some cases. Because more than 50% of Global Income
Fund's total assets at the close of any taxable year will generally consist of
stock or securities of foreign corporations, Global Income Fund will generally
qualify to file an election with the Internal Revenue Service pursuant to which
shareholders of Global Income Fund would
B-92
<PAGE>
be required to (i) include in ordinary gross income (in addition to taxable
dividends actually received) their pro rata shares of foreign income taxes paid
by Global Income Fund that are treated as income taxes under U.S. tax
regulations (which excludes, for example, stamp taxes, securities transaction
taxes, and similar taxes) even though not actually received by such
shareholders, and (ii) treat such respective pro rata portions as foreign income
taxes paid by them. Global Income Fund may or may not make this election for
any particular taxable year. Core Fund will not satisfy the 50% requirement
described above and, therefore, will not make this election. Core Fund and, if
it does not make the election, Global Income Fund will, however, be entitled to
deduct such taxes in computing the amounts they are required to distribute.
If Global Income Fund makes this election, its shareholders may then deduct
such pro rata portions of qualified foreign taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of qualified foreign taxes paid by
Global Income Fund, although such shareholders will be required to include their
shares of such taxes in gross income if Global Income Fund makes the election
referred to above.
If a shareholder chooses to take a credit for the foreign taxes deemed paid
by such shareholder as a result of any such election by Global Income Fund, the
amount of the credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken which the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. For
this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by Global Income Fund will generally not be treated as
income from foreign sources. This foreign tax credit limitation may also be
applied separately to certain specific categories of foreign-source income and
the related foreign taxes. As a result of these rules, which have different
effects depending upon each shareholder's particular tax situation, certain
shareholders of Global Income Fund may not be able to claim a credit for the
full amount of their proportionate shares of the foreign taxes paid by the Fund.
Shareholders who are not liable for U.S. federal income taxes, including
tax-exempt shareholders, will ordinarily not benefit from this election. Each
year, if any, that Global Income Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of qualified foreign income taxes paid by Global Income Fund and (ii) the
portion of Fund dividends which represents income from each foreign country.
If Core, or Global Income or High Yield Funds acquire stock (including,
under proposed regulations, an option to acquire stock
B-93
<PAGE>
such as is inherent in a convertible bond) in certain foreign corporations that
receive at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies") Core, Global Income or High Yield Funds could be subject
to federal income tax and additional interest charges on "excess distributions"
received from such companies or gain from the sale of such stock in such
companies, even if all income or gain actually received by Core, Global Income
or High Yield Funds is timely distributed to its shareholders. Core, Global
Income or High Yield Funds would not be able to pass through to their
shareholders any credit or deduction for such a tax. Certain elections may, if
available, ameliorate these adverse tax consequences, but any such election
would require Core, Global Income or High Yield Funds to recognize taxable
income or gain without the concurrent receipt of cash. Core, Global Income or
High Yield Funds may limit and/or manage their holdings in passive foreign
investment companies to minimize its tax liability or maximize its return from
these investments.
A Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark-to-market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations
B-94
<PAGE>
concerning the tax-exempt status of such obligations, nor does it guarantee or
represent that bond counsels' opinions are correct. Bond counsels' opinions will
generally be based in part upon covenants by the issuers and related parties
regarding continuing compliance with federal tax requirements. Tax laws not
only limit the purposes for which tax-exempt bonds may be issued and the supply
of such bonds, but also contain numerous and complex requirements that must be
satisfied on a continuing basis in order for bonds to be and remain tax-exempt.
If the issuer of a bond or a user of a bond-financed facility fails to comply
with such requirements at any time, interest on the bond could become taxable,
retroactive to the date the obligation was issued. In that event, a portion of
a Tax Exempt Fund's distributions attributable to interest the Fund received on
such bond for the current year and for prior years could be characterized or
recharacterized as taxable income. The availability of tax-exempt obligations
and the value of a Tax Exempt Fund's portfolio may be affected by restrictive
federal income tax legislation enacted in recent years or by similar, future
legislation. If a Tax Exempt Fund satisfies the applicable requirements,
dividends paid by the Fund which are attributable to tax exempt interest on
Municipal Securities and designated by the Fund as exempt-interest dividends in
a written notice mailed to its shareholders within sixty days after the close
of its taxable year may be treated by shareholders as items of interest
excludable from their gross income under Section 103(a) of the Code. Exempt-
interest dividends a Tax Exempt Fund receives from other regulated investment
companies, including exempt-interest dividends on auction rate preferred
securities of such companies held by a Fund, are treated as interest on
Municipal Securities and may be distributed by a Tax Exempt Fund as exempt-
interest dividends. The recipient of tax-exempt income is required to report
such income on his federal income tax return. However, a shareholder is advised
to consult his tax adviser with respect to whether exempt-interest dividends
retain the exclusion under Section 103(a) if such shareholder would be treated
as a "substantial user" under Section 147(a)(1) with respect to some or all of
the tax-exempt obligations held by a Tax Exempt Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of a
Tax Exempt Fund is not deductible to the extent attributable to exempt-interest
dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
B-95
<PAGE>
ALL FUNDS. Distributions from investment company taxable income, as
defined above, are taxable to shareholders who are subject to tax as ordinary
income whether paid in cash or reinvested in additional shares. Taxable
distributions include distributions from any Fund, including Short Duration Tax-
Free Fund and Municipal Income Fund, that are attributable to (i) taxable
income, including but not limited to dividends, taxable bond interest,
recognized market discount income, original issue discount income accrued with
respect to taxable bonds, income from repurchase agreements, income from
securities lending, income from dollar rolls, income from interest rate or
currency swaps, caps, floors and collars, and a portion of the discount from
certain stripped tax-exempt obligations or their coupons or (ii) capital gains
from the sale of securities or other investments (including from the disposition
of rights to when-issued securities prior to issuance) or from options, futures
or certain forward contracts. Any portion of such taxable distributions that is
attributable to a Fund's net capital gain, as defined above, may be designated
by the Fund as a "capital gain dividend," taxable to shareholders as long-term
capital gain whether received in cash or additional shares and regardless of the
length of time their shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less than a
minimum period, generally 46 days. Receipt of certain distributions qualifying
for the deduction may result in reduction of the tax basis of the corporate
shareholder's shares and may give rise to or increase its liability for federal
corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes,
will first reduce a shareholder's basis in his shares and, after the
shareholder's basis is reduced to zero, will generally constitute capital gains
to a shareholder who holds his shares as capital assets. Amounts that are not
allowable as a deduction in computing taxable income, including expenses
associated with earning tax-exempt interest income, do not reduce a Fund's
current earnings and profits for these purposes. Consequently, the portion, if
any, of Short Duration Tax-Free Fund's or Municipal Income Fund's distributions
from gross tax-exempt interest income that exceeds its net tax-exempt interest
would be taxable as ordinary income to the extent of such disallowed deductions
even
B-96
<PAGE>
though such excess portion may represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash and will have a cost basis in the shares received equal
to such amount.
TAXABLE U.S. SHAREHOLDERS -- SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of in
a transaction that is treated as a sale for tax purposes, the shareholder will
generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale, such gain or loss should be capital in
character, and long-term if the shareholder has a tax holding period for the
shares of more than one year, otherwise short-term, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund Shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. All or a portion
of a sales charge paid in purchasing Class A shares of Adjustable Rate Fund or
Global Income Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of that Fund or another fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment or
exchange privilege. Any disregarded portion of such charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired. If
a shareholder received a capital gain dividend with respect to shares and such
shares have a tax holding period of six months or less at the time of the sale
or redemption, then any loss the shareholder realizes on the sale or redemption
will be treated as a long-term capital loss to the extent of such capital gain
dividend. Also, any losses realized by shareholders who dispose of shares of
Short Duration Tax-Free or Municipal Income Funds with a tax holding period of
six months or less are disallowed to the extent of any exempt-interest dividends
received with respect to such shares. Additionally, any loss realized on a sale
or redemption of shares of a Fund may be disallowed under "wash sale" rules to
the extent the shares disposed of are replaced with other shares of the same
Fund within a period of 61 days beginning 30 days before and ending 30 days
after the shares are disposed of, such as pursuant to a dividend reinvestment in
shares of the Fund. If disallowed, the loss will be reflected in an adjustment
to the basis of the shares acquired.
After the close of each calendar year, each of Short Duration Tax-Free Fund
and Municipal Income Fund will inform shareholders of
B-97
<PAGE>
the federal income tax status of its dividends and distributions for such year,
including the portion of such dividends that qualifies as tax-exempt and the
portion, if any, that should be treated as a tax preference item for purposes of
the federal alternative minimum tax. Shareholders who have not held shares of
Short Duration Tax-Free Fund or Municipal Income Fund for such Fund's full
taxable year may have designated as tax-exempt or as a tax preference item a
percentage of distributions which is not equal to the actual amount of tax-
exempt income or tax preference item income earned by Short Duration Tax-Free
Fund or Municipal Income Fund during the period of their investment in Short
Duration Tax-Free Fund or Municipal Income Fund, as the case may be.
All distributions, whether received in shares or in cash, as well as
redemptions and exchanges, must be reported by each shareholder who is required
to file a U.S. Federal income tax return.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish the Funds with their correct taxpayer identification number and with
certain required certifications or if the Service or a broker notifies the Funds
that the number furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from Short
Duration Tax-Free Fund or Municipal Income Fund will not be subject to backup
withholding if the applicable Fund reasonably estimates that at least 95% of its
distributions will be exempt-interest dividends. A Fund may refuse to accept an
application that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
B-98
<PAGE>
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment company taxable income distributed by a
Fund to a shareholder who is not a U.S. person will be subject to U.S.
withholding tax at the rate of 30% (or a lower rate provided by an applicable
tax treaty) unless the dividends are effectively connected with a U.S. trade or
business of the shareholder, in which case the dividends will be subject to tax
on a net income basis at the graduated rates applicable to U.S. individuals or
domestic corporations. Distributions of net capital gain, including amounts
retained by a Fund which are designated as undistributed capital gains, to a
shareholder who is not a U.S. person will not be subject to U.S. federal income
or withholding tax unless the distributions are effectively connected with the
shareholder's trade or business in the United States or, in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met. Non-U.S. shareholders may also be subject to U.S.
withholding tax on deemed income resulting from any election by Global Income
Fund to treat qualified foreign taxes it pays as passed through to shareholders
(as described above), but they may not be able to claim a U.S. tax credit or
deduction with respect to such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
B-99
<PAGE>
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Thirty-day yield and average annual total return values are computed pursuant to
formulas specified by the SEC. Each Fund may also from time to time quote
distribution rates in reports to shareholders and in sales literature.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price per share on the
last day of such period. Yield is then annualized by assuming that yield is
realized each month for twelve months and is reinvested every six months. Net
investment income per share is equal to the dividends and interest earned during
the period, reduced by accrued expenses for the period. The calculation of net
investment income for these purposes may differ from the net investment income
determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, a Tax Exempt Fund's tax-free yield. Tax equivalent yield is
calculated by dividing a Tax Exempt Fund's tax-exempt yield by one minus a
stated federal and/or state tax rate.
Distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share on the last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price applicable to the relevant
class (i.e., net asset value in the case of each class other than Class A) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption (and in the case
of Class B and Class C Shares payment of any contingent deferred sales charge)
at the end of the period. This calculation assumes a complete redemption of the
investment. It also assumes that all dividends and distributions are reinvested
at net asset value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price per share with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period.
B-100
<PAGE>
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
Thirty-day yield, tax equivalent yield (Short Duration Tax-Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A, Class B or Class C Shares which is based upon a Fund's net asset value per
share would be reduced if a sales charge were taken into account.
B-101
<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- -------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 6.00% 5.94%
Administration Shares 5.75% 5.69%
Service Shares/2/
Class A Shares
- Assumes 1.5% sales charge 5.66% 5.35%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.43% 6.16%
Administration Shares 6.19% 5.93%
Service Shares 5.96% 5.71%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.34% 3.71%
Administration Shares 4.09% 3.42%
Service Shares 3.84% 3.22%
CORE FUND
Institutional Shares 6.60% 6.25%
Administration Shares 6.37% 6.03%
Service Shares 6.12% 5.78%
GLOBAL INCOME FUND
Institutional Shares 5.20% 4.76%
Service Shares/2/
Class A Shares
(Assumes 4.5% sales charge) 4.54% 4.08%
Class B Shares 4.23% 3.80%
MUNICIPAL INCOME FUND
Class A Shares 4.21% 3.56%
(assumes 4.5% sales charge)
Class B Shares 3.68% 3.25%
GOVERNMENT INCOME FUND
Class A Shares 6.04% 4.76%
(assumes 4.5% sales charge)
Class B Shares 5.57% 4.48%
</TABLE>
B-102
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- ---- ------------------ ----------- -------------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 5.87% 5.81%
Administration Shares 5.62% 5.56%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.62% 5.31%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.24% 5.97%
Administration Shares 6.00% 5.72%
Service Shares 5.78% 5.49%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.19% 3.56%
Administration Shares 3.94% 3.28%
Service Shares 3.69% 3.06%
MUNICIPAL INCOME FUND
Class A Shares 4.27% 3.59%
-assumes no sales charge
Class B Shares 3.53% 3.09%
GOVERNMENT INCOME FUND
Class A Shares 6.33% 5.00%
-assumes no sales charge
Class B Shares 5.58% 4.50%
CORE FUND
Institutional Shares 6.46% 6.12%
Administration Shares 6.23% 5.89%
Service Shares 5.98% 5.63%
GLOBAL INCOME FUND
Institutional Fund 5.95% 6.18%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.44% 4.96%
Class B Shares 5.02% 4.59%
</TABLE>
B-103
<PAGE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---- ------------------ -------------- --------------
<S> <C> <C> <C>
30-Days
ended
10/31/96
SHORT DURATION
TAX-FREE FUND/3/
Institutional Shares 6.94% 5.89%
Administration Shares 6.52% 5.43%
Service Shares 6.11% 5.07%
MUNICIPAL INCOME FUND/3/
Class A Shares 7.07% 5.94%
-assumes no sales charge
Class B Shares 5.84% 5.12%
</TABLE>
- ----------------------------------
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to limit its advisory fees and to maintain
expenses at a specified level.
2 There were no Service Shares outstanding during the periods indicated.
3 The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 39.6% federal income tax rate.
The above tables should not be considered a representation of future
performance.
B-104
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- ---------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/96 5.32% 5.19%
11/1/95 one year ended
10/31/96 6.86% 6.80%
11/1/91 five years ended
10/31/96 5.13% 5.05%
Administration Shares 4/15/93/1b/ ended 10/31/96 4.69% 4.64%
11/1/95 one year ended
10/31/96 6.60% 6.53%
Service Shares/1c/ N/A N/A
Class A Shares 5/12/95/1d/ ended 10/31/96
Assumes 1.5% Sales Charge 5.29% 4.96%
Assumes No Sales Charge 6.40% 6.07%
11/1/95 one year ended
Assumes 1.5% Sales Charge 10/31/96 4.99% 4.66%
Assumes No Sales Charge 6.60% 6.27%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/96 7.24% 6.84%
11/1/95 one year ended
10/31/96 6.75% 6.47%
11/1/91 five years
ended 10/31/96 5.67% 5.44%
Administration Shares 2/28/96/2b/ ended 10/31/96 4.00% 3.82%
Service Shares 4/10/96/2b/ ended 10/31/96 4.35% 4.20%
</TABLE>
B-105
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-----------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
Institutional Shares 10/1/92/3a/ ended 10/31/96 4.21% 3.71%
11/1/95 one year ended
10/31/96 4.50% 3.92%
Administration Shares 5/20/93/3b/ ended 10/31/96 3.51% 3.15%
11/1/95 one year ended
10/31/96 4.24% 3.66%
Service Shares 9/20/94/3c/ ended 10/31/96 4.36% 3.92%
11/1/95 one year ended
10/31/96 3.98% 3.40%
CORE FUND
Institutional Shares 1/15/94/4a/ 10/31/96 6.34% 5.70%
11/1/95 one year ended
10/31/96 5.98% 5.58%
Administration Shares 2/28/96/4b/ ended
10/31/96 3.56% 3.29%
Service Shares 3/13/96/4b/ ended
10/31/96 4.90% 4.69%
</TABLE>
B-106
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
------------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- -------------- ------------------- --------------- ------------
<S> <C> <C> <C> <C>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/96
Assumes 4.5% Sales Charge 7.08% 6.76%
Assumes No Sales Charge 8.02% 7.71%
Assumes 4.5% Sales Charge 11/1/95 one year 6.08% 5.57%
Assumes No Sales Charge ended 10/31/96 11.05% 10.53%
Assumes 4.5% Sales Charge 11/1/91 five years 7.02% 6.73%
Assumes No Sales Charge ended 10/31/96 8.01% 7.69%
Class B Shares/5b/ 5/1/96 ended 10/31/96/5d/ 6.24% 6.01%
Institutional Shares 8/1/95/5e/ ended 10/31/96 12.95% 12.45%
11/1/95 one year
ended 10/31/96 11.55% 11.05%
Service Shares/5f/
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/96
Assumes 4.5% Sales Charge 3.80% 2.78%
Assumes No Sales Charge 5.27% 4.23%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.35% 0.65%
Assumes No Sales Charge 6.13% 5.40%
Class B Shares/6b/ 5/1/96 ended 10/31/96 4.40% 4.07%
</TABLE>
B-107
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
--------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/96
Assumes 4.5% Sales Charge 5.41% 2.92%
Assumes No Sales Charge 6.72% 4.21%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.06% -0.33%
Assumes No Sales Charge 5.80% 4.35%
Class B Shares/7b/ 5/1/96 ended 10/31/96 4.85% 4.17%
- ----------------
</TABLE>
1a Institutional Shares of Adjustable Rate Fund commenced operations on
July 17, 1991.
1b Administration Shares of Adjustable Rate Fund commended operations on
April 15, 1993.
1c No Service Shares of Adjustable Rate Fund were outstanding during the
periods indicated.
1d Class A shares of Adjustable Rate Fund commenced operations on May 12,
1995.
2a Institutional Shares of Short Duration Government Fund commenced
operations on August 15, 1988.
2b Administration Shares of Short Duration Government Fund commenced
operations on February 28, 1996. Service Shares of Short Duration
Government Fund commenced operations on April 10, 1996. An aggregate total
return (not annualized) is shown instead of an average annual total return
since Administration and Service Shares have not completed a full 12 months
of operation as of October 31, 1996.
3a Institutional Shares of Short Duration Tax-Free Fund commenced operations
on October 1, 1992.
3b Administration Shares of Short Duration Tax-Free Fund commenced operations
on May 20, 1993.
3c Service Shares of Short Duration Tax-Free Fund commenced operations on
September 20, 1994.
4a Institutional Shares of Core Fund commenced operations on January 5, 1994.
4b Administration Shares of Core Fund commenced operations on February
28, 1996. Service Shares of Core Fund commenced operations on March 13,
1996. An aggregate total return (not annualized) is shown instead of an
average annual total return since Administration and Service Shares have
not completed a full 12 months of operation as of October 31, 1996.
5a Class A Shares of Global Income Fund commenced operations on August 2,
1991.
5b Class B Shares of Global Income Fund commenced operations on May 1, 1996.
5c On November 27, 1992, the maximum sales charge was changed from 3% to
4.5% of the offering price. All performance figures in this table
incorporate the sales charge currently in effect.
5d An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a full
12 months of operation as of October 31, 1996.
5e Institutional Shares of Global Income Fund commenced operations on
August 1, 1995.
5f No Service Shares of Global Income Fund were outstanding during the
periods indicated.
6a Class A shares of Municipal Income Fund commenced operations on July
20, 1993.
6b Class B Shares of Municipal Income Fund commenced operations on May 1,
1996. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a full
12 months of operation as of October 31, 1996.
B-108
<PAGE>
7a Class A Shares of Government Income Fund commenced operations on
February 10, 1993.
7b Class B Shares of Government Income Fund commenced operations on May
1, 1996. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a full
12 months of operation as of October 31, 1996.
The above table should not be considered a representation of future
performance.
B-109
<PAGE>
Occasionally statistics may be used to specify a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare a Fund's net
asset value or performance relative to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market. A beta of more than 1.00 indicates volatility greater than the market,
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average,
over a specified period of time. The premise is that greater volatility
connotes greater risk undertaken in achieving performance.
Each Fund may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to, Lipper
------
Analytical Services, Inc., Donaghues Money Fund Report, Barron's, The Wall
- ------------------------- --------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- ----------------- -------------------------------- -----
In addition, Adjustable Rate, Government Income and Short Duration
Government Funds may from time to time advertise their performance relative to
certain indices and benchmark investments, including: (a) the Shearson Lehman
Government/Corporate (Total) Index, (b) Shearson Lehman Government Index, (c)
Merrill Lynch 1-3 Year Treasury Index, (d) Merrill Lynch 2-Year Treasury Curve
Index, (e) the Salomon Brothers Treasury Yield Curve Rate of Return Index, (f)
the Payden & Rygel 2-Year Treasury Note Index, (g) 1 through 3 year U.S.
Treasury Notes, (h) constant maturity U.S. Treasury yield indices, (i) the
Consumer Price Index, (j) the London Interbank Offered Rate, (k) other taxable
investments such as certificates of deposit, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds, repurchase
agreements, commercial paper and (l) historical data concerning the performance
of adjustable and fixed-rate mortgage loans.
Short Duration Tax-Free and Municipal Income Funds may from time to
time advertise their performance relative to certain indices, any components of
such indices and benchmark investments, including but not limited to: (a) the
Lipper Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed Income
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
Lehman Brothers Municipal Bond Indices; (c) the Merrill Lynch Municipal Bond
Institutional Total Rate of Return Indices; (d) Bond Buyer Indices; (e)
IBC/Donoghue's Money Fund Averages/Institutional Only Tax Free; and constant
maturity U.S. Treasury yield indices.
Core, Global Income and High Yield Funds may each from time to time
advertise its performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income
B-110
<PAGE>
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
CDA Mutual Fund Report published by CDA Investment Technologies, Inc. (which
analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Salomon Brothers' World Bond Index (which measures the total
return in U.S. dollar terms of government bonds, Eurobonds and foreign bonds of
ten countries, with all such bonds having a minimum maturity of five years); (f)
the Lehman Brothers Aggregate Bond Index or its component indices; (g) the
Standard & Poor's Bond Indices (which measure yield and price of corporate,
municipal and U.S. government bonds); (h) the J.P. Morgan Global Government Bond
Index; (i) other taxable investments including certificates of deposit (CDs),
money market deposit accounts (MMDAs), checking accounts, savings accounts,
money market mutual funds and repurchase agreements; (j) historical investment
data supplied by the research departments of Goldman Sachs, Lehman Brothers
Inc., First Boston Corporation, Morgan Stanley & Co. Incorporated, Salomon
Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson
Lufkin and Jenrette Securities Corporation; and (k) Donoghue's Money Fund Report
(which provides industry averages for 7-day annualized and compounded yields of
taxable, tax-free and U.S. government money funds).
The composition of the investments in the above-referenced indices and
the characteristics of a Fund's benchmark investments are not identical to, and
in some cases may be very different from, those of a Fund's portfolio. These
indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by the a Fund to calculate its performance figures.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Goldman Sachs as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
regulated matters believed to be of relevance to a Fund.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. The performance of various types of securities (taxable money market funds,
U.S. Treasury securities, adjustable rate mortgage securities, government
securities, municipal bonds) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
B-111
<PAGE>
. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/ All
Taxable Index) over varying periods of time.
. Credit Ratings of domestic government bonds in various countries
. Price volatility comparisons of types of securities over different periods
of time.
. Price and yield comparisons of a particular security over different periods
of time.
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other material
which highlight or summarize the services provided in support of an asset
allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein.
Performance data is based on historical results and is not intended to
indicate future performance. Total return, thirty-day yield, tax equivalent
yield and distribution rate will vary based on changes in market conditions,
portfolio expenses, portfolio investments and other factors. The value of a
Fund's shares will fluctuate and an investor's shares may be worth more or less
than their original cost upon redemption. The Trust may also, at its
discretion, from time to time make a list of a Fund's holdings available to
investors upon request.
OTHER INFORMATION
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value of each Fund during any 90-day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net
B-112
<PAGE>
asset value of each respective Fund at the time of redemption by a distribution
in kind of securities (instead of cash) from such Fund. The securities
distributed in kind would be readily marketable and would be valued for this
purpose using the same method employed in calculating each Fund's net asset
value per share. See "Net Asset Value." If a shareholder receives redemption
proceeds in kind, the shareholder should expect to incur transaction costs upon
the disposition of the securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such other period as the
SEC may by order permit for the protection of shareholders of a Fund.
The Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen LLP,
independent public accounts, for each Fund contained in each Fund's 1996 Annual
Report are hereby incorporated by reference and attached hereto. A copy of the
annual reports may be obtained without charge by writing Goldman, Sachs & Co.,
4900 Sears Tower, Chicago, Illinois 60606 or by calling Goldman, Sachs & Co., at
the telephone number on the back cover of each Fund's Prospectus. Unaudited
financial statements for each Fund for the six months ended April 30, 1997 are
also attached hereto.
B-113
<PAGE>
OTHER INFORMATION REGARDING PURCHASES,
REDEMPTIONS,EXCHANGES AND DIVIDENDS
The following information supplements the information in the Prospectus
under the captions "How to Invest," "How to Sell Shares of the Funds" and
"Dividends." Please see the Prospectus for more complete information.
OTHER PURCHASE INFORMATION
==========================
If shares of a Fund are held in a "street name" account with an Authorized
Dealer, all recordkeeping, transaction processing and payments of distributions
relating to the beneficial owner's account will be performed by the Authorized
Dealer, and not by the Fund and its Transfer Agent. Since the Funds will have
no record of the beneficial owner's transactions, a beneficial owner should
contact the Authorized Dealer to purchase, redeem or exchange shares, to make
changes in or give instructions concerning the account or to obtain information
about the account. The transfer of shares in a "street name" account to an
account with another dealer or to an account directly with the Fund involves
special procedures and will require the beneficial owner to obtain historical
purchase information about the shares in the account from the Authorized Dealer.
Authorized Dealers and other financial intermediaries provide varying
arrangements for their clients to purchase and redeem Fund shares. Some may
establish higher minimum investment requirements and others may limit the
availability of certain privileges with respect to the purchase and redemption
of shares or the reinvestment of dividends. Firms may arrange with their
clients for other investment or administrative services and may independently
establish and charge additional amounts to their clients for such services,
which charges would reduce a client's return. If shares of a Fund are held in a
"street name" account or were purchased through an Authorized Dealer,
shareholders should contact the Authorized Dealer to purchase, redeem or
exchange shares, to make changes in or give information about the account.
The Adviser, Distributor and/or their affiliates may pay, out of their own
assets, compensation to Authorized Dealers and other persons for the sale and
distribution of Class A, Class B and Class C Shares of the Funds and/or for the
servicing of those shares. These payments ("Additional Payments") would be in
addition to the payments by the Funds described in the Funds' Prospectus and
this Statement of Additional Information for distribution and shareholder
servicing and processing, and would also be in addition to the sales commissions
payable to dealers as set forth in the Prospectus. These Additional Payments
may take the form of "due diligence" payments for an Authorized Dealer's
examination of the Funds and payments for providing extra employee training and
B-114
<PAGE>
information relating to the Funds; "listing" fees for the placement of the Funds
on a dealer's list of mutual funds available for purchase by its customers;
"finders" or "referral" fees for directing investors to the Funds; "marketing
support" fees for providing assistance in promoting the sale of the Funds' Class
A, Class B and Class C Shares; and payments for the sale of Class A, Class B and
Class C Shares and/or the maintenance of Shares balances. In addition, the
Adviser, Distributor and/or their affiliates may make Additional Payments for
subaccounting, administrative and/or shareholder processing services that are in
addition to the shareholder servicing and processing fees paid by the Funds.
The Additional Payments made by the Adviser, Distributor and their affiliates
may be a fixed dollar amount, may be based on the number of customer accounts
maintained by an Authorized Dealer, or may be based on a percentage of the value
of Shares sold to, or held by, customers of the Authorized Dealers involved, and
may be different for different Authorized Dealers. Furthermore, the Adviser,
Distributor and/or their affiliates may contribute to various non-cash and cash
incentive arrangements to promote the sale of shares, as well as sponsor various
educational programs, sales contests and/or promotions in which participants may
receive prizes such as travel awards, merchandise and cash and/or investment
research pertaining to particular securities and other financial instruments or
to the securities and financial markets generally, educational information and
related support materials and hardware and/or software. The Adviser,
Distributor and their affiliates may also pay for the travel expenses, meals,
lodging and entertainment of Authorized Dealers and their salespersons and
guests in connection with educational, sales and promotional programs, subject
to applicable NASD regulations. The Distributor currently expects that such
additional bonuses or incentives will not exceed 0.50% of the amount of any
sales.
RIGHT OF ACCUMULATION - (CLASS A)
=================================
A Class A shareholder qualifies for cumulative quantity discounts if the
current purchase price of the new investment plus the shareholder's current
holdings of existing Class A Shares (acquired by purchase or exchange) of the
Funds and Class A Shares of any other Goldman Sachs Fund (as defined in the
Prospectus) total the requisite amount for receiving a discount. For example,
if a shareholder owns shares with a current market value of $65,000 and
purchases additional Class A Shares of the Government Income Fund with a
purchase price of $45,000, the sales charge for the $45,000 purchase would be
3.0% (the rate applicable to a single purchase of more than $100,000). Class A
Shares purchased without the imposition of a sales charge and shares of another
class of the Funds may not be aggregated with Class A Shares purchased subject
to a sales charge. Class A Shares of the Funds and any other Goldman Sachs Fund
purchased (i) by an individual, his spouse and his children, and (ii) by a
trustee, guardian or other fiduciary of a single trust estate or a single
fiduciary account, will be
B-115
<PAGE>
combined for the purpose of determining whether a purchase will qualify for such
right of accumulation and, if qualifying, the applicable sales charge level.
For purposes of applying the right of accumulation, shares of the Funds and any
other Goldman Sachs Fund purchased by an existing client of the Private Client
Services Division of Goldman Sachs will be combined with Class A Shares held by
any other Private Client Services account. In addition, Class A Shares of the
Funds and Class A Shares of any other Goldman Sachs Fund purchased by partners,
directors, officers or employees of the same business organization or by groups
of individuals represented by and investing on the recommendation of the same
accounting firm, certain affinity groups or other similar organization
(collectively, "eligible persons") may be combined for the purpose of
determining whether a purchase will qualify for the right of accumulation and,
if qualifying, the applicable sales charge level. This right of accumulation is
subject to the following conditions: (i) the business organization's, group's
or firm's agreement to cooperate in the offering of the Funds' shares to
eligible persons; and (ii) notification to the Funds at the time of purchase
that the investor is eligible for this right of accumulation.
STATEMENT OF INTENTION - (CLASS A)
==================================
If a shareholder anticipates purchasing at least $100,000 ($500,000 in the
case of Adjustable Rate Government Fund and $250,000 in the case of Short
Duration Government and Short Duration Tax-Free Funds) of Class A Shares of a
Fund alone or in combination with Class A Shares of any other Goldman Sachs Fund
within a 13-month period, the shareholder may purchase shares of the Fund at a
reduced sales charge by submitting a Statement of Intention (the "Statement").
Shares purchased pursuant to a Statement will be eligible for the same sales
charge discount that would have been available if all of the purchases had been
made at the same time. The shareholder or his Authorized Dealer must inform
Goldman Sachs that the Statement is in effect each time shares are purchased.
There is no obligation to purchase the full amount of shares indicated in the
Statement. A shareholder may include the value of all Class A Shares on which a
sales charge has previously been paid as an "accumulation credit" toward the
completion of the Statement, but a price readjustment will be made only on Class
A Shares purchased within ninety (90) days before submitting the Statement. The
Statement authorizes the Transfer Agent to hold in escrow a sufficient number of
shares which can be redeemed to make up any difference in the sales charge on
the amount actually invested. For purposes of satisfying the amount specified
on the Statement, the gross amount of each investment, exclusive of any
appreciation on shares previously purchased, will be taken into account.
B-116
<PAGE>
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
=================================================
A Fund shareholder should obtain and read the prospectus relating to any
other Goldman Sachs Fund or ILA Portfolio (as defined in the Prospectus) and its
shares or units and consider its investment objective, policies and applicable
fees before electing cross-reinvestment into that Fund or Portfolio. The
election to cross-reinvest dividends and capital gain distributions will not
affect the tax treatment of such dividends and distributions, which will be
treated as received by the shareholder and then used to purchase shares of the
acquired fund. Such reinvestment of dividends and distributions in shares of
other Goldman Sachs Funds or in units of ILA Portfolios is available only in
states where such reinvestment may legally be made.
AUTOMATIC EXCHANGE PROGRAM
==========================
A Fund shareholder may elect cross-reinvestment into an identical account
or an account registered in a different name or with a different address, social
security or other taxpayer identification number, provided that the account in
the acquired fund has been established, appropriate signatures have been
obtained and the minimum initial investment requirement has been satisfied. A
Fund shareholder should obtain and read the prospectus relating to any other
Goldman Sachs Fund and its shares and consider its investment objective,
policies and applicable fees and expenses before electing an automatic exchange
into that Goldman Sachs Fund.
SYSTEMATIC WITHDRAWAL PLAN
==========================
A systematic withdrawal plan (the "Systematic Withdrawal Plan") is
available to shareholders of a Fund whose shares are worth at least $5,000. The
Systematic Withdrawal Plan provides for monthly payments to the participating
shareholder of any amount not less than $50.
Dividends and capital gain distributions on shares held under the
Systematic Withdrawal Plan are reinvested in additional full and fractional
shares of the applicable Fund at net asset value. The Transfer Agent acts as
agent for the shareholder in redeeming sufficient full and fractional shares to
provide the amount of the systematic withdrawal payment. The Systematic
Withdrawal Plan may be terminated at any time. Goldman Sachs reserves the right
to initiate a fee of up to $5 per withdrawal, upon thirty (30) days written
notice to the shareholder. Withdrawal payments should not be considered to be
dividends, yield or income. If periodic withdrawals continuously exceed new
purchases and reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. The maintenance of a withdrawal plan concurrently with purchases of
additional Class A, Class B or Class C Shares would be
B-117
<PAGE>
disadvantageous because of the sales charge imposed on purchases of Class A
Shares or the imposition of a CDSC on redemptions of Class A, Class B and Class
C Shares. The CDSC applicable to Class B and Class C Shares redeemed under a
systematic withdrawal plan may be waived. See "How to Invest--Waiver or
Reduction of Contingent Deferred Sales Charge" in the Prospectus. In addition,
each withdrawal constitutes a redemption of shares, and any gain or loss
realized must be reported for federal and state income tax purposes. A
shareholder should consult his or her own tax adviser with regard to the tax
consequences of participating in the Systematic Withdrawal Plan. For further
information or to request a Systematic Withdrawal Plan, please write or call the
Transfer Agent.
OFFERING PRICE OF CLASS A SHARES
================================
Class A Shares of Government Fund, Municipal Fund, Core Fund and Global
Income Fund are sold at a maximum sales charge of 4.5%, Adjustable Rate Fund at
1.5% and Short Duration Government Fund and Short Duration Tax-Free Fund at 2%.
Using the offering price as of October 31, 1996, the maximum offering price of
the class A shares of each Fund's shares then in existence would be as follows:
<TABLE>
<CAPTION>
Offering
Net Asset Maximum Price
Value Sales Charge to Public
--------- ------------ ---------
<S> <C> <C> <C>
Adjustable Rate Fund $ 9.82 $0.15 $ 9.97
Municipal Income Fund $14.37 $0.68 $15.05
Government Income Fund $14.36 $0.68 $15.04
Global Income Fund $14.53 $0.68 $15.21
Short Duration Government N/A N/A N/A
Short Duration Tax-Free N/A N/A N/A
Core Fixed Income N/A N/A N/A
</TABLE>
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
CLASS A DISTRIBUTION PLANS. As described in the Prospectus, the Trust
with respect to the Class A Shares of each Fund has adopted a distribution plan
(the "Class A Plans") pursuant to Rule 12b-1 under the Act. See "Distribution
and Authorized Dealer Service Plans" in the Prospectus.
B-118
<PAGE>
The Class A Plans were most recently approved on April 23, 1997 by a
majority vote of the Trustees of the Trust, including a majority of the non-
interested Trustees of the Trust who have no direct or indirect financial
interest in the Class A Plans, cast in person at a meeting called for the
purpose of approving the Plans. The Plans were approved by the sole initial
shareholder of Class A Shares of Adjustable Rate Fund on May 12, 1995, Municipal
Income Fund on July 16, 1993, Government Income Fund on January 29, 1993, and
Global Income Fund on December 5, 1991.
The compensation payable under the Class A Plans may not exceed 0.25%
per annum of each Fund's average daily net assets attributable to its Class A
Shares. Currently, Goldman Sachs is waiving its entire fee under the Class A
Plans applicable to each Fund other than Global Income Fund and is limiting the
fee payable by Global Income Fund to 0.21% of average daily net assets
attributable to Class A Shares. Goldman Sachs has no current intention of
modifying or discontinuing such waivers and limitation, but may do so in the
future at its discretion.
Effective June 30, 1995, the Class A Plan for Adjustable Rate
Government, Government Income, Municipal and Global Income Funds was amended to
reduce the fee payable under the Plan from 0.50% to 0.25% of a Fund's average
daily net assets attributable to Class A Shares. At the same time, each Fund
adopted an Authorized Dealer Service Plan. See "Authorized Dealer Service
Plans." For the fiscal years ended October 31, 1996, 1995 and 1994, each Fund
paid Goldman Sachs the following amounts under the Class A Plans:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- ----------
<S> <C> <C> <C>
Adjustable Rate
Government Fund
with fee waivers $ 0 $ 0 $ N/A
without fee waivers 30,905 17,967 N/A
Municipal Income Fund
with fee waivers 0 70,023 85,242
without fee waivers 131,925 195,152 217,701
Government Income Fund
with fee waivers 0 25,630 14,350
without fee waivers 73,949 76,499 65,604
Global Income Fund
with fee waivers 493,170 645,259 1,518,814
without fee waivers 549,164 1,257,211 3,037,628
</TABLE>
Goldman Sachs may pay up to the entire amount of such fee under the Plans
to Authorized Dealers for providing services in connection with the sale of each
Fund's shares. To the extent such fee is not paid to such dealers, Goldman
Sachs may retain such fee
B-119
<PAGE>
as compensation for its services and expenses incurred in accordance with the
Plans of distributing a Fund's shares. If such fee exceeds its expenses,
Goldman Sachs may realize a profit from these arrangements.
The Plans are compensation plans which provide for the payment of a
specified fee without regard to the expenses actually incurred by Goldman Sachs.
If a Plan were terminated by the Trustees of the Trust and no successor plan
were adopted, the Fund would cease to make payments under the Plan to Goldman
Sachs and Goldman Sachs would be unable to recover the amount of any of its
unreimbursed expenditures. However, Goldman Sachs does not intend to make
expenditures for which it may be compensated under a Plan at a rate that
materially exceeds the rate of compensation received under the Plan.
During the fiscal year ended October 31, 1996, Goldman Sachs incurred the
following distribution expenses under the Class A Plan on behalf of Adjustable
Rate Government, Government Income, Municipal Income and Global Income Funds
(Goldman Sachs used the fees, if any, received under the Plan in the same
proportion to the amounts set forth below).
<TABLE>
<CAPTION>
Fiscal Year Compensation Compensation Allocable Printing and Preparation and
ended to Dealers and Expenses Overhead, Mailing of Distribution of
October 31, of the Telephone Prospectuses Sales Literature
1996 Distributor and Travel to Other than and Advertising
and its Sales Expenses Current
Personnel Shareholders
<S> <C> <C> <C> <C> <C>
Adjustable
Rate Fund/1/ N/A N/A N/A N/A N/A
Municipal
Income Fund/2/ N/A N/A N/A N/A N/A
Government
Income Fund/2/ N/A N/A N/A N/A N/A
Global
Income Fund 0 $274,757 $116,417 $36,868 $102,215
</TABLE>
_________________________
/1/ No expenses are reflected for Class A shares of Adjustable Rate Fund.
Since inception of this class, Goldman Sachs has waived the 0.25% Class A Plan
fee; no revenue has therefore been earned for the period.
/2/ Commencing June 1, 1995, Goldman Sachs is waiving the 0.25% Class A Plan
fee; as no distribution revenue has therefore been earned after June 1, 1995, no
expenses are reflected above.
B-120
<PAGE>
Under the Class A Plans, Goldman Sachs, as distributor of each Fund's Class
A Shares, will provide to the Trustees of the Trust for their review, and the
Trustees of the Trust will review at least quarterly a written report of the
services provided and amounts expended by Goldman Sachs under the Plans and the
purposes for which such services were performed and expenditures were made.
The Class A Plans will remain in effect until May 1, 1998 and from year to
year thereafter, provided such continuance is approved annually by a majority
vote of the Trustees of the Trust, including a majority of the non-interested
Trustees of the Trust who have no direct or indirect financial interest in the
Class A Plans. A Class A Plan may not be amended to increase materially the
amount to be spent for the services described therein without approval of a
majority of the outstanding Class A Shares of the applicable Fund. All material
amendments of the Class A Plan must also be approved by the Trustees of the
Trust in the manner described above. A Class A Plan may be terminated at any
time without payment of any penalty by a vote of a majority of the non-
interested Trustees of the Trust or by vote of a majority of the Class A Shares
of the applicable Fund. So long as a Class A Plan is in effect, the selection
and nomination of non-interested Trustees of the Trust shall be committed to the
discretion of the non-interested Trustees of the Trust. The Trustees of the
Trust have determined that in their judgment there is a reasonable likelihood
that the Plans will benefit the Funds and their Class A Shareholders.
CLASS B DISTRIBUTION PLAN. As described in the Prospectus, the Trust has
adopted on behalf of Short Duration Government Fund, Short Duration Tax Free
Fund, Municipal Income Fund, Government Income Fund, Core Fixed Income Fund,
Global Income Fund and High Yield Fund, distribution plans (the "Class B Plans")
pursuant to Rule 12b-1 under the Act with respect to Class B Shares. See
"Distribution and Authorized Dealer Service Plans" in the Prospectus.
The Class B Plans were most recently approved on April 23, 1997 on behalf
of Municipal Income, Government Income, Global Income, High Yield, Short
Duration Government, Short Duration Tax-Free and Core Fixed Income Funds, in
each case by a majority vote of the Trust's Board of Trustees, including a
majority of the Trustees who are not interested persons of the Trust and have no
direct or indirect financial interest in the Class B Plans (the "non-interested
Trustees"), cast in person at a meeting called for the purpose of approving the
Class B Plans.
With respect to each Fund, the compensation payable under the Class B Plans
is equal to 0.75% per annum of the average daily net assets attributable to
Class B Shares of that Fund. The fees received by Goldman Sachs under the Class
B Plans and contingent deferred sales charge on Class B Shares may be sold by
Goldman
B-121
<PAGE>
Sachs as distributor to entities which provide financing for payments to
Authorized Dealers in respect of sales of Class B Shares. To the extent such
fee is not paid to such dealers, Goldman Sachs may retain such fee as
compensation for its services and expenses of distributing the Funds' Class B
Shares. If such fee exceeds its expenses, Goldman Sachs may realize a profit
from these arrangements.
For the fiscal years ended October 31, 1996, each Fund paid Goldman Sachs
the following amounts under the Class B Plans:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Municipal Income Fund
with fee waivers 378
without fee waivers 378
Government Income Fund
with fee waivers 332
without fee waivers 332
Global Income Fund
with fee waivers 374
without fee waivers 374
</TABLE>
Goldman Sachs may pay up to the entire amount of such fee under the Plans
to Authorized Dealers for providing services in connection with the sale of each
Fund's shares. To the extent such fee is not paid to such dealers, Goldman
Sachs may retain such fee as compensation for its services and expenses incurred
in accordance with the Plans of distributing a Fund's shares. If such fee
exceeds its expenses, Goldman Sachs may realize a profit from these
arrangements.
The Class B Plans are compensation plans which provide for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class B Plans were terminated by the Trust's
Board of Trustees and no successor plan were adopted, the Funds would cease to
make distribution payments to Goldman Sachs and Goldman Sachs would be unable to
recover the amount of any of its unreimbursed distribu tion expenditures.
During the fiscal year ended October 31, 1996, Goldman Sachs incurred the
following expenses in connection with distribution under the Class B Plan on
behalf of each Fund (Goldman Sachs used the fees, if any, received under the
Plan in the same proportion to the amounts set forth below).
B-122
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Compensation Compensation Allocable Printing and Preparation and
ended to Dealers and Expenses Overhead, Mailing of Distribution of
October 31, of the Telephone Prospectuses Sales Literature
1996 Distributor and Travel to Other than and Advertising
and its Sales Expenses Current
Personnel Shareholders
<S> <C> <C> <C> <C> <C>
Municipal
Income Fund $241/(1)/ N/A N/A N/A N/A
Government
Income Fund $299/(1)/ N/A N/A N/A N/A
Global
Income Fund $247/(1)/ N/A N/A N/A N/A
</TABLE>
_______________________
(1) Advance commissions paid to dealers of 4% on Class B sales are
considered deferred assets which are amortized over a period of 6
years; amounts presented above reflect amortization expense recorded
during the period presented.
Under the Class B Plans, Goldman Sachs, as distributor of the Funds'
shares, will provide to the Board of Trustees for its review, and the Board will
review at least quarterly, a written report of the services provided and amounts
expended by Goldman Sachs under the Class B Plans and the purposes for which
such services were performed and expenditures were made.
The Class B Plans will remain in effect with respect to the Funds from year
to year, provided such continuance is approved annually by a majority vote of
the Board of Trustees, including a majority of the non-interested Trustees. A
Class B Plan may not be amended to increase materially the amount to be spent
for the services described therein as to any Fund without approval of a majority
of the outstanding Class B Shares of that Fund. All material amendments of the
Class B Plan must also be approved by the Board of Trustees of the Trust in the
manner described above. With respect to any Fund, a Class B Plan may be
terminated at any time without payment of any penalty by a vote of the majority
of the non-interested Trustees or by vote of a majority of the outstanding
voting securities of the Class B Shares of that Fund. So long as a Class B Plan
is in effect, the selection and nomination of non-interested Trustees shall be
committed to the discretion of the non-interested Trustees. The Trustees have
determined that in their judgment there is a reasonable likelihood that the
Class B Plans will benefit each Fund and their respective Class B shareholders.
CLASS C DISTRIBUTION PLANS. As described in the Prospectus, the Trust has
adopted, on behalf of the Funds, distribution plans (the "Class C Plans")
pursuant to Rule 12b-1 under the Act with
B-123
<PAGE>
respect to the Class C Shares. See "Distribution and Authorized Dealer Service
Plans" in the Prospectus.
The Class C Plans of each Fund were approved for the Funds on July 22,
1997, on behalf of the Trust by a majority vote of the Trustees, including a
majority of the non-interested Trustees who have no direct or indirect financial
interest in the Class C Plans, cast in person at a meeting called for the
purpose of approving the Class C Plans.
With respect to each Fund, the compensation payable under the Class C Plans
is equal to 0.75% per annum of the average daily net assets attributable to
Class C Shares of that Fund. To the extent such fee is not paid to such
dealers, Goldman Sachs may retain such fee as compensation for its services and
expenses of distributing the Funds' Class C Shares.
The Class C Plans are compensation plans which provide for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class C Plans were terminated by the Trustees
and no successor plan were adopted, the Funds would cease to make distribution
payments to Goldman Sachs and Goldman Sachs would be unable to recover the
amount of any of its unreimbursed distribution expenditures.
Under the Class C Plans, Goldman Sachs, as distributor of the Funds'
shares, will provide to the Board of Trustees for its review, and the Board will
review at least quarterly, a written report of the services provided and amounts
expended by Goldman Sachs under the Class C Plans and the purposes for which
such services were performed and expenditures were made.
The Class C Plans will remain in effect until May 1, 1998 and from year to
year, provided such continuance is approved annually by a majority vote of the
Trustees, including a majority of the non-interested Trustees. A Class C Plan
may not be amended to increase materially the amount to be spent for the
services described therein as to any Fund without approval of a majority of the
outstanding Class C Shares of that Fund. All material amendments of the Class C
Plans must also be approved by the Trustees in the manner described above. With
respect to any Fund, a Class C Plan may be terminated at any time without
payment of any penalty by a vote of the majority of the non-interested Trustees
or by vote of a majority of the outstanding voting securities of the Class C
Shares of that Fund. So long as Class C Plans are in effect, the selection and
nomination of non-interested Trustees shall be committed to the discretion of
the non-interested Trustees. The Trustees have determined that in their
judgment there is a reasonable likelihood that the Class C Plans will benefit
each Fund and their respective Class C shareholders.
B-124
<PAGE>
AUTHORIZED DEALER SERVICE PLAN. As described in the Prospectus, the Trust
with respect to each Fund has adopted non-Rule 12b-1 Authorized Dealer Service
Plans (the "Service Plans") with respect to Class A, Class B and Class C Shares.
See "Distribution and Authorized Dealer Service Plans" in the Prospectus.
The compensation under the Service Plans may not exceed 0.25% per annum of
the average daily net assets attributable to the class of shares to which the
plan relates. Up to the entire amount of the fee under the Service Plans may be
paid to Authorized Dealers for providing personal and account maintenance
services in connection with each Fund's Shares. Under the Service Plans,
Goldman Sachs will provide to the Trustees for their review at least quarterly a
written report of the services provided and amount expended under the Service
Plans.
For the fiscal years ended October 31, 1996 and October 31, 1995 the
Adjustable Rate Government, Government Income, Municipal Income and Global
Income Funds paid Goldman Sachs the following amounts under their respective
Service Plans with respect to its Class A Shares and Class B shares:
<TABLE>
<CAPTION>
Class A Class B
1996 1995 1996
-------- ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund $ 30,905 17,967 $ N/A
Municipal Income Fund 131,925 55,106 126
Government Income Fund 74,060 25,239 111
Global Income Fund 549,164 281,949 125
</TABLE>
The Service Plans applicable to Class A, Class B and Class C Shares were
most recently approved on April 23, 1997 by a majority of the Board of Trustees
of the Trust. The Service Plans will remain in effect until May 1, 1998 and
from year to year thereafter, provided that such continuance is approved
annually by a majority vote of the Trustees, including a majority of the non-
interested Trustees who have no direct or indirect financial interest in the
Service Plans.
B-125
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with
a robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and
Treasury prices remained in a narrow trading range throughout the summer and
fall. During September and October, however, interest rates retreated and the
bond market strengthened. The rebound was primarily due to evidence of a
slowing U.S. economy and strong demand for Treasury bonds from the central banks
of China, Japan and Germany, which accelerated their purchases dramatically
toward the end of the period. By the end of October, prices of 30-year
Treasuries broke out of the trading range that had persisted for over six
months.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 GS Core Fixed Income Fund 22
GS Adjustable Rate Government Fund 3 Financial Statements 30
GS Short Duration Government Fund 9 Notes to Financial Statements 34
GS Short Duration Tax-Free Fund 15 Financial Highlights 42
- ---------------------------------------------------------------------------------------------------------
</TABLE>
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter,
with annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Tresuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[GRAPH APPEARS HERE]
The yield curve steepened on the short end and shifted upward on the longer end.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significiantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a
Republican-controlled Congress, which points toward continued budgetary
restraint.
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and
we look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Adjustable Rate Government Fund seeks a high level of current income
consistent with low volatility of principal. The portfolio ordinarily invests
substantially all of its assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, with primary emphasis on
adjustable rate mortgage securities (ARMs). Under normal interest rate
conditions, the fund's duration is expected to be in a range approximately equal
to that of a six-month to one-year U.S. Treasury security.
The ARM Market Began Weak but Improved as Prepayments Slowed and Demand
Increased
The key factors affecting ARM performance during the 12 months under review
were the changing direction of interest rates and, consequently, the pace of
mortgage prepayments. From November 1995 through early February 1996, declining
interest rates spurred homeowners to switch from ARMs to fixed rate mortgages to
lock in attractive rates. The high level of refinancing activity depressed the
ARM market and caused yield spreads between ARMs and Treasuries to widen until
the end of January 1996, when long-term interest rates began to rise. Throughout
the spring, the ARM market strengthened as interest rates climbed sharply.
Spreads between ARMs and Treasuries continued to tighten even after rates
stabilized from the end of May through August, partly due to strong demand from
"crossover" investors from other short-duration fixed income sectors. Although
interest rates declined in September and October, mortgage prepayment fears
remained subdued as rates were still relatively high compared with their levels
a year earlier. Investor demand for seasoned one-year Constant Maturity Treasury
(CMT) ARMs, which our fund stresses, remained especially strong due to their
relative prepayment stability in a falling rate environment.
Performance Review
During the period under review, the fund's Institutional, Administration
and Class A shares all significantly outperformed both the six-month U.S.
Treasury bill and the one-year U.S. Treasury bill. (As of October 31, the fund's
duration was 0.7 years, in between that of the six-month and the one-year U.S.
Treasury bill.) The fund's positive performance can be attributed to the
incremental yield its ARM holdings delivered over similar-duration Treasuries
and tightening spreads between ARMs and Treasuries.
- ------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six-
Month One-Year
Institu- Adminis- Class Treasury Treasury
tional tration A Bill Bill
------ ------- - ---- ----
<S> <C> <C> <C> <C> <C>
Total Return (based 6.86% 6.60% 6.60% 5.48% 5.82%
on net asset value)
- ------------------------------------------------------------------------
Return From 6.25% 5.99% 5.99% NA NA
Monthly
Distributions
- ------------------------------------------------------------------------
Return From Price 0.61% 0.61% 0.61% NA NA
Appreciation
- ------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.83 $9.83 NA NA
- ------------------------------------------------------------------------
NAV Change +$0.06 +$0.06 +$0.06 NA NA
- ------------------------------------------------------------------------
</TABLE>
We are also pleased to note that the fund outperformed most of its peers.
For the 12 months ended October 31, 1996, the fund's Institutional shares ranked
fourth out of 53 adjustable rate mortgage funds based on total return, as
tracked by Lipper Analytical Services, Inc. (Lipper does not rank the fund's
Administration and Class A shares. Please note that Lipper rankings do not take
sales charges into account and that past performance is not a guarantee of
future results.) As of October 31, 1996, the
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
fund's Institutional shares were ranked "four stars" by Morningstar, Inc., an
independent rating agency.\1\
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Repos/Cash Equivalents 3.4%
CMOs 3.5%
SBA Floaters 7.8%
ARMs 85.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ---------------------------------------------
/1/ Source (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received five
and four stars for the three- and five-year periods, respectively. The
Institutional shares were rated among 1,054 and 572 fixed income funds for the
three- and five-year periods, respectively. For the one-year period, the
Institutional shares were rated among 1,654 fixed income funds. 22.5% of the
funds receive the four-star rating. The Morningstar rating applies only to the
fund's Institutional shares; the fund's Class A and Administration shares have
not been rated. Class A and Administration shares are subject to additional fees
that may have the effect of lowering performance and may affect and future
Morningstar rating. Morningstar rates funds against their peers in the same
category. In all, there are five Morningstar categories (domestic equity,
international equity, fixed income, municipal and hybrid). Morningstar ratings
range from five stars (highest) to one star (lowest). Funds with five-star
ratings are in the top 10% of their category, four-star ratings in the next
22.5%, three stars the next 35%, two stars the next 22.5% and one star the
lowest 10% of their categories.
Portfolio Composition and Investment Strategies
During the period under review, the portfolio's sector allocation shifted
slightly, with reductions in collateralized mortgage obligations (CMOs) and
Small Business Administration (SBA) loans in favor of ARMs.
. ARMs. As of October 31, 1996, ARMs accounted for 85.3% of the portfolio, up
from 80.2% a year ago. We emphasized seasoned, one-year CMT issues that offered
relative prepayment and duration stability as well as incremental yield over
Treasuries. The position significantly contributed to the fund's performance
during the period.
. SBA Floaters. The portfolio held a 7.8% allocation in securities backed by
Small Business Administration loans, which traded at attractive spreads relative
to Treasuries. We trimmed the portfolio's holdings in the sector slightly from
8.9% a year ago to take profits after the position performed well.
. CMOs. CMOs accounted for 3.5% of the portfolio as of October 31,
approximately half their weighting a year ago (7.7%). This position provided
relatively stable cash flows and a greater number of opportunities to take
advantage of potential mispricing than comparable fixed income sectors. During
December 1995 and January 1996, the sector became expensive versus
similar-duration Treasuries, and we subsequently sold part of the fund's
holdings at a profit. The fund's CMO position included 1.4% in floaters, which
added incremental yield, and 0.4% in sequential-pay CMOs. In addition, the fund
held CMO super floaters, discussed below.
. Prudent Use of Derivatives. We used higher risk derivatives very sparingly to
enhance the fund's performance without taking on additional undue risk. As of
October 31, 1996, the fund held a 1.5% position in super floaters, which
contributed to its performance during the year. (Super floaters are floating
rate securities whose coupons reset higher and more quickly than regular
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
ARMs in a rising interest rate environment.) The portfolio also included minor
positions in interest-only (IO) and inverse IO securities.
. Duration. As of October 31, the duration of the fund was 0.7 years, unchanged
from a year earlier. Rather than attempting to make interest rate predictions,
we seek to provide excess returns over a similar-duration U.S. Treasury security
through sector weightings and security selection. During the period, we used
financial futures as a tool to help manage the portfolio's duration.
. Credit Quality. The fund invests exclusively in securities issued by the U.S.
government and its agencies or instrumentalities, which are considered to be of
the highest credit quality.
ARM Outlook: Seasoned ARMs Are Expected to Perform Well Relative to Other
Sectors
Our outlook for the ARM sector is moderately constructive. Although spreads
have tightened over the course of the year, we expect them to remain stable for
the near term due to strong investor demand and limited supply. In addition, we
believe that our core holding of seasoned ARMs should fare well relative to less
seasoned issues if rates continue to decline and prepayments increase.
Distribution Policy
During the 12-month period ended October 31, 1996, the fund's Institutional,
Administration and Class A shares distributed $0.59, $0.57 and $0.57 per
share, respectively.
The fund distributes substantially all of its investment company taxable
income. The dividend is set at the start of each month, based on the income the
fund is expected to generate. However, because the fund invests primarily in
mortgage securities that are subject to prepayments, we cannot precisely predict
the amount of principal and interest that a portfolio will receive. Therefore,
at times a portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy has not affected the management of
the fund nor significantly affected its net asset value (NAV) per share.
In conclusion, we appreciate your investment in the GS Adjustable Rate
Government Fund and will continue to seek attractive fixed income investments in
the months ahead.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
GS Adjustable Rate Government Fund
November 29, 1996
- --------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Adjustable Rate Government Fund based on a normal minimum
initial investment, for each class, is compared to its benchmarks--the Lehman
Brothers Mutual Fund Short (1-2) U.S. Government Index ("Lehman 1-2 Index") and
the six month and one year U.S. Treasury Bills ("6-Month T-Bill / 1-Year T-
Bill"). All performance data shown represents past performance and should not be
considered indicative of future performance which will fluctuate as market
conditions change. The investment return and principal value of an investment
will fluctuate with changes in market conditions so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
HYPOTHETICAL INVESTMENTS/(a)/
Institutional Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/1/91 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/91 51,047 51,581 51,179 50,870
- --------------------------------------------------------------------------------
10/31/92 54,176 55,506 54,161 53,376
- --------------------------------------------------------------------------------
10/31/93 56,414 58,368 56,198 55,197
- --------------------------------------------------------------------------------
10/31/94 57,475 59,511 57,744 57,257
- --------------------------------------------------------------------------------
10/31/95 61,355 64,343 61,766 60,819
- --------------------------------------------------------------------------------
10/31/96 65,576 68,197 65,373 64,158
- --------------------------------------------------------------------------------
</TABLE>
Administration Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Administration Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/93 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/93 50,917 50,931 50,785 50,780
- --------------------------------------------------------------------------------
10/31/94 51,747 51,931 52,182 52,675
- --------------------------------------------------------------------------------
10/31/95 55,100 56,148 55,835 55,951
- --------------------------------------------------------------------------------
10/31/96 58,742 59,511 59,096 59,023
- --------------------------------------------------------------------------------
</TABLE>
Class A Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Short (1-2) One Year Six Month
(no sales charge) (w/ sales charge) Gov't Index T-Bill T-Bill
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/1/95 10,000 9,850 10,000 10,000 10,000
- ---------------------------------------------------------------------------------------------------
10/31/95 10,222 10,069 10,277 10,260 10,246
- ---------------------------------------------------------------------------------------------------
10/31/96 10,898 10,735 10,893 10,859 10,809
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
Average Annual Total Return
--------------------------------------------------
One Year Five Year Since Inception/(b)/
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Institutional Shares 6.86% 5.13% 5.32%
- --------------------------------------------------------------------------------
Administration Shares 6.60% N/A 4.69%
- --------------------------------------------------------------------------------
Class A Shares
excluding sales charge 6.60% N/A 6.40%
- --------------------------------------------------------------------------------
Class A Shares
including sales charge 4.99% N/A 5.29%
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ For comparative purposes, initial investments are assumed to be made on
the first day of the month following the commencement of operations.
/(b)/ The Institutional, Administration and Class A shares commenced operations
July 17, 1991, April 15, 1993 and May 15, 1995, respectively.
- --------------------------------------------------------------------------------
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations--96.3%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(d)--25.6%
<S> <C> <C> <C>
$ 409,475 7.33% 11/01/17 $ 422,849
1,443,341 7.54 12/01/18 1,482,297
2,695,805 7.40 07/01/18 2,793,527
1,799,007 7.69 01/01/19 1,857,314
10,670,041 7.38 05/01/19 11,021,833
20,341,589 7.58 11/01/19 21,218,921
5,280,731 7.70 05/01/20 5,464,395
19,004,192 7.42 06/01/20 19,698,985
37,238,927 7.73 02/01/22/(a)/ 38,845,042
4,072,603 7.39 08/01/22 4,215,145
2,234,941 7.56 08/01/22 2,331,334
6,804,200 7.53 09/01/22 7,067,182
17,808,242 7.61 11/01/22 18,565,092
10,195,026 7.63 06/01/24 10,506,892
3,045,972 7.31 12/01/24 3,122,121
3,495,056 7.20 02/01/28 3,604,835
4,584,605 7.09 07/01/29 4,671,987
1,815,464 7.62 07/01/30 1,892,059
2,055,859 7.39 05/01/31 2,110,462
- --------------------------------------------------------------------------------
$160,892,272
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)--55.4%
$ 1,138,394 7.80% 11/01/14 $ 1,187,493
6,190,161 6.54 03/01/17 6,277,194
3,662,002 7.56 03/01/17 3,799,511
4,221,326 6.21 03/01/18 4,247,709
6,778,125 7.66 04/01/18 7,046,064
874,932 7.63 05/01/18 901,180
7,405,181 7.34 07/01/18 7,724,566
5,249,737 7.41 07/01/18 5,456,472
6,398,858 7.08 08/01/18 6,609,828
3,972,504 7.64 08/01/18 4,143,838
3,746,795 7.42 10/01/18 3,896,068
6,780,326 7.41 11/01/18 7,009,162
2,068,449 7.29 12/01/18 2,138,591
13,495,001 7.67 12/01/18/(a)/ 14,077,040
3,484,080 7.27 06/01/19 3,597,870
4,440,531 7.31 07/01/19 4,579,297
1,698,502 7.34 07/01/19 1,755,826
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)(continued)
<S> <C> <C> <C>
$ 2,849,462 7.46% 01/01/20 $ 2,942,526
3,037,915 7.70 03/01/20 3,168,940
8,771,533 7.40 07/01/20 9,055,204
4,563,057 7.48 09/01/20 4,746,994
4,953,382 7.53 02/01/21 5,167,022
5,289,644 7.28 04/01/21 5,464,044
74,489,219 7.51 09/01/21/(a)/ 77,678,102
4,088,820 7.95 11/01/21 4,210,095
22,090,964 7.56 02/01/22 23,043,747
14,611,569 7.68 06/01/22 15,112,892
6,682,461 7.47 08/01/22 6,893,894
759,290 7.48 08/01/22 776,511
38,116,807 7.56 09/01/22/(a)/ 39,760,785
1,934,079 7.53 02/01/23 1,968,235
277,701 6.22 12/01/23 276,574
18,079,861 7.48 09/01/25 18,856,752
2,565,500 7.33 10/01/27 2,653,702
1,177,401 7.04 07/01/29 1,205,729
3,288,252 7.59 04/01/30 3,376,640
8,565,310 7.58 01/01/31 8,934,732
28,276,177 6.09 02/01/31 28,161,376
- --------------------------------------------------------------------------------
$ 347,902,205
- --------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association
(GNMA)(d) -- 2.2%
$ 1,527,707 6.50% 03/20/16 $ 1,551,096
1,806,135 7.12 08/20/17 1,839,711
1,026,294 7.12 08/20/18 1,046,984
8,886,125 6.00 11/20/25 9,040,211
- --------------------------------------------------------------------------------
$ 13,478,002
- --------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(d)--7.8%
$ 1,416,469 6.75% 10/25/14 $ 1,449,883
2,562,866 6.75 02/25/15 2,624,144
3,684,715 6.75 03/25/15 3,773,370
2,839,268 6.75 04/25/15 2,907,581
2,057,142 6.75 05/25/15 2,106,637
1,036,764 6.75 08/25/15 1,062,040
1,684,161 6.75 09/25/15 1,725,220
2,069,161 6.75 10/25/15 2,119,917
1,110,382 6.37 09/25/16 1,125,305
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations (continued)
Adjustable Rate Small Business Administration
(SBA)(d)(continued)
$ 4,125,881 6.37% 07/25/17 $ 4,181,333
9,019,837 6.37 08/25/17 9,141,062
4,040,857 6.37 09/25/17 4,095,166
3,577,478 6.37 10/25/17 3,625,559
8,937,943 6.37 02/25/18 9,058,069
- --------------------------------------------------------------------------------
$ 48,995,286
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations-5.3%
Adjustable Rate CMOs(d)-1.8%
FNMA Remic Trust 1990-145, Class A
$ 11,024,778 6.51% 12/25/20 $ 11,025,439
- --------------------------------------------------------------------------------
Inverse Floater(d)-0.0%
FNMA Remic Trust 1991-91, Class S
$ 164,490 17.66% 07/25/98 $ 174,261
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(d)-0.0%
FNMA Remic Trust 1992-157, Class SA
$2,002,645/(b)/ 14.10% 03/25/04 $ 168,743
- --------------------------------------------------------------------------------
Inverse IOette-0.1%
FHLMC Series 1164, Class O
$ 36,128/(b)/ 29.44% 11/15/06 $ 489,372
- --------------------------------------------------------------------------------
IOette-0.1%
FNMA Remic Trust 1990-145, Class B
$ 27,091/(b)/ 10.00% 12/25/20 $ 657,906
- --------------------------------------------------------------------------------
Regular Floater CMOs(d)-1.4%
FHLMC Series 1011, Class F
$ 8,872,813 6.34% 11/15/20 $ 9,069,612
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs-0.4%
FNMA Remic Trust 1990-65, Class U
$ 616,589 9.50% 11/25/06 $ 619,475
FNMA Remic Trust 1991-37, Class E
1,664,339 8.50% 04/25/05 1,679,418
- --------------------------------------------------------------------------------
$ 2,298,893
- --------------------------------------------------------------------------------
Super Floater CMOs(d)-1.5%
FNMA Remic Trust 1992-157, Class FA
$ 9,859,177(b) 1.22% 03/25/04 $ 9,631,134
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 33,515,360
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $605,544,961) $604,783,125
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Repurchase Agreement-2.1%
Joint Repurchase Agreement Account
$ 13,000,000 5.58% 11/01/96/(a)/$ 13,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $13,000,000) $ 13,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $618,544,961/(c)/) $617,783,125
================================================================================
Futures contracts open at October 31, 1996:
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- --------------------------------- ------------- ------------------- ----------------
<S> <C> <C> <C>
1-Month Libor 45 November 1996 $4,500
Euro Dollars 365 December 1996 309,500
Euro Dollars 280 March 1997 95,000
Euro Dollars 55 June 1997 28,000
5-Year U.S. Treasury Notes 67 December 1996 9,766
10-Year U.S. Treasury Notes (270) December 1996 (302,812)
----------------
$143,954
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 2,404,589
Gross unrealized loss for investments in which cost
exceeds value (3,318,600)
- --------------------------------------------------------------------------------------
Net unrealized gain $ (914,011)
======================================================================================
</TABLE>
(a) Portions of these securities are being segregated for futures margin
requirements.
(b) Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
(c) The aggregate costs for federal income tax purposes is $618,697,136.
(d) Variable rate security. Coupon rate disclosed is that which is in effect
at October 31, 1996.
(e) Each Euro Dollar contract represents $1,000,000 in notional par value.
Each Libor contract represents $3,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and U.S. Treasury Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $879,000,000 and $200,909,125, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Government Fund's primary objective is to provide a
high level of current income by investing in a portfolio that consists of
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including mortgage-backed securities as well as repurchase
agreements collateralized by such instruments. Under normal interest rate
conditions, the fund's duration is expected to be within one-half year of its
benchmark, the two-year U.S. Treasury security.
Performance Review
During the period under review, the fund's Institutional, Administration
and Service shares all outperformed the two-year U.S. Treasury security,
primarily due to our emphasis on and the favorable performance of
mortgage-backed security investments, as well as our ability to identify
relative value within the sector. In addition, the portfolio's term structure,
which overweighted one- and three-year maturity securities, also contributed to
performance when the yield curve steepened.
During the period, the net asset values (NAVs) of the fund's Institutional
and Administration shares (which opened February 28, 1996) were nearly unchanged
while the NAV of the fund's Service shares (which opened April 10, 1996) rose
$0.10 as interest rates stabilized and subsequently declined.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (4/10/96-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net 6.75% 4.00% 4.35%
asset value
- --------------------------------------------------------------------------------
Return From Monthly 6.65% 4.10% 3.32%
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.10% -0.10% 1.03%
Depreciation/
Appreciation
- --------------------------------------------------------------------------------
Total Return of Two-Year 5.64% 3.61% 3.71%
U.S. Treasury
- --------------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.85 $9.82
- --------------------------------------------------------------------------------
NAV Change +$0.01 -$0.01 +$0.10
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund performed well compared with its peers. The Institutional shares
ranked in the top 10% of short-intermediate U.S. government funds (fifth out of
88) based on total return for the 12-month period ended October 31, 1996,
according to Lipper Analytical Services, Inc. (The Administration and Service
shares were not ranked for this period because they were in existence less than
12 months. Please note that Lipper rankings do not take sales charges into
account and that past performance is not a guarantee of future results.)
Portfolio Composition and Investment Strategies
The fund significantly reduced its allocation in U.S. Treasuries in favor
of collateralized mortgage obligations (CMOs), which offered more attractive
return potential according to our analysis. This strategy proved successful as
mortgage-backed securities outperformed comparable-duration Treasuries.
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Repos/Cash Equivalents 1.1%
Fixed Rate Mortgage
Pass-Throughs 7.2%
U.S. Treasuries 15.8%
ARMs 19.0%
CMOs 56.9%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- --------------------------------------------------------------------------------
. CMOs. During the period, we more than doubled the portfolio's allocation in
collateralized mortgage obligations, with most of the increase occurring from
February through April. As of October 31, 56.9% of the portfolio was invested in
CMOs, of which 24.7% were sequential-pay CMOs (up from 10.4% last year) and
17.0% were planned amortization class (PAC) CMOs (up from 1.9% last year).
These sectors were favored for their relatively stable cash flows and
incremental yields over Treasuries, and they performed well during the period.
Though the CMO sector was fairly valued relative to equal-duration Treasuries
from January through the end of the period, our extensive research enabled us to
identify specific securities that presented attractive investment opportunities.
. ARMs. Adjustable rate mortgage securities (ARMs) accounted for 19.0% of the
portfolio as of October 31, down from 23.7% last year. We focused on seasoned
securities indexed to the one-year Constant Maturity Treasury (CMT), which
offered attractive income stability and low relative prepayment risk. A high
level of mortgage refinancing adversely impacted the sector in November and
December of 1995 when rates had eased, but ARMs strengthened when rates started
to rise during the first quarter of 1996 and prepayment fears faded.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio's
position in U.S. Treasuries was cut to 15.8%, down from 37.1% a year ago, as we
identified securities in other sectors that offered higher incremental yield. In
addition, repurchase agreements/cash equivalents were reduced to 1.1% from 4.7%
a year ago.
. Fixed Rate Mortgage Pass-Throughs. Fixed rate pass-throughs, a 7.2%
allocation, offered more attractive yield spreads than most of the other
high-credit quality fixed income sectors. During the period under review, the
technical balance of the pass-through market strengthened, with investor demand
improving as prepayments and supply slowed from the high levels experienced last
November. We continued to emphasize seasoned premium mortgages because they
typically have lower prepayment risk than recently issued mortgages.
. Issuer Composition. The breakdown of the portfolio's mortgage-backed security
holdings by issuer was 37.8% in Federal National Mortgage Association (FNMA)
issues, 36.0% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 9.2%
in Government National Mortgage Association (GNMA) issues.
. Credit Quality. The fund invests exclusively in issues of the U.S. government
and its agencies or instrumentalities.
. Prudent Use of Derivatives. Sequential-pay CMOs and PAC CMOs, which are
typically considered to be lower risk derivatives, represented 24.7% and 17.0%
of the portfolio, respectively, as noted earlier. Other derivative investments
included CMO floaters (10.0%), which are securities whose coupons reset upward
as interest rates rise, and inverse floaters (3.2%), which have coupons that
reset in the opposite direction from interest rates. When floaters are held
along with inverse floaters, they can produce a position with a similar risk
profile as a fixed rate pass-through but provide a higher yield. The fund also
held a small position (1.3%) in PAC interest-only securities (IOs). We invest in
such higher risk derivatives very sparingly in an effort to enhance returns
without taking undue risk. In addition, we used futures as a tool to help manage
the portfolio's duration.
Market Outlook
In general, we have a cautiously optimistic view of the mortgage-backed
securities market in the near term. In the ARM sector, we expect spreads to
remain stable due to strong investor demand and limited supply. Given the
environment of declining rates for the past few months, we will continue to
emphasize seasoned one-year CMT
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
ARMs due to the relative prepayment stability that these securities offer.
Though we have a neutral outlook for the CMO market, we continue to find areas
that offer attractive investment opportunities. In the mortgage pass-through
market, we believe the recent widening of yield spreads during September and
October has been somewhat overdone, but we will remain vigilant to an increase
in prepayments that may result from a further decline in interest rates. We will
continue to actively allocate the portfolio's assets among the various fixed
income sectors as their relative value changes throughout the coming year.
Distribution Policy
During the period under review, the fund's Institutional shares paid out
distributions of $0.63 per share. From their inceptions through October 31,
1996, the fund's Administration and Service shares distributed $0.39 per share
and $0.32 per share, respectively. (The Administration shares opened on February
28, 1996 and the Service shares opened on April 10, 1996.) The fund distributes
substantially all of its investment company taxable income, as required by tax
law.
We thank you for your support and look forward to continuing to meet your
investment needs in the future.
Sincerely,
/s/Jonathan A. Beinner
Jonathan A. Beinner
/s/James B. Clark
James B. Clark
Portfolio Managers
GS Short Duration Government Fund
November 29, 1996
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short-Term Government Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmarks, the U.S.
2-Year Treasury Bill ("2-Year T-Bill") and the Lehman Brothers Mutual Fund Short
(1-3) U.S. Government Index ("Lehman Short (1-3) Gov't Index"). All performance
data shown represents past performance and should not be considered indicative
of future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Shares(a)
Institutional Shares 2-Year\r T-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
9/1/88 50,000 50,000 50,000
10/31/88 51,283 51,057 51,091
10/21/89 55,940 55,412 55,919
10/31/90 60,543 59,876 60,861
10/31/91 67,161 66,615 67,699
10/31/92 71,365 72,161 73,208
10/31/93 75,326 76,335 77,446
10/31/94 76,072 77,058 78,339
10/31/95 82,895 84,009 85,256
10/31/96 88,507 88,756 90,346
</TABLE>
Administration Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Administration Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
2/28/96 50,000 50,000 50,000
10/31/96 52,000 51,805 51,760
</TABLE>
Service Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Service Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
4/10/96 50,000 50,000 50,000
10/31/96 52,175 51,855 52,110
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------
Average Annual Total Return
-----------------------------------------------------------
One Year Five Year Since Inception(b)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional shares 6.75% 5.6% 7.24%
- --------------------------------------------------------------------------------
Administrative shares N/A N/A 4.00(c)
- --------------------------------------------------------------------------------
Service shares N/A N/A 4.35(c)
- --------------------------------------------------------------------------------
</TABLE>
/a/ For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
/b/ The Institutional, Administration and Service shares commenced operations
August 15, 1988, February 28, 1996 and April 10, 1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--82.4%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(a)--14.2%
$ 1,208,677 6.00% 11/15/16 $ 1,198,196
1,941,838 7.54 12/01/18/(b)/ 1,994,248
8,544,958 7.73 02/01/22/(b)/ 8,913,502
2,234,941 7.56 08/01/22 2,331,334
- --------------------------------------------------------------------------------
$ 14,437,280
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(a)--6.2%
$ 389,769 9.00% 12/01/97 $ 402,558
2,732,146 7.80 11/01/14/(b)/ 2,849,984
3,025,230 7.48 08/01/22/(b)/ 3,093,842
- --------------------------------------------------------------------------------
$ 6,346,384
- --------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (GNMA)--3.5%
$ 1,093,610 6.00% 06/01/09/(b)/ $ 1,065,244
2,058,384 6.00 10/01/09/(b)/ 2,004,994
540,970 6.00 10/01/08/(b)/ 526,938
- --------------------------------------------------------------------------------
$ 3,597,176
- --------------------------------------------------------------------------------
Fixed Rate Government National Mortgage Association--3.3%
$ 3,040,068 10.00% 12/15/17/(b)/ $ 3,338,359
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--55.3%
Inverse Floater(a)--5.7%
FHLMC Series 1296, Class J
$ 890,613 11.93% 07/15/99/(b)/ $ 948,502
FHLMC Series 1325, Class B
2,416,565 6.06 07/15/97/(b)/ 2,421,833
FHLMC Series 1325, Class C
1,028,325 7.56 07/15/97/(b)/ 1,034,598
FNMA Remic Trust 1991-127, Class S
144,496 12.98 09/25/98 153,084
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 10.00 05/25/99 1,241,097
- --------------------------------------------------------------------------------
$ 5,799,114
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.3%
FHLMC Series 1684, Class JD
$ 2,801,277(c) 3.66% 08/15/20/(b)/ $ 199,759
FNMA Remic Trust 1993-110, Class SC
2,597,458(c) 3.46 04/25/19/(b)/ 126,990
- --------------------------------------------------------------------------------
$ 326,749
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
Mortgage Backed Obligations (continued)
Collateralized Mortgage Obligations (continued)
Planned Amortization Class (PAC CMOs)--11.1%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,954,040
FNMA Remic Trust 1992-138, Class C
2,350,000 6.00 12/25/18/(b)/ 2,325,020
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09 6,038,400
- --------------------------------------------------------------------------------
$ 11,317,460
- --------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--0.6%
FHLMC Series 1552, Class JE
$ 10,552,245/(c)/ 7.00% 02/15/14/(b)/ $ 590,926
- --------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.5%
FNMA Remic Trust 1992-198, Class K
$ 42,908/(c)/ 16.00% 12/25/15 $ 547,555
- --------------------------------------------------------------------------------
Regular Floater (a)--9.9%
FHLMC Series 1684, Class F
$ 5,000,000 5.75% 08/15/20/(b)/ $ 4,818,750
FHLMC Series 1684, Class JC
2,801,277 5.34 08/15/20/(b)/ 2,737,352
FNMA Remic Trust 1993-110, Class FC
2,597,459 5.54 04/25/19/(b)/ 2,565,796
- --------------------------------------------------------------------------------
$ 10,121,898
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--27.1%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,095,620
FHLMC Series 1296, Class I
2,493,715 5.24 07/15/99/(b)/ 2,481,546
FHLMC Series 174, Class Z
3,757,885 10.00 08/15/21 4,189,703
FNMA Remic Trust 1988-12, Class A
4,076,171 10.00 02/25/18/(b)/ 4,350,090
FNMA Remic Trust 1988-12, Class B
3,218,030 4.47 02/25/18/(b)/ 3,081,585
FNMA Remic Trust 1989-12, Class X
1,955,861 10.00 12/25/14/(b)/ 2,021,246
FNMA Remic Trust 1989-18, Class B
1,312,493 9.50 01/25/04 1,359,730
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
$ 4,628,657 7.75% 10/25/18 (b) $ 4,699,707
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,394,800
- --------------------------------------------------------------------------------
$ 27,674,027
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 56,377,729
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $83,545,715) $ 84,096,928
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--15.7%
United States Treasury Notes
$ 5,150,000 5.88% 04/30/98 $ 5,166,068
10,900,000 5.13 06/30/98/(b)/ 10,804,620
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $15,894,705) $ 15,970,688
- --------------------------------------------------------------------------------
Repurchase Agreement--1.0%
Joint Repurchase Agreement Account
$ 1,000,000 5.58% 11/01/96/(b)/ $ 1,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,000,000) $ 1,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $100,440,420(d)) $ 101,067,616
================================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- ------------------------- -------------- ------------------ ----------------
Euro Dollars 40 December 1996 $28,000
Euro Dollars 29 March 1997 34,650
Euro Dollars 37 June 1997 38,950
Euro Dollars 47 September 1997 68,625
Euro Dollars 45 December 1997 80,375
Euro Dollars 35 March 1998 25,250
Euro Dollars 20 June 1998 9,000
2 Year U.S. Treasury Notes 71 December 1996 87,859
5 Year U.S. Treasury Notes (89) December 1996 (173,203)
10 Year U.S. Treasury Notes (44) December 1996 (131,781)
20 Year U.S. Treasury Notes (7) December 1996 (34,844)
--------------
$32,881
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 826,961
Gross unrealized loss for investments in which
cost exceeds value (213,881)
- --------------------------------------------------------------------------------
Net unrealized gain $ 613,080
================================================================================
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for futures margin
requirements.
/(c)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/The aggregate cost for federal income tax purposes is $100,454,536.
/(e)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
2-Year U.S. Treasury Note contract represents $200,000 in notional par
value. Each 5-Year U.S. Treasury Note, 10-Year U.S. Treasury Note, and 20-
Year U.S. Treasury Note contract represents $100,000 in notional par value.
The total notional amount and market value are $253,200,000 and
$89,469,788, respectively. The determination of notional amounts and market
value as presented here are indicative only of volume of activity and not a
measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Tax-Free Fund seeks to provide a high level of
current income exempt from regular federal income tax, consistent with
relatively low principal volatility, through investments in municipal securities
rated single-A or better or deemed to be of comparable quality. Under normal
interest rate conditions, the fund's duration will be within one-half year of
its benchmark, the Lehman Brothers Three-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a three-year
bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a three-year municipal bond
(as calculated from data provided by Municipal Market Data, an independent
municipal market information provider) fell slightly (0.14%), while yields rose
from 4.10% on October 31, 1995 to 4.15% on October 31, 1996.
The municipal bond market began the period under review on a weak note.
Tax reform uncertainty impacted investor demand during November and December
1995, while municipal bond supply was high due to seasonably heavy year-end
issuance. The market environment improved during January and February 1996, when
fading tax reform concerns helped to revive investor interest in the sector and
issuance declined. From March through the end of the period, the market's
technical balance was generally healthy, though occasional spikes in supply
periodically overwhelmed demand and briefly impacted performance. The largest of
these surges occurred in June when supply rose to its highest level since late
1995, but subsequently both new issuance and secondary supply fell dramatically
from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (which control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review
The performance of the fund's Institutional shares was in line with the
benchmark, the Lehman Brothers Three-Year Municipal Bond Index (the "Index"),
for the 12-month period ended October 31, 1996. The Administration and Service
shares also performed well, but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- --------------------------------------------------------------------------------
Lehman Brothers
Institu- Adminis- 3-Year
tional tration Service Municipal Bond Index
-------- -------- ------- ---------------------
<S> <C> <C> <C> <C>
Total Return (based on net 4.50% 4.24% 3.98% 4.51%
asset value)
- --------------------------------------------------------------------------------
Return From 4.30% 4.04% 3.78% NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.20% 0.20% 0.20% NA
Appreciation
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.96 $9.96 $9.97 NA
- --------------------------------------------------------------------------------
NAV Change +$0.02 +$0.02 +$0.02 NA
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period was primarily due to our
emphasis on higher yielding revenue bonds, as well as successful selection of
specific securities and relative value trades. As always, we did not make any
bets on the direction of interest rates, but rather kept the fund's duration in
line with the Index, occasionally using Treasury futures to actively manage
sector allocation.
In our search for incremental yield, we focused on three types of bonds.
The first category was relatively generic, highly liquid securities; the second
included slightly less liquid issues such as insured hospital bonds and
letter-of-credit-backed debt; and the last area was "story" bonds, such as
uninsured hospital and electric utility issues and multifamily housing revenue
bonds, whose value is often unrecognized by the market because they are unique
or generally not well understood. We identified attractive investment
opportunities for the third category through our extensive credit analysis.
We are pleased to report that the fund's Institutional shares ranked first
out of 26 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the 12-month period ended October 31, 1996 based on
total return. (Lipper did not rank the fund's Administration and Service shares.
Please note that Lipper rankings do not take sales charges into account and that
past performance is not a guarantee of future results.) In addition, as of
October 31, 1996, the fund's Institutional shares were rated "five stars" by
Morningstar, Inc., its highest rating./1/
Portfolio Composition and Investment Strategies:
Revenue Bonds Dramatically Increased
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
General Obligations 3.0%
Variable Rate Demand Notes 4.7%
Insured General Obligations 12.6%
Insured Revenue Bonds 24.2%
Revenue Bonds 55.5%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ----------------------------
1 Source: (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and ten-year average annual returns (where applicable) in excess of
90-day Treasury bill returns with appropriate fee and sales charge adjustments
and a risk factor that reflects fund performance below 90-day Treasury bill
returns. The one-year rating is calculated using the same methodology, but is
not a component of the overall rating. The fund's Institutional shares received
five stars and were rated among 1,038 municipal bond funds for the three-year
period. For the one-year period, the Institutional shares received five stars
and were rated among 1,728 municipal bond funds. 10% of the funds receive the
five-star rating. The Morningstar rating applies only to the fund's
Institutional shares; the fund's Administration and Service shares have not been
rated. Administration and Service shares are subject to additional fees that may
have the effect of lowering performance and may affect any future Morningstar
rating. Morningstar rates funds against their peers in the same category. In
all, there are five Morningstar categories (domestic equity, international
equity, fixed income, municipal and hybrid). Morningstar ratings range from five
stars (highest) to one star (lowest). Funds with five-star ratings are in the
top 10% of their category, four-star ratings in the next 22.5%, three stars the
next 35%, two stars the next 22.5% and one star the lowest 10% of their
categories.
- --------------------------------------------------------------------------------
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------
. Revenue Bonds. As of October 31, the portfolio's combined position in
insured and uninsured revenue bonds was significantly overweighted compared with
the Index, 79.7% versus 35.8%. We substantially increased the portfolio's total
revenue bond allocation (from 29.2% a year ago) because our emphasis on credit
analysis enabled us to identify attractive revenue bonds that offered higher
incremental yield than was available from general obligation bonds. (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 15.6% of the
portfolio, down from 51.0% a year ago and significantly underweighted versus the
Index's 55.5%. GOs are backed by the general taxing power of a municipality and
are typically higher credit quality but lower yielding than revenue bonds.
. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash
equivalents that we used to manage the portfolio's excess liquidity. VRDNs
were a 4.7% position, down from 10.0% a year ago.
. Pre-refunded Bonds. Over the course of the year, we trimmed the fund's
holdings in pre-refunded bonds (9.8% as of October 31, 1995). In October, we
sold the fund's remaining position in the sector in favor of revenue bonds that
offered more attractive yields.
. Duration. As of October 31, the fund's duration was in line with that of
the Index at 2.7 years.
. Credit Quality. During the year, the fund's credit quality allocations
shifted. We reduced the portfolio's allocation in triple-A-rated GOs in favor of
single-A-rated revenue bonds, which allowed us to maintain the fund's targeted
double-A-rated average credit quality and liquidity while achieving higher
overall yields. We structured the portfolio's credit-quality allocation like a
"barbell," emphasizing higher credit quality securities in the four- to five-
year maturity range and lower relative credit quality securities in the one- to
three-year maturity range. As of October 31, more than half of the portfolio was
invested in triple-A-rated bonds (52.7%), while double-A- and single-A-rated
securities accounted for 20.1% and 27.2%, respectively.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
12-month period ended October 31, 1996, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.42,
$0.39 and $0.37 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
We value your continued confidence in the GS Short Duration Tax-Free Fund
and look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
GS Short Duration Tax-Free Fund
November 29, 1996
- --------------------------------------------------------------------------------
18
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short Duration Tax-Free Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmark, the Lehman
Brothers 3-Year Municipal Bond Index ("3-Year Bond Index"). All performance data
shown represents past performance and should not be considered indicative of
future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT/(a)/
[GRAPH APPEARS HERE]
Institutional Shares
<TABLE>
<CAPTION>
Institutional Shares 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/92 50000 50000
- --------------------------------------------------------------------------------
10/31/92 49830 49805
- --------------------------------------------------------------------------------
10/31/93 53333 53102
- --------------------------------------------------------------------------------
10/31/94 53424 53825
- --------------------------------------------------------------------------------
10/31/95 56618 58023
- --------------------------------------------------------------------------------
10/31/96 59172 60646
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Administration Shares
<TABLE>
<CAPTION>
Admin 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
6/1/93 50000 50000
- --------------------------------------------------------------------------------
10/31/93 51088 51144
- --------------------------------------------------------------------------------
10/31/94 51031 51840
- --------------------------------------------------------------------------------
10/31/95 53971 55884
- --------------------------------------------------------------------------------
10/31/96 56265 58410
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Service Shares
<TABLE>
<CAPTION>
Service 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/94 50000 50000
- --------------------------------------------------------------------------------
10/31/94 49810 49880
- --------------------------------------------------------------------------------
10/31/95 52594 53771
- --------------------------------------------------------------------------------
10/31/96 54693 56201
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
Average Annual Total Return
------------------------------------
One Year Since Inception/(b)/
-----------------------------------------------------------
<S> <C> <C>
Institutional Shares 4.50% 4.21%
-----------------------------------------------------------
Administration Shares 4.24% 3.51%
-----------------------------------------------------------
Service Shares 3.98% 4.36%
-----------------------------------------------------------
</TABLE>
/(a)/For comparative purposes, initial investments are assumed to be made on the
first day of the month following the commencement of operations of the
Administration and Service share classes.
/(b)/The Institutional, Administration and Service shares commenced operations
October 1, 1992, May 20, 1993 and September 20, 1994, respectively.
- --------------------------------------------------------------------------------
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligation--98.2%
Alabama--2.8%
Selma, AL IDA for International Paper Co. PCRB (A-/A3)
$1,000,000 4.15% 07/15/08 $1,000,000
- --------------------------------------------------------------------------------
Arkansas--3.8%
West Memphis, AR Public Utility System RB (MBIA) (NR/Aaa)
$1,310,000 5.25%(e) 12/01/00 $1,344,388
- --------------------------------------------------------------------------------
Colorado--4.2%
Municipal Sub District of Northern Colorado Water Conservation Co.
RB(AMBAC)(AAA/Aaa)
$1,435,000 5.75% 12/01/01 $1,508,845
- --------------------------------------------------------------------------------
Connecticut--4.3%
Connecticut State Resource Recovery Authority Series A RB (AA-/NR)
$1,500,000 5.60% 11/15/99 $1,546,185
- --------------------------------------------------------------------------------
Illinois--4.4%
Chicago, IL GO (MBIA) (AA/Aaa)
$1,500,000 5.40% 10/31/00 $1,547,670
- --------------------------------------------------------------------------------
Kentucky--7.5%
Jefferson County, KY Trust Certificates (A+/NR)RB
$1,145,000 5.25% 03/01/99 $1,163,904
Pendleton County, KY LOC (Self Insurance)(NR/VMIG1)
1,500,000 4.25 07/01/01 1,503,045
- --------------------------------------------------------------------------------
$2,666,949
- --------------------------------------------------------------------------------
Louisiana--7.4%
Louisiana Offshore Deepwater Part Authority Term B RB (A/Baa1)
$1,000,000 5.85% 09/01/00 $1,040,080
Louisiana State Refunding RB, Series A GO (FGIC) (AAA/Aaa)
1,500,000 6.00 08/01/01 1,583,970
- --------------------------------------------------------------------------------
$2,624,050
- --------------------------------------------------------------------------------
New Jersey--4.0%
West Windsor/Plainsboro, NJ Regional School District (FGIC)
(AAA/Aaa)
$1,400,000 5.25% 12/01/99 $1,436,750
- --------------------------------------------------------------------------------
New York--6.8%
Municipal Assistance Corp. Refunding RB (AMBAC) (AAA/Aaa)
$1,000,000 6.00% 07/01/00 $1,051,690
Syracuse, NY IDA RB (AA/NR)
$1,365,000 4.60% 10/15/98 $1,369,491
- --------------------------------------------------------------------------------
$2,421,181
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Oklahoma--13.5%
Enid, OK Hospital Authority RB (Societe Generale LOC) (NR/Aa2)
$2,700,000 6.63%(a) 10/01/15 $2,747,115
Southern Oklahoma Memorial Hospital RB(b) (A/A)
2,000,000 5.60 02/01/00 2,043,680
- -------------------------------------------------------------------------------
$4,790,795
- -------------------------------------------------------------------------------
Oregon--4.2%
Klamath Falls, OR Salt Caves Hydroelectic RB (SP1+/NR)
$1,500,000 4.50% 05/01/23 $1,507,980
- -------------------------------------------------------------------------------
Pennsylvania--9.7%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB
(FGIC) (AAA/Aaa)
$1,500,000 5.75% 06/15/00 $1,559,730
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,879,146
- --------------------------------------------------------------------------------
$3,438,876
- --------------------------------------------------------------------------------
Texas--11.4%
Bexar County, TX MFH Finance Corp. RB (CFMG) (NR/A3)
$1,500,000 4.88% 11/01/04 $1,502,220
Houston, TX Water & Sewer RB Series B (A/A)
1,430,000 5.25 12/01/99 1,460,802
Port Neches, TX Independent School District GO (AAA/Aaa)
1,000,000 7.00 02/15/01 1,092,480
- -------------------------------------------------------------------------------
$4,055,502
- -------------------------------------------------------------------------------
Virginia--5.0%
Petersburg, VA Hospital Authority RB (NR/A)
$1,760,000 5.50% 07/01/99 $1,798,157
- -------------------------------------------------------------------------------
Washington--4.6%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$1,500,000 7.20% 07/01/02 $1,623,044
- -------------------------------------------------------------------------------
Wyoming--4.6%
Uinta County, WY School District GO, Series A (FSA) (AAA/Aaa)
$1,500,000 6.88% 06/01/00 $1,620,390
- -------------------------------------------------------------------------------
Total Debt Obligations
(Cost $34,727,338) $34,930,762
===============================================================================
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Short-Term Obligations--4.5%
Illinois--0.6%
Illinois Development Finance Authority RB (AA+/A-1)/(c)/
$200,000 3.55% 01/1/96 $200,000
Louisiana--3.9%
East Baton Rouge Parish PCRB (AAA/Aaa)/(c)/
$1,400,000 3.60% 11/1/96 $1,400,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,600,000) $ 1,600,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $36,328,338)/(d)/ $36,530,762
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 204,715
Gross unrealized loss for investments in which
cost exceeds value (2,291)
- --------------------------------------------------------------------------------
Net unrealized gain $ 202,424
================================================================================
</TABLE>
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for when-issued
securities.
/(c)/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next reset interest dates.
/(d)/The amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/When-issued securities.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal Bond Assurance Corp.
CFMG --Credit Lyonnais Line of Credit
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Core Fixed Income Fund seeks to achieve a total return consisting of
capital appreciation and income that exceeds the total return of its benchmark,
the Lehman Brothers Aggregate Bond Index (the "Index"), through a diversified
portfolio of fixed income securities. The fund may invest in U.S. Treasury,
agency, corporate, mortgage-backed and asset-backed securities, as well as in a
limited amount of non-dollar-denominated fixed income securities. While the
fund's performance will be measured against the Index, the portfolio is not
required to hold the same securities or match the sector weightings of the
Index. Every security in the portfolio must be rated at least investment grade
by an independent rating agency or be considered to be of equivalent quality by
Goldman Sachs Asset Management at the time it is purchased. The fund's
approximate interest rate sensitivity is expected to be comparable to that of a
five-year bond.
Performance Review
During the period under review, the fund's Institutional shares outperformed
the Index. The strong performance was primarily due to its investments in
corporate bonds and emerging market debt. In addition, the fund also benefited
from its mortgage-backed and asset-backed holdings when both sectors
strengthened during the period.
The fund fared well relative to its peers. For the 12-month period ended
October 31, 1996, the fund's Institutional shares ranked in the top quartile
(24th out of 96 funds) in Lipper Analytical Services, Inc.'s "corporate debt -
BBB-rated" category based on total return. (Lipper did not rank the fund's
Administration and Service shares for the period because they were in existence
less than 12 months. Please note that Lipper rankings do not take sales charges
into account and that past performance is not a guarantee of future results.)
The fund's Administration and Service shares, which began operations on
February 28, 1996 and March 13, 1996, respectively, achieved positive returns
since their inceptions.
During the period, the net asset value (NAV) of the fund's Institutional
shares fell $0.15 due to the sharp rise in interest rates during the first half
of 1996. Reflecting the fact that rates had already risen significantly, the NAV
of the fund's Administration shares (which opened in February) also declined but
not as significantly, while the NAV of the fund's Service shares (which opened
in March) rose $0.09.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary
- -------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (3/13/96-
10/31/96) 10/31/96) 10/31/96)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Return (based on 5.98% 3.56% 4.90%
net asset value)
- -------------------------------------------------------------------------------
Return From Monthly 7.48% 4.27% 3.98%
Distributions
- -------------------------------------------------------------------------------
Return From Price -1.50% -0.71% 0.92%
Depreciation/
Appreciation
- -------------------------------------------------------------------------------
Total Return of Lehman 5.83% 3.74% 4.94%
Brothers Aggregate
Bond Index
- -------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.85 $9.84 $9.86
- -------------------------------------------------------------------------------
NAV Change -$0.15 -$0.07 +$0.09
- -------------------------------------------------------------------------------
</TABLE>
*New share class opened during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Corporate Bonds 26.6%
Fixed Rate Mortgage Pass-Throughs 23.9%
U.S. Treasuries 19.5%
ABSs 12.5%
CMOs 9.8%
Emerging Market Debt 4.5%
Repos/Cash Equivalents 1.7%
Agency Debentures 1.5%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
. Corporate Bonds. As of October 31, the fund's largest allocation was in
corporate bonds, overweighted relative to the Index (26.6% versus 17.6%),
which significantly benefited performance. Though corporate bonds began the
period on a weak note due to the economic slowdown during November and December,
the sector improved dramatically when companies reported positive earnings
growth from January 1996 through the end of the period. Within the sector, we
stressed industrial and financial issues. Industrials performed well due to the
strengthening economy, while financials benefited from the relatively steep
yield curve, which enabled issuers to borrow at lower, short-term rates and lend
at higher, long-term rates.
. Fixed Rate Mortgage Pass-Throughs. Fixed rate mortgage pass-throughs, a
23.9% position as of October 31, were underweighted compared with the Index
(29.7%), with the remainder of the fund's mortgage-backed security allocation
invested in collateralized mortgage obligations (CMOs). We emphasized seasoned
premium mortgages, which have lower prepayment risk than recently issued
mortgages. The sector suffered from high prepayments during November and
December 1995, but conditions improved when interest rates rose sharply during
the first half of 1996 and prepayments declined. Over the course of the year,
these securities positively contributed to the fund's performance.
During the period, we occasionally used mortgage dollar rolls to benefit from
short-term supply and demand imbalances in the mortgage settlement process.
(Mortgage dollar rolls refer to transactions that involve selling mortgage
securities owned by the fund and simultaneously contracting to buy back similar
mortgage securities with the same coupon on a specified future date -- usually
one month forward.) At all times, we "cover" the mortgage dollar rolls by
keeping cash or high-grade liquid debt securities equal to the dollar amount of
the forward commitment in a segregated account with the fund's custodian.
. CMOs. During the period, we increased the portfolio's CMO allocation to
9.8%, up from 2.0% a year earlier. Within the sector, we initiated a
position in sequential-pay/support CMOs (5.1% as of October 31) and increased
the portfolio's position in planned amortization class (PAC) CMOs to 3.5% from
0.9%. These securities were favored for their relative stability and attractive
spreads compared with Treasuries, and they benefited performance during the
period. The remaining CMO positions were inverse floaters, discussed below.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The fund's
allocation in U.S. Treasuries was reduced to 19.5% from 24.7% a year ago. We
significantly underweighted Treasuries relative to the benchmark (45.2%) to
focus on other sectors that offered more attractive relative value. In addition,
repurchase agreements/cash equivalents accounted for 1.7% of the portfolio, up
from 0.4% a year ago.
. Asset-Backed Securities (ABSs). We increased the fund's allocation in ABSs to
12.5%, up from 9.9% a year ago. The ABS position consisted of short-term,
high-credit-quality issues primarily backed by credit card loans, as well as
smaller positions in automobile loan debt and other receivables, that offered
incremental yield over similar-duration Treasuries. When the period under review
began, the ABS market was weak due to uncertainty regarding credit card
delinquencies, but those concerns waned and the sector strengthened from January
through October. The supply of ABSs was robust during the period, with a wide
variety of innovative new issues across a range of maturities, collateral types
and structures. Despite the increased issuance, the technical balance of the ABS
market remained favorable due to heavy investor demand from foreign banks,
insurance companies and an increasing number of corporate "crossover" accounts.
- --------------------------------------------------------------------------------
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
. Emerging Market Debt. The portfolio's investments in emerging market debt
(4.5%) performed extremely well during the period. We carefully managed the
fund's exposure in the sector by stressing higher credit-quality, short-duration
bonds. Geographically, we emphasized Latin American countries because we believe
this region has the best risk/reward characteristics. During the period, we
focused on bonds from Chile, Colombia and the Andean region development bank. We
also initiated a new position in investment-grade Mexican bonds.
. Agency Debentures. Agency debentures, a small position (1.5%), added to the
portfolio's diversification and contributed incremental yield. However, we
underweighted the sector relative to the Index (6.5%) because our analysis
indicated that it did not adequately compensate us given its level of risk.
. Duration. As of October 31, the fund's duration matched that of the Index at
4.7 years. Rather than attempting to predict the direction of interest rates, we
manage the fund's duration to approximate that of the Index, partly through the
use of financial futures. We seek to add incremental return over the Index
through sector weighting and individual security selection.
. Credit Quality. More than half of the portfolio was invested in government
and agency securities (51 .1%), with another 12.6% invested in triple-A-rated
securities. The remainder of the portfolio was made up of double-A-rated
securities (2.7%), single-A-rated securities (12.5%), triple-B-rated
securities (19.4%) and cash equivalents
(1.7%).
. Prudent Use of Derivatives. As noted, the portfolio held positions in asset-
backed securities (12.5%), sequential-pay/support CMOs (5.1%) and PAC CMOs
(3.5%), which are all typically considered to be lower risk derivatives. In
addition, we held a 1.2% position in inverse floaters, which are securities
whose coupons reset in the opposite direction from interest rate movements.
These securities performed well during the period, offering incremental yield
over Treasuries.
Market Outlook
We are somewhat cautious on the corporate bond sector as it has become
expensive relative to Treasuries, but expect the sector to continue to benefit
from strong technical and fundamental factors. We intend to continue to
overweight industrial and financial issues and underweight utilities due to
their regulatory and competitive pressures. In the mortgage pass-through market,
certain segments are attractively valued, and we believe that our current
seasoned holdings should fare well relative to other sectors if interest rates
were to continue to fall and increase the level of prepayments. We are
cautiously optimistic on the ABS market, where we expect the sector's
significant spread premiums relative to comparably rated corporate securities to
continue to buoy investor demand. In addition, Fed surveys indicate that banks
have been tightening their underwriting standards over the last three quarters,
which should help to allay lingering investor concerns surrounding consumer
credit card delinquencies. Finally, we remain optimistic on the prospects for
the relative performance of emerging market debt, which continues to offer good
value compared with other asset classes. Overall, the economic trends in
emerging markets appear to be headed in the right direction and the
globalization of financial markets is likely to increase investor interest in
the sector. During the coming year, we will continue to actively allocate the
portfolio's assets among the various fixed income sectors as their relative
value changes.
Distribution Policy
During the 12-month period under review, the fund's Institutional shares
distributed $0.72 per share. From their inceptions through October 31, the
fund's Administration and Service shares paid out $0.41 and $0.38 per share,
respectively. (The Administration shares' inception date was on February 28,
1996, and the Service shares' inception date was on March 13, 1996.) Dividends
are
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
declared daily and paid on a monthly basis. As required by tax law, the fund
distributes substantially all of its investment company taxable income.
In closing, we appreciate your investment and look forward to serving you in
the future.
Sincerely,
/s/ Jonathan A Beinner
Jonathan A Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Stephen R. Warren
Stephen R. Warren
Portfolio Managers
GS Core Fixed Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Core Fixed Income Fund based on the Fund's normal minimum
initial investment of $50,000, is compared to its benchmark, the Lehman Brothers
Aggregate Bond Index ("Lehman Aggregate Index"). All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate as market conditions change. The investment
return and principal value of an investment will fluctuate with changes in
market conditions so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
Institutional Shares/(a)/ Administration Shares Service Shares
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 48500 10/31/96 51780 10/31/96 52450
10/31/95 56124
10/31/96 59492
Lehman Aggregate Index Lehman Aggregate Index Lehman Aggregate Index
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 46980 10/31/96 51870 10/31/96 52470
10/31/95 54332
10/31/96 57505
<TABLE>
<CAPTION>
------------------------ -----------------------------------------------------
Average Annual Total Return
------------------------ -----------------------------------------------------
One Year Since Inception/(a)/
<S> <C> <C>
------------------------ ---------------------------- ------------------------
Institutional Shares 5.98% 6.34%
------------------------ ---------------------------- ------------------------
Administration Shares N/A 3.56/(b)/
------------------------ ---------------------------- ------------------------
Service Shares N/A 4.90/(b)/
------------------------ ---------------------------- ------------------------
</TABLE>
(a) The Institutional, Administration and Service shares commenced operations
January 5, 1994, February 28, 1996 and March 13, 1996, respectively
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
26
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
GS Core Fixed Income Fund
October 31, 1996
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds--26.8%
Finance Bonds--12.6%
BankAmerica Corp.
$ 20,000 6.03% 05/17/99 $ 201,724
Bear Stearns Mortgage Securities, Inc.
2,045,784 6.50 03/28/09 1,903,048
Capital One Bank
600,000 8.63 01/15/97 603,000
500,000 8.13 02/27/98 511,610
Comdisco Inc.
950,000 9.75 01/15/97 956,717
200,000 7.33 03/06/97 201,112
Conseco Inc.
340,000 10.50 12/15/04 402,688
Continental Bank N.A.
525,000 11.25 07/01/01 565,971
Countrywide Funding Corp.
125,000 6.08 07/14/99 124,166
250,000 8.43 11/16/99 263,653
250,000 7.75 08/10/01 259,800
Ford Capital Corp.
200,000 9.38 01/01/98 207,584
300,000 9.50 07/01/01 333,960
General Motors Acceptance Corp.
275,000 7.63 03/09/98 281,064
200,000 7.13 05/10/00 204,238
375,000 9.63 12/15/01 422,483
Meditrust, Inc.
240,000 7.82 09/10/26 258,144
Security Pacific Corp.
995,000 11.50 11/15/00 1,268,429
Signet Banking Corp.
240,000 9.63 06/01/99 257,527
Washington Real Estate Corp.
120,000 7.13 08/13/03 120,307
- ---------------------------------------------------------------------
$ 9,247,225
- ---------------------------------------------------------------------
Industrial Bonds--13.7%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 520,312
Auburn Hills Trust
210,000 12.00 05/01/20 316,730
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds (continued)
Industrial Bonds (continued)
Cablevision Industries Corp.
$ 150,000 10.75% 01/30/02 $ 162,534
Continental Airlines, Inc.
349,679 7.75 07/02/14 364,513
569,776 8.56 07/02/14 620,880
Ford Holdings, Inc.
300,000 9.25 03/01/00 325,581
Mitchell Energy & Development Corp.
400,000 8.00 07/15/99 410,020
News America Holdings, Inc.
350,000 9.13 10/15/99 375,340
150,000 7.50 03/01/00 154,083
Northwest Airlines Corp.
167,795 8.26 03/10/06 179,500
575,000 8.97 01/02/15 605,573
RJR Nabisco Inc.
175,000 8.00 07/15/01 175,334
450,000 8.63 12/01/02 456,467
Tele-Communications, Inc.
50,000 6.46 03/06/00 49,465
300,000 8.25 01/15/03 296,652
1,135,000 6.27 09/15/03 1,132,764
Tenneco Inc.
1,175,000 10.00 08/01/98 1,249,178
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,708,410
400,000 7.98 08/15/04 409,452
U.S. Air Inc.
560,072 6.76 04/15/08 547,711
- ---------------------------------------------------------------------
$10,060,499
- ---------------------------------------------------------------------
Utility Bonds--0.5%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 329,248
- ---------------------------------------------------------------------
$ 329,248
- ---------------------------------------------------------------------
Total Corporate Bonds
(Cost $19,435,482) $19,636,972
- ---------------------------------------------------------------------
Asset-Backed Securities--12.2%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 $ 159,816
- ---------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
27
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C> <C>
Asset-Backed Securities (continued)
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
$ 232,121 5.80% 06/15/02 $ 231,466
Discover Card Master Trust, Series 1996-4, Class A
1,910,000 5.76 10/16/13 1,926,101
Discover Card Master Trust, Series 1996-4, Class B
1,100,000 5.93 10/16/13 1,100,000
General Motors Acceptance Corp. Series 1995, Class A
99,367 7.15 03/15/00 100,546
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
291,994 6.55 11/20/01 293,725
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
314,669 6.85 06/15/01 318,757
Premier Auto Trust Series 1995-1, Class A4
360,000 7.85 09/04/98 362,023
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 81,150
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20 02/16/06 675,750
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 577,500
Sears Credit Card Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 306,561
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,140,294
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 924,183
Standard Credit Card Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 726,111
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $8,987,847) $8,923,983
- --------------------------------------------------------------------------------
Emerging Market Debt--3.9%
Bancoldex
$ 160,000 8.63% 06/02/00 $ 164,731
Corp. Andina de Fomento
200,000 7.25 04/30/98 202,294
40,000 8.38 07/29/01 40,698
Empresa Col Petroleos
900,000 7.25 07/08/98 904,563
Financiera Energy Nacional
530,000 6.63 12/13/96 534,400
160,000 9.38 06/15/06 165,234
- --------------------------------------------------------------------------------
Emerging Market Debt (continued)
Instituto de Fomento Industrial
$ 80,000 8.38% 07/29/01 $ 81,397
Korea Electric Power
266,952 7.40 04/01/16 269,197
YPF Sociedad Anonima
456,886 7.50 10/26/02 463,036
- --------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,799,425) $2,825,550
- --------------------------------------------------------------------------------
Government Bonds--0.9%
Province of Quebec
$ 520,000 13.25% 09/15/14 $ 630,058
- --------------------------------------------------------------------------------
Total Government Bonds
(Cost $653,628) $ 630,058
- --------------------------------------------------------------------------------
Mortgage Backed Obligations--31.1%
Federal Home Loan Mortgage Corp. (FHLMC((b)
$4,500,000 7.50% TBA-30 Yr(b) $4,515,435
1,208,677 6.00 TBA-30 Yr(b) 1,198,196
Federal National Mortgage Association (FNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,930
1,000,000 8.00 11/15/16 1,020,000
126,229 8.50 06/01/06 131,790
125,861 8.50 09/01/06 131,406
720,814 8.50 03/01/10 752,213
500,000 6.25 07/25/18 492,810
989,360 7.00 02/01/26 970,493
1,000,001 8.50 07/01/26 1,034,681
FNMA Remic Trust, Series 1993-201G
1,000,000 3.50 05/25/19 871,560
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24 1,842,500
Government National Mortgage Association (GNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,620
1,000,000 7.50 TBA-30 Yr(b) 1,003,120
3,000,000 8.00 TBA-30 Yr(b) 3,067,500
1,000,000 8.50 TBA-30 Yr(b) 1,038,120
342,966 8.00 02/15/17 356,042
850,876 7.50 03/15/23 857,785
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
- ----------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
======================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Government National Mortgage Association (GNMA)--(continued)
$ 512,583 7.00% 08/15/23 $ 505,699
124,369 7.50 08/15/23 125,379
Prudential Home Mortgage Securities Corp., Series 1992-39 A8
1,000,000 7.74 12/25/07 892,270
- ----------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $22,482,170) $22,768,549
- ----------------------------------------------------------------------
Sovereign Credit--1.3%
United Mexican States
$ 650,000 7.69% 08/06/01 $ 658,769
State of Israel
300,000 6.38 12/15/05 286,611
- ----------------------------------------------------------------------
Total Sovereign Credit
(Cost $926,260) $ 945,380
- ----------------------------------------------------------------------
U.S. Government Agency Obligations--1.5%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 300,000 8.20% 01/16/98 $ 301,734
250,000 6.83 09/18/02 249,023
Resolution Funding Corp. Principal-Only Stripped Securities/(c)/
1,790,000 7.08 10/15/20 335,392
1,140,000 7.08 01/15/21 210,136
- ----------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $1,058,170) $ 1,096,285
- ----------------------------------------------------------------------
U.S. Treasury Obligations--19.3%
United States Treasury Bonds
$ 3,900,000 8.75% 05/15/17 $ 4,772,625
30,000 8.88 08/15/17 37,153
150,000 8.75 08/15/20 185,180
120,000 7.88 02/15/21 135,900
United States Treasury Interest-Only Stripped Securities/(d)/
2,250,000 6.69 08/15/09 968,063
350,000 6.75 11/15/10 137,736
United States Treasury Notes
1,200,000 5.88 04/30/98 1,203,744
3,250,000 6.88 08/31/99 3,331,250
100,000 6.13 07/31/00 100,375
2,090,000 7.88 11/15/04 2,293,775
United States Treasury Principal-Only Stripped Securities/(c)/
40,000 5.54 11/15/97 37,792
590,000 6.41 11/15/04 354,885
2,920,000 6.95 05/15/20 581,460
- ----------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,792,338) $14,139,938
- ----------------------------------------------------------------------
Repurchase Agreements--19.0%
Joint Repurchase Agreement Account/(a)/
$ 13,900,000 5.58% 11/01/96 $13,900,000
- ----------------------------------------------------------------------
Total Repurchase Agreements
(Cost $13,900,000) $13,900,000
- ----------------------------------------------------------------------
Total Investments
(Cost $84,035,320/(e)/) $84,866,715
======================================================================
</TABLE>
Futures contracts open at October 31, 1996 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type Long (f) Month Gain
- ------------------------- ------------ --------------- ------------
<S> <C> <C> <C>
Euro Dollars 5 December 1996 $5,125
Euro Dollars 5 March 1997 6,875
Euro Dollars 3 September 1997 825
Euro Dollars 5 June 1997 7,500
Euro Dollars 5 June 1998 3,625
5-Year U.S. Treasury
Notes 7 December 1996 8,641
10-Year U.S. Treasury
Notes 18 December 1996 65,625
=====================================================================
$98,216
-----------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 993,383
Gross unrealized loss for investments in
which cost exceeds value (243,229)
=====================================================================
Net unrealized gain $ 750,154
- ---------------------------------------------------------------------
</TABLE>
/(a)/Portions of these securities are being segregated for open TBA purchases,
mortgage dollar rolls and futures.
/(b)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally + / -2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(c)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(d)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(e)/The aggregate cost for federal income tax purposes is $84,116,561.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year U.S. Treasury Note and, 10-Year U.S. Treasury Note contract
represents $100,000 in notional par value. The total notional amount and
market value are $25,500,000 and $8,144,325, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==============================================================
<S> <C> <C> <C> <C>
Assets:
Investments in securities, at value (cost $618,544,961, $100,440,420,
$36,328,338 and $84,035,320, respectively) $617,783,125 $1O1,067,616 $36,530,762 $84,866,715
Receivables:
Investment securities sold 9,023,710 -- 2,639,947 4,512,122
Interest 6,238,391 962,570 560,207 981,011
Fund shares sold 93,534 9,761 48,407
Variation margin -- -- -- 5,475
Cash 23,482 85,863 133,870 70,206
Deferred organization expenses, net -- -- 20,748 53,352
Other assets 186,057 127,499 66,001 66,089
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 633,348,299 102,253,309 39,999,942 90,554,970
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,479,757 109,402 20,960 23,483
Investment securities purchased 3,134,490 -- 4,336,434 17,313,687
Fund shares repurchased 732,405 55,958 20,916 6,846
Variation margin 20,125 256 -- --
Investment adviser fees 210,539 34,534 11,033 22,677
Transfer agent fees 46,181 -- 5,254 3,058
Authorized dealer service fees 1,675 -- -- --
Accrued expenses and other liabilities 54,249 35,598 48,693 40,800
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,679,421 235,748 4,443,290 17,410,551
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 680,810,713 115,128,671 39,403,964 72,421,889
Accumulated undistributed (distributions in excess of) net
investment income (3,441,783) 770,624 90,133 33,551
Accumulated net realized loss on investment and futures
transactions (49,082,170) (14,541,811) (4,139,869) (240,632)
Net unrealized gain (loss) on investments and futures (617,882) 660,077 202,424 929,611
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $627,668,878 $102,017,561 $35,556,652 $73,144,419
===================================================================================================================================
Net asset value, offering and redemption price per share
Institutional shares $9.83 $9.83 $9.96 $9.85
Administration shares $9.83 $9.85 $9.96 $9.84
Service shares -- $9.82 $9.97 $9.86
Class A shares(a) $9.83 -- -- --
===================================================================================================================================
Shares Outstanding:
Institutional shares 62,407,407 10,168,881 3,494,408 7,312,322
Administration shares 385,738 25,537 4,845 71,240
Service shares -- 185,492 69,696 38,782
Class A shares 1,091,335 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value
(unlimited number of shares authorized) 63,884,480 10,379,910 3,568,949 7,422,344
===================================================================================================================================
</TABLE>
(a) Maximum public offering price per share (NAV per share x 1.0152) for Class A
shares of GS Adjustable Rate Government Fund is $9.97
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Operations
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==========================================================
<S> <C> <C> <C> <C>
Investment income:
Interest, net (a) $39,925,070 $7,068,555 $1,979,825 $4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 39,925,070 7,068,555 1,979,825 4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 2,535,709 514,200 169,796 246,568
Distribution fees 30,905 -- -- --
Authorized dealer service fees 30,905 -- -- --
Administration share fees 9,833 107 129 751
Service share fees -- 1,222 2,322 422
Transfer agent fees 278,337 -- 16,980 24,657
Custodian fees 136,975 66,180 53,929 81,841
Professional fees 86,751 56,020 54,712 53,340
Registration fees 72,001 37,210 44,701 48,435
Amortization of deferred organization expenses 20,848 -- 22,735 24,562
Trustees' fees 1,899 1,287 760 915
Other 106,857 59,952 65,554 30,136
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,311,020 736,178 431,618 511,627
Less--Expenses reimbursable and fees waived by Goldman Sachs (417,768) (272,069) (238,097) (233,065)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 2,893,252 464,109 193,521 278,562
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 37,031,818 6,604,446 1,786,304 4,013,477
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (310,326) (222,458) 367,144 (108,070)
Futures transactions (2,192,298) (345,361) (35,506) (145,350)
Net change in unrealized gain (loss) on:
Investments 6,892,986 661,003 (396,071) (192,910)
Futures 818,120 (41,385) -- 117,560
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 5,208,482 51,799 (64,433) (328,770)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $42,240,300 $ 6,656,245 $ 1,721,871 $3,684,707
====================================================================================================================================
(a) Net of $1,314 in foreign withholding tax for the Core Fixed Income Fund.
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
----------------------------------------------------------
<S> <C> <C> <C> <C>
From Operations:
Net investment income $ 37,031,818 $6,604,446 $1,786,304 $4,013,477
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819) 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618 (396,071) (75,350)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245 1,721,871 3,684,707
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519) (1,766,892) (4,019,797)
Administration shares (220,450) (2,548) (2,032) (19,144)
Service shares -- (14,792) (17,380) (5,349)
Class A shares (577,779) -- -- --
In excess of net investment income
Institutional shares (1,304,006) -- -- --
Administration shares (7,930) -- -- --
Class A shares (20,794) -- -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- -- -- (450,016)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859) (1,786,304) (4,494,306)
- ------------------------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441 22,248,684 21,976,567
Reinvestment of dividends and distributions 18,181,648 4,153,816 1,401,492 4,315,748
Cost of shares repurchased (477,107,914) (47,993,112) (46,918,400) (7,840,575)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from shares transactions (52,339,892) (1,819,855) (23,268,224) 18,451,740
- ------------------------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469) (23,332,657) 17,642,141
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of year $676,133,018 $103,760,030 $58,889,309 $55,502,278
- ------------------------------------------------------------------------------------------------------------------------------
End of year $627,668,878 $102,017,561 $35,556,652 $73,144,419
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed
net investment income $ (3,441,783) $ 770,624 $ 90,133 $ 33,551
- ------------------------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467 2,233,482 2,244,430
Reinvestment of dividends and distributions 1,856,783 424,274 140,950 439,299
Shares repurchased (48,741,470) (4,905,357) (4,727,959) (811,075)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616) (2,353,527) 1,872,654
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
32
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short-Term
Rate Government
Government Agency
Agency Fund Fund
==================================
<S> <C> <C>
From Operations:
Net investment income $ 42,586,453 $ 8,885,667
Net realized gain (loss) from investment and futures transactions (12,000,479) (4,030,174)
Net change in unrealized gain on investments and futures 16,138,367 5,735,691
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 46,724,341 10,591,184
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (42,629,917) (8,684,213)
Administration shares (278,448) (11,164)
Service shares -- --
Class A shares (425,863) --
In excess of net investment income
Institutional shares (2,124,188) --
Administration shares (13,875) --
Class A shares (21,220) --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (45,493,511) (8,695,377)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 456,762,969 49,034,023
Proceeds from reorganizations 37,593,780 --
Reinvestment of dividends and distributions 21,273,685 4,993,443
Cost of shares repurchased (790,211,526) (145,988,674)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (274,581,092) (91,961,208)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (273,350,262) (90,065,401)
Net Assets:
Beginning of year 949,483,280 193,825,431
- ----------------------------------------------------------------------------------------------------------------
End of year $676,133,018 $103,760,030
================================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ (2,129,902) $ 708,450
================================================================================================================
Summary of Share Transactions:
Shares sold 46,809,171 5,072,030
Shares exchanged in reorganizations 3,843,169 --
Reinvestment of dividends and distributions 2,181,117 516,178
Shares repurchased (81,125,615) (15,135,663)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (28,292,158) (9,547,455)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GS Short GS Core
Duration Fixed
Tax-Free Income
Fund Fund
============================
<S> <C> <C>
From Operations:
Net investment income $ 2,814,454 $2,248,195
Net realized gain (loss) from investment and futures transactions (472,312) 921,130
Net change in unrealized gain on investments and futures 1,270,197 1,663,176
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,612,339 4,832,501
- ---------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (2,771,793) (2,253,625)
Administration shares (20,584) --
Service shares (22,077) --
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
- ---------------------------------------------------------------------------------------------------------
Total distributions to shareholders (2,814,454) (2,253,625)
- ---------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 36,468,900 30,256,879
Proceeds from reorganizations -- --
Reinvestment of dividends and distributions 1,873,154 2,232,160
Cost of shares repurchased (67,865,169) (4,073,379)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (29,523,115) 28,415,660
- ---------------------------------------------------------------------------------------------------------
Total (decrease) increase (28,725,230) 30,994,536
Net Assets:
Beginning of year 87,614,539 24,507,742
- ---------------------------------------------------------------------------------------------------------
End of year $58,889,309 $55,502,278
=========================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ 67,398 $ 40,202
=========================================================================================================
Summary of Share Transactions:
Shares sold 3,733,382 3,077,397
Shares exchanged in reorganizations -- --
Reinvestment of dividends and distributions 190,942 230,595
Shares repurchased (6,950,294) (411,156)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,025,970) 2,896,836
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust
registered under the Investment Company Act of 1940 (as amended) as an open-end,
management investment company. Included in this report are the financial
statements for the GS Adjustable Rate Government Fund, GS Short Duration
Government Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund,
collectively, ("the Funds"). The Funds are diversified portfolios of the Trust
offering three classes of shares - Institutional shares, Administration shares
and Service shares. In addition, the GS Adjustable Rate Government Fund offers
Class A shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
-------------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations
for which accurate market quotations are readily available are valued on the
basis of quotations furnished by a pricing service or provided by dealers in
such securities. Other securities are valued based on yield equivalents, a
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Portfolio securities for which accurate market
quotations are not readily available are valued based on yield equivalents,
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Short-term debt obligations maturing in sixty days or
less are valued at amortized cost.
B. Security Transactions and Investment Income
------------------------------------------------
Security transactions are recorded on trade date. Realized gains and
losses on sales of portfolio securities are calculated on the identified cost
basis. Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account actual principal
prepayment experience and estimates of future principal prepayments. Certain
mortgage security paydown gains and losses are taxable as ordinary income. Such
paydown gains and losses increase or decrease taxable ordinary income available
for distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
Market premiums resulting from the purchase of long-term debt securities are
amortized to interest income over the life of the security with a corresponding
decrease in the cost basis of that security for GS Short Duration Tax-Free Fund.
Market discounts and market premiums on debt securities, other than mortgage
backed securities, are amortized to interest income over the life of the
security with a corresponding adjustment in the cost basis of that security for
GS Core Fixed Income Fund.
C. Mortgage Dollar Rolls
--------------------------
The Funds, with the exception of the GS Short Duration Tax-Free Fund, may
enter into mortgage "dollar rolls" in which the Fund sells securities in the
current month for delivery and simultaneously contracts with the same
counterparty to repurchase similar (same type,
34
<PAGE>
coupon and maturity) but not identical securities on a specified future date.
The Fund loses the right to receive principal and interest paid on the
securities sold. However, the Fund benefits to the extent of any price received
for the securities sold and the lower forward price for the future purchase
(often referred to as the "drop") or fee income plus the interest earned on the
cash proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high-grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
D. Futures Contracts
----------------------
The Funds may enter into futures transactions in order to hedge against
changes in interest rates, securities prices, currency exchange rates in the
case of GS Core Fixed Income Fund or to seek to increase total return. A Fund
will engage in futures transactions only for bona fide hedging purposes as
defined in regulations of the CFTC or to seek to increase total return to the
extent permitted by such regulations. The use of futures contracts involve, to
varying degrees, elements of market risk which may exceed the amounts recognized
in the Statements of Assets and Liabilities.
Upon entering into a futures contract, a Fund is required to deposit with
a broker an amount of cash or securities equal to the minimum "initial margin"
requirement of the futures exchange on which the contract is traded. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the contract, and are
recorded for financial reporting purposes as unrealized gains or losses by the
Fund. When entering into a closing transaction, the Fund will realize, for book
purposes, a gain or loss equal to the difference between the value of the
futures contract to sell and the futures contract to buy. Futures contracts are
valued at the most recent settlement price, unless such price does not reflect
the fair market value of the contract, in which case the position will be valued
using methods as approved by the Board of Trustees.
Certain risks may arise upon entering into futures contracts. The
predominant risk is that the changes in the value of the futures contract may
not directly correlate with changes in the value of the underlying securities.
This risk may decrease the effectiveness of the Funds' hedging strategies and
may also result in a loss to the Funds.
E. Deferred Organization Expenses
-----------------------------------
Organization-related costs are being amortized on a straight-line basis
over a period of five years.
F. Expenses
-------------
Expenses incurred by the Trust that do not specifically relate to an
individual portfolio of the Trust are allocated to the portfolios based on each
portfolio's relative average net assets for the period.
Shareholders of Administration shares and Service shares bear all expenses
and fees paid to service organizations for their services with respect to such
shares as well as other expenses (subject to expense limitations) which are
directly attributable to such shares. For the GS Adjustable Rate Government
Fund, shareholders of Class A shares bear all expenses and fees relating to the
distribution and authorized dealer service plans as well as other expenses which
are directly attributable to such shares.
G. Federal Taxes
------------------
It is each Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute each
year substantially all of its investment company taxable and tax-exempt income
to its shareholders. Accordingly, no federal tax provisions are required.
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The characterization of distributions to shareholders for financial
statement purposes as either from or in excess of net investment income or net
realized gain on investment transactions, or from capital, depends on the type
of book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. federal tax purposes:
<TABLE>
<CAPTION>
Years of
Fund Amount Expiration
- --------------------------------------- --------------------- -----------------
<S> <C> <C>
GS Adjustable Rate
Government Fund $47,923,000 2000-2003
GS Short Duration Government
Fund $13,272,000 2002-2003
GS Short Duration Tax-Free
Fund $4,271,000 2002-2003
GS Core Fixed Income
Fund $77,000 2004
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by applicable laws or regulations.
3. Agreements
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman,
Sachs & Co. ("Goldman Sachs"), serves as the investment adviser for the GS
Adjustable Rate Government and GS Short Duration Government Funds pursuant to
Investment Advisory Agreements. Goldman Sachs Asset Management ("GSAM"), a
separate operating division of Goldman Sachs, serves as the investment adviser
for the GS Short Duration Tax-Free and GS Core Fixed Income Funds pursuant to
Investment Advisory Agreements. Under the Investment Advisory Agreements, the
adviser, subject to the general supervision of the Trust's Board of Trustees,
manages the Funds' portfolios and provides for the administration of the Funds'
other affairs. As compensation for the services rendered under the Investment
Advisory Agreements and the assumption of the expenses related thereto, the
adviser is entitled to a fee, computed daily and payable monthly at an annual
rate equal to .40% of average daily net assets of GS Adjustable Rate Government,
GS Short Duration Tax-Free and GS Core Fixed Income Funds and .50% of average
daily net assets of GS Short Duration Government Fund. Until further notice,
GSFM has voluntarily agreed not to impose .10% of its investment advisory fee
for the GS Short Duration Government Fund. For the year ended October 31, 1996,
investment advisory fees of approximately $103,000 were waived for the GS Short
Duration Government Fund.
The adviser has voluntarily agreed to limit certain of the Funds' expenses
(excluding investment advisory fees, taxes, interest, brokerage, litigation,
administrative and service share fees, indemnification and other extraordinary
expenses and with respect to GS Adjustable Rate Government Class A shares,
distribution and authorized dealer service fees) to the extent that such
expenses exceed .05% per annum of each Fund's average daily net assets. For the
year ended October 31, 1996, the amount of reimbursed expenses for the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and GS Core Fixed Income Funds were approximately $387,000, $169,000,
$238,000 and $233,000, respectively. The amounts reimbursable to the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and the GS Core Fixed Income Funds at October 31, 1996 were
approximately $29,000, $12,000, $31,000 and $19,000, respectively, and are
included in "Other assets" in the accompanying Statements of Assets and
Liabilities.
Goldman Sachs serves as Distributor of the shares of the Funds pursuant to
a Distribution Agreement and receives no compensation in this capacity with the
exception of GS Adjustable Rate Government Fund Class A shares. At October 31,
1996, Goldman Sachs retained approximately $79,000 of sales load related to
Class A shares. Goldman Sachs also serves as Transfer Agent of the Funds for a
fee.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
The Trust, on behalf of the GS Adjustable Rate Government Fund, has
adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 for the Class A
shares. Under the Plan, Goldman Sachs is entitled to receive a quarterly
distribution fee equal, on an annual basis, to .25% of the average daily net
assets of Class A shares. Currently, Goldman Sachs has agreed to voluntarily
waive this distribution fee. Distribution fees waived for the period amounted to
approximately $31,000.
The Trust, on behalf of the GS Adjustable Rate Government Fund, has
adopted a non-Rule 12b-1 Authorized Dealer Service Plan (the "Service Plan")
pursuant to which Goldman Sachs and Authorized Dealers are compensated for
providing personal and account maintenance services. GS Adjustable Rate
Government Fund pays a fee under the Service Plan equal, on an annual basis, to
.25% of its average daily net assets attributable to Class A shares.
For the year ended October 31, 1996, GS Adjustable Rate Government Fund,
GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS Core
Fixed Income Fund incurred commission expenses of approximately $108,000,
$24,000, $1,000 and $4,000, respectively, in connection with futures contracts
entered into with Goldman Sachs. At October 31, 1996, GS Adjustable Rate
Government Fund had approximately $20,000, payable to Goldman Sachs related to
variation margin on futures contracts. Approximately $5,000 relating to
variation margin was due to the GS Core Fixed Income Fund from Goldman Sachs.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving
line of credit facility to be used solely for temporary or emergency purposes.
Under the most restrictive arrangement, each fund must own securities having a
market value in excess of 300% of the total bank borrowings. The interest rate
on the borrowings is based on the federal funds rate. During the year ended
October 31, 1996, the Funds did not have any borrowings under this facility.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for
the year ended October 31, 1996, were as follows:
================================================================================
GS GS GS
Adjustable Short Short GS
Rate Duration Duration Core Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
- --------------------------------------------------------------------------------
Purchases of U.S.
Government and
agency obligations $319,204,368 $117,205,724 -- $227,149,602
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) -- -- $101,504,852 41,015,852
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 370,448,093 113,784,637 -- 251,512,185
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) -- -- 128,041,004 19,684,141
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
Fund Dollars Shares
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $391,363,204 39,981,299
Reinvestment of dividends and
distributions 17,432,484 1,780,288
Shares repurchased (456,776,795) (46,666,343)
----------------------------------------
(47,981,107) (4,904,756)
----------------------------------------
Administration Shares:
Shares sold 1,457,872 148,981
Reinvestment of dividends and
distributions 94,420 9,641
Shares repurchased (1,356,764) (138,609)
----------------------------------------
195,528 20,013
----------------------------------------
37
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund: Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares:
Shares sold $ 13,765,298 1,404,698
Reinvestment of dividends and distributions 654,744 66,854
Shares repurchased (18,974,355) (1,936,518)
-------------------------------------
(4,554,313) (464,966)
-------------------------------------
Total $ (52,339,892) (5,349,709)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 39,855,638 4,072,082
Reinvestment of dividends and distributions 4,137,041 422,559
Shares repurchased (47,875,174) (4,893,286)
-------------------------------------
(3,882,495) (398,645)
-------------------------------------
Administration Shares:
Shares sold 326,101 33,251
Reinvestment of dividends and distributions 2,032 207
Shares repurchased (77,312) (7,921)
-------------------------------------
250,821 25,537
-------------------------------------
Service Shares:
Shares sold 1,837,702 188,134
Reinvestment of dividends and distributions 14,743 1,508
Shares repurchased (40,626) (4,150)
-------------------------------------
1,811,819 185,492
-------------------------------------
Total $ (1,819,855) (187,616)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 20,777,050 2,085,253
Reinvestment of dividends and distributions 1,383,351 139,126
Shares repurchased (45,664,878) (4,601,865)
-------------------------------------
(23,504,477) (2,377,486)
-------------------------------------
Administration Shares:
Shares sold 105,302 10,672
Reinvestment of dividends and distributions 2,017 203
Shares repurchased (105,478) (10,644)
-------------------------------------
1,841 231
-------------------------------------
Service Shares:
Shares sold $ 1,366,332 137,557
Reinvestment of dividends and distributions 16,124 1,621
Shares repurchased (1,148,044) (115,450)
-------------------------------------
234,412 23,728
-------------------------------------
Total $ (23,268,224) (2,353,527)
=====================================
GS Core Fixed Income Fund
Institutional Shares:
Shares sold $ 20,524,422 2,094,833
Reinvestment of dividends and distributions 4,292,533 436,903
Shares repurchased (7,431,360) (769,104)
-------------------------------------
17,385,595 1,762,632
-------------------------------------
Administration Shares:
Shares sold 1,029,912 106,074
Reinvestment of dividends and distributions 17,883 1,847
Shares repurchased (358,284) (36,681)
-------------------------------------
689,511 71,240
-------------------------------------
Service Shares:
Shares sold 422,233 43,525
Reinvestment of dividends and distributions 5,332 549
Shares repurchased (50,931) (5,292)
-------------------------------------
376,634 38,782
-------------------------------------
Total $ 18,451,740 1,872,654
=====================================
</TABLE>
- --------------------------------------------------------------------------------
Share activity for the year ended October 31, 1995 is as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $ 445,293,934 45,635,666
Shares exchanged in reorganization 18,823,725 1,926,438
Reinvestment of dividends and distributions 20,730,137 2,125,494
Shares repurchased (771,265,543) (79,186,935)
-------------------------------------
(286,417,747) (29,499,337)
-------------------------------------
Administration Shares:
Shares sold 648,042 66,628
Shares exchanged in reorganization 1,561,584 159,814
Reinvestment of dividends and distributions 124,368 12,743
Shares repurchased (5,731,937) (588,307)
-------------------------------------
(3,397,943) (349,122)
-------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
============================================================================================
<S> <C> <C>
Class A Shares:
Shares sold 10,820,993 1,106,877
Shares exchanged in reorganization 17,208,471 1,756,917
Reinvestment of dividends and distributions 419,180 42,880
Shares repurchased (13,214,046) (1,350,373)
-------------------------------------
15,234,598 1,556,301
-------------------------------------
Total $(274,581,092) (28,292,158)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 49,032,419 5,071,865
Reinvestment of dividends and distributions 4,993,225 516,155
Shares repurchased (145,260,300) (15,059,774)
-------------------------------------
(91,234,656) (9,471,754)
-------------------------------------
Administration Shares:
Shares sold 1,604 165
Reinvestment of dividends and distributions 218 23
Shares repurchased (728,374) (75,889)
-------------------------------------
(726,552) (75,701)
-------------------------------------
Total $ (91,961,208) (9,547,455)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 18,780,011 1,920,432
Reinvestment of dividends and distributions 1,860,104 189,624
Shares repurchased (46,762,899) (4,787,105)
-------------------------------------
(26,122,784) (2,677,049)
-------------------------------------
Administration Shares:
Shares sold -- --
Reinvestment of dividends and distributions 2,483 246
Shares repurchased (3,800,930) (390,639)
-------------------------------------
(3,798,447) (390,393)
-------------------------------------
Service Shares:
Shares sold 17,688,889 1,812,950
Reinvestment of dividends and distributions 10,567 1,072
Shares repurchased (17,301,340) (1,772,550)
-------------------------------------
398,116 41,472
-------------------------------------
Total $(29,523,115) (3,025,970)
=====================================
</TABLE>
7. Repurchase Agreements
- --------------------------------------------------------------------------------
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Fund's custodian, or at subcustodians. GSFM and GSAM
monitor the market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having
advisory agreements with GSFM and GSAM or their affiliates, transfer uninvested
cash balances into a joint account, the daily aggregate balance of which is
invested in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of October 31, 1996, the GS Adjustable Rate Government, GS Short Duration
Government and GS Core Fixed Income Funds had an .49%, .04% and .52%,
respectively, undivided interest in the repurchase agreements in the following
joint account which equaled $13,000,000, $1,000,000 and $13,900,000,
respectively, in principal amount.
- --------------------------------------------------------------------------------
39
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
As of October 31, 1996, the repurchase agreement in the joint account along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,290,445, 5.5%--8.50%, 2.1.09-6/1/26; FHLMC: $165,859,789, 5.50%--8.50%,
9/1/98--8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (U.S. Treasury
Notes: $942,903,967, 4.38%--8.50%, 11/15/96--8/15/03)
924,700,000 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,600,142, 5.50%--8.00%, 2/1/02-10/1/26; FHLMC:
$464,523,981, 6.00%--9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S. Treasury
Interest Only Stripped Securities: $11,653,277, 2/15/98--5/15/02; U.S. Treasury
Notes: $85,997,728, 5.25%--7.75%, 5/15/97-10/15/06; U.S. Treasury Principal
Only Stripped Securities: $33,993,571, 5/15/97--5/15/05; U.S. Treasury Bills:
$41,756,285, 12/12/96--3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price
$175,026,979
(Treasury Notes: $178,528,739, 6.88%--7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement $2,669,700,000
================================================================================
</TABLE>
9. Administration and Service Plans
The Funds have adopted Administration and Service Plans. These plans allow
for Administration shares and Service shares, respectively, to compensate
service organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
10. Other Matters
On April 28, 1995, the GS Adjustable Rate Government Fund acquired the
assets of GS Government Agency Portfolio (For Financial Institutions) in
exchange solely for (i) the issuance of Institutional shares and Administration
shares of beneficial interest of the GS Adjustable Rate Government Fund and
(ii) the assumption by GS Adjustable Rate Government Fund of the liabilities of
GS Government Agency Portfolio (For Financial Institutions). Following this
transfer, GS Government Agency Portfolio (For Financial Institutions) was
liquidated and GS Adjustable Rate Government Fund's Institutional and
Administration shares were distributed to the former shareholders of GS
Government Agency Portfolio (For Financial Institutions).
The Reorganization was accomplished by a tax-free transfer of assets whereby
each shareholder of GS Government Agency Portfolio (For Financial Institutions)
received a number of full and fractional shares of GS Adjustable Rate Government
Fund having a total net asset value of their shares of GS Government Agency
Portfolio (For Financial Institutions) held on April 28, 1995. The net assets,
including $370,489 of unrealized depreciation for the GS Government Agency
Portfolio (For Financial Institutions), net asset values per share and shares
outstanding as of April 28, 1995 were:
================================================================================
GS Government
Agency
Portfolio
(For Financial GS Adjustable GS Adjustable
Institutions Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
Net Assets $20,385,309 $673,292,455 $693,677,764
Shares Outstanding
Institutional Shares 1,912,506 68,506,367 70,432,805
Administration Shares 158,661 401,122 560,936
Net Asset Value Per Share
Institutional Shares 9.84 9.77 9.77
Administration Shares 9.84 9.77 9.77
================================================================================
On May 11, 1995, shareholders of the GS Adjustable Rate Mortgage Fund
approved a Plan of Reorganization (the Plan) which was completed on May 12,
1995. Under the Plan, GS Adjustable Rate Mortgage Fund was reorganized as a
separate class (Class A) of the GS
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Adjustable Rate Government Fund. GS Adjustable Rate Mortgage Fund's assets were
acquired by GS Adjustable Rate Government Fund in exchange solely for (i) the
issuance of Class A shares of beneficial interest of GS Adjustable Rate
Government Fund and (ii) the assumption by GS Adjustable Rate Government Fund of
the liabilities of GS Adjustable Rate Mortgage Fund. Following this transfer, GS
Adjustable Rate Mortgage Fund was liquidated and GS Adjustable Rate Government
Fund Class A shares were distributed to the former shareholders of GS Adjustable
Rate Mortgage Fund.
The Reorganization was accomplished by a tax-free transfer of assets
whereby each shareholder of GS Adjustable Rate Mortgage Fund received a number
of Class A full and fractional shares of GS Adjustable Rate Government Fund
having a total net asset value of their shares of GS Adjustable Rate Mortgage
Fund held as of May 12, 1995. The net assets, including $45,684 of net
unrealized depreciation for the GS Adjustable Rate Mortgage Fund, net asset
values per share and shares outstanding as of May 12, 1995 were:
================================================================================
<TABLE>
<CAPTION>
GS Adjustable
Rate Mortgage GS Adjustable GS Adjustable
Fund Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Assets $17,208,471 $727,300,372 $744,508,843
Shares Outstanding
Institutional Shares -- 73,743,084 73,743,084
Administration Shares -- 561,352 561,352
Class A Shares 3,552,167 -- 1,756,917
Net Asset Value Per Share
Institutions Shares -- 9.79 9.79
Administration Shares -- 9.79 9.79
Class A Shares 4.84 -- 9.79
</TABLE>
================================================================================
The total amount of capital loss carryforward brought on to the books of
the GS Adjustable Rate Government Fund due to these reorganization was
approximately $3,154,000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing
and Retirement Income Plan was beneficial owner of approximately 29% of the
outstanding shares of the GS Short Duration Government Fund.
11. Certain Reclassifications
In accordance with Statement of Position 93-2, the GS Adjustable Rate
Government Fund, GS Short Duration Tax-Free Fund, and GS Core Fixed Income Fund
have reclassified $20,849, $36,587, $22,735, and $24,162, respectively, from
paid-in capital to accumulated undistributed net investment income. These
reclassifications have no impact on the net asset value of the Fund and are
designed to present the Fund's capital accounts on a tax basis.
- --------------------------------------------------------------------------------
41
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
=================================================================== ============================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option of net
beginning investment futures related investment investment and futures investment
of period income transactions transactions operations income transactions income
================================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ $9.77 $0.5759(a) $0.0772(a) -- $0.6531 $ (0.5725) -- $ (0.0206)
1996-Administration
Shares............ 9.77 0.5489(a) 0.0797(a) -- 0.6286 (0.5489) -- (0.0198)
1996-Class A
Shares............ 9.77 0.5481(a) 0.0806(a) -- 0.6287 (0.5489) -- (0.0198)
1995-Institutional
Shares............ 9.74 0.5630(a) 0.0717(a) -- 0.6347 (0.5759) -- (0.0287)
1995-Administration
Shares............ 9.74 0.5366(a) 0.0737(a) -- 0.6103 (0.5528) -- (0.0275)
1995-Class A
Shares(c)......... 9.79 0.2721(a) (0.0090)(a) -- 0.2631 (0.2697) -- (0.0134)
1994-Institutional
Shares............ 10.00 0.4341(a) (0.2455)(a) -- 0.1886 (0.4486) -- --
1994-Administration
Shares............ 10.00 0.4211(a) (0.2572)(a) -- 0.1639 (0.4239) -- --
1993-Institutional
Shares............ 10.04 0.4397 (0.0376)(d) -- 0.4021 (0.4397) -- (0.0024)
1993-Administration
Shares(e)......... 10.02 0.2146 (0.0173)(d) -- 0.1973 (0.2146) -- (0.0027)
1992-Institutional
Shares............ 10.03 0.5599 (0.0029)(d) -- 0.5570 (0.5470) -- --
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 10.00 0.1531 0.0322(d) -- 0.1853 (0.1553) -- --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
=========================================
In excess of
net realized Net
gain on increase Ratio of
investment, From Total (decrease) Net asset net
option and paid distributions in net value at expenses
futures in to asset end of Total to average
transactions capital shareholders value period return(k) net assets
==============================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ -- -- $(0.5931) $0.0600 $9.83 6.86% 0.45%
1996-Administration
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1996-Class A
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1995-Institutional
Shares............ -- -- (0.6046) 0.0301 9.77 6.75 0.46
1995-Administration
Shares............ -- -- (0.5803) 0.0300 9.77 6.48 0.71
1995-Class A
Shares(c)......... -- -- (0.2831) (0.0200) 9.77 2.74(f) 0.69(b)
1994-Institutional
Shares............ -- -- (0.4486) (0.2600) 9.74 1.88 0.46
1994-Administration
Shares............ -- -- (0.4239) (0.2600) 9.74 1.63 0.71
1993-Institutional
Shares............ -- -- (0.4421) (0.0400) 10.00 4.13 0.45
1993-Administration
Shares(e)......... -- -- (0.2173) (0.0200) 10.00 2.01(f) 0.70(b)
1992-Institutional
Shares............ -- -- (0.5470) 0.0100 10.04 6.12 0.42
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ -- -- (0.1553) 0.0300 10.03 2.14(f) 0.20(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
=============================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
========================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ 5.85% 52.36% $613,149 0.51% 5.79%
1996-Administration
Shares............ 5.59 52.36 3,792 0.76 5.53
1996-Class A
Shares............ 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares............ 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares............ 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares(c)......... 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institutional
Shares............ 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares............ 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares............ 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares(e)......... 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institutional
Shares............ 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations Distributions to shareholders
---------------------------------------------------------- ----------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------------------
GS SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares ........... $9.82 $0.6290/(a)/ $0.0136/(a)/ -- $0.6426 $(0.6326) --
1996-Administration
Shares/(h)/ ...... 9.86 0.3837/(a)/ 0.0003/(a)/ -- 0.3840 (0.3940) --
1996-Service
Shares/(i)/ ...... 9.72 0.3134/(a)/ 0.1018/(a)/ -- 0.4152 (0.3152) --
1995-Institutional
Shares ........... 9.64 0.6652/(a)/ 0.1666/(a)/ -- 0.8318 (0.6518) --
1995-Administration
Shares ........... 9.64 0.2384/(a)/ (0.0433)/(a)/ -- 0.1951 (0.2051) --
1994-Institutional
Shares ........... 10.14 0.5628/(a)/ (0.4592)/(a)/ -- 0.1036 (0.5598) (0.0438)
1994-Administration
Shares ........... 10.14 0.5329/(a)/ (0.4539)/(a)/ -- 0.0790 (0.5352) (0.0438)
1993-Institutional
Shares ........... 10.16 0.5627 (0.0135)/(d)/ -- 0.5492 (0.5627) --
1993-Administration
Shares/(e)/ ...... 10.23 0.2725 (0.0900)/(d)/ -- 0.1825 (0.2725) --
1992-Institutional
Shares ........... 10.22 0.6703 (0.0600)/(d) -- 0.6103 (0.6703) --
1991-Institutional
Shares ........... 10.00 0.8020 0.2200/(d)/ -- 1.0220 (0.8020) --
1990-Institutional
Shares ........... 10.07 0.8300 (0.0700)/(d) -- 0.7600 (0.8300) --
1989-Institutional
Shares ........... 10.10 0.8800 -- -- 0.8800 (0.8800) --
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ........... 10.00 0.1800 0.1000/(d)/ -- 0.2800 (0.1800) --
<CAPTION>
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of
income transactions capital shareholders value period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
1996-Institutional
Shares ............ -- -- -- $(0.6326) $0.0100 $9.83
1996-Administration
Shares/(h)/ ....... -- -- -- (0.3940) (0.0100) 9.85
1996-Service
Shares/(i)/ ....... -- -- -- (0.3152) 0.1000 9.82
1995-Institutional
Shares ............ -- -- -- (0.6518) 0.1800 9.82
1995-Administration
Shares ............ -- -- -- (0.2051) (0.0100) 9.63/(h)/
1994-Institutional
Shares ............ -- -- -- (0.6036) (0.5000) 9.64
1994-Administration
Shares ............ -- -- -- (0.5790) (0.5000) 9.64
1993-Institutional
Shares ............ (0.0065) -- -- (0.5692) (0.0200) 10.14
1993-Administration
Shares/(e)/ ....... -- -- -- (0.2725) (0.9000) 10.14
1992-Institutional
Shares ............ -- -- -- (0.6703) (0.0600) 10.16
1991-Institutional
Shares ............ -- -- -- (0.8020) 0.2200 10.22
1990-Institutional
Shares ............ -- -- -- (0.8300) (0.0700) 10.00
1989-Institutional
Shares ............ -- -- (0.0300) (0.9100) (0.0300) 10.07
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ -- -- -- (0.1800) 0.1000 10.10
<CAPTION>
Ratios assuming
not voluntary waiver
of fees or
expense limitations
--------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
Total to average to average turnover period to average to average
return/(k)/ net assets net assets rate/(d)/ (in 000s) net assets net assets
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
1996-Institutional
Shares ............ 6.75% 0.45% 6.44% 115.45% $99,944 0.71% 6.18%
1996-Administration
Shares/(h)/ ....... 4.00/(f)/ 0.70%/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/ ....... 4.35/(f)/ 0.95/(b)/ 6.05/(b) 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional
Shares ............ 8.97 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares ............ 2.10 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional
Shares ............ 0.99 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares ............ 0.73 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares ............ 5.55 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/ ....... 1.74 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional
Shares ............ 6.24 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares ............ 10.93 0.45 8.25 155.44 158,948 0.79 7.91
1990-Institutional
Shares ............ 8.23 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares ............ 9.03 0.46 8.71 137.37 31,015 1.39 7.78
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ 3.30/(f)/ 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
================================================ ===================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
===============================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $9.94 $0.4192/(a)/ $0.0200/(a)/ -- $0.4392 $(0.4192) --
1996-Administration Shares.......... 9.94 0.3944/(a)/ 0.0200/(a)/ -- 0.4144 (0.3944) --
1996-Service Shares................. 9.95 0.3697/(a)/ 0.0200/(a)/ -- 0.3897 (0.3697) --
1995-Institutional Shares........... 9.79 0.4235/(a)/ 0.1500/(a)/ -- 0.5735 (0.4235) --
1995-Administration Shares.......... 9.79 0.3989/(a)/ 0.1500/(a)/ -- 0.5489 (0.3989) --
1995-Service Shares................. 9.79 0.3744/(a)/ 0.1600/(a)/ -- 0.5344 (0.3744) --
1994-Institutional Shares........... 10.23 0.3787/(a)/ (0.3575)/(a)/ -- 0.0212 (0.3787) (0.0825)
1994-Administration Shares.......... 10.23 0.3537/(a)/ (0.3575)/(a)/ -- (0.0038) (0.3537) (0.0825)
1994-Service Shares/(j)/............ 9.86 0.0475/(a)/ (0.0700)/(a)/ -- (0.0225) (0.0475) --
1993-Institutional Shares........... 9.93 0.3834 0.3000/(d)/ -- 0.6834 (0.3834) --
1993-Administration Shares/(j)/..... 10.16 0.1555 0.0720/(d)/ -- 0.2275 (0.1555) --
For the Period October 1, 1992/(g)/ through October 31,
- ----------------------------------------------------
1992-Institutional Shares........... 10.00 0.0341 (0.0700)/(d)/ -- (0.0359) (0.0341) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
==================================
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return/(k)/ net assets
==================================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
====================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.4192) $0.0300 $9.96 4.50% 0.45%
1996-Administration Shares.......... -- -- -- (0.3944) 0.0300 9.96 4.24 0.70
1996-Service Shares................. -- -- -- (0.3697) 0.0200 9.97 3.98 0.95
1995-Institutional Shares........... -- -- -- (0.4235) 0.1500 9.94 5.98 0.45
1995-Administration Shares.......... -- -- -- (0.3989) 0.1500 9.94 5.76 0.70
1995-Service Shares................. -- -- -- (0.3744) 0.1600 9.95 5.59 0.95
1994-Institutional Shares........... -- -- -- (0.4612) (0.4400) 9.79 0.17 0.45
1994-Administration Shares.......... -- -- -- (0.4362) (0.4400) 9.79 (0.11) 0.70
1994-Service Shares/(j)/............ -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/ 0.95/(b)/
1993-Institutional Shares........... -- -- -- (0.3834) 0.3000 10.23 7.03 0.41
1993-Administration Shares/(j)/..... -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/ 0.70/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/ 0.05/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
==================================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate/(d)/ (in 000s) net assets net assets
==========================================================
GS SHORT DURATION TAX-FREE FUND
- --------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 4.21% 231.65% $34,814 1.01% 3.65%
1996-Administration Shares.......... 3.96 231.65 48 1.26 3.40
1996-Service Shares................. 3.74 231.65 695 1.51 3.18
1995-Institutional Shares........... 4.31 259.52 58,389 0.77 3.99
1995-Administration Shares.......... 4.14 259.52 46 1.02 3.82
1995-Service Shares................. 3.87 259.52 454 1.27 3.55
1994-Institutional Shares........... 3.74 354.00 83,704 0.61 3.58
1994-Administration Shares.......... 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/............ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares........... 3.70 404.60 115,803 1.06 3.05
1993-Administration Shares/(j)/..... 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
----------------------------------------------------- ------------------------------
Net realized
Net realized and From net
and unrealized unrealized Total realized gain
gain (loss) gain (loss) income on
Net asset on investment, on foreign (loss) investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-----------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $10.00 $0.6448 $(0.0704) -- $0.5744 $(0.6438) $(0.0806)
1996-Administrative Shares(l)....... 9.91 0.4083 (0.0703) -- 0.3380 (0.4080) --
1996-Service Shares(l).............. 9.77 0.3756 0.0898 -- 0.4654 (0.3754) --
1995-Institutional Shares........... 9.24 0.6423 0.7610 -- 1.4033 (0.6433) --
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 10.00 0.4648 (0.7617) -- (0.2969) (0.4648) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
---------------------------------------------------
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return(k) net assets
--------------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.7244) $(0.1500) $9.85 5.98% 0.45%
1996-Administrative Shares(l)....... -- -- -- (0.4080) (0.0700) 9.84 3.56(f) 0.70(b)
1996-Service Shares(l).............. -- -- -- (0.3754) 0.0900 9.86 4.90(f) 0.95(b)
1995-Institutional Shares........... -- -- -- (0.6433) 0.7600 10.00 15.72 0.45
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... -- -- -- (0.4648) (0.7617) 9.24 (3.00) 0.45(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
-------------------------
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 6.51% 414.20% $72,061 0.83% 6.13%
1996-Administrative Shares(l)....... 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service Shares(l).............. 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional Shares........... 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
</TABLE>
- ------------------
(a)Calculated based on the average shares outstanding methodology.
(b)Annualized.
(c)Class A share activity commenced on May 15, 1995.
(d)Includes the effect of mortgage dollar roll transactions.
(e)Administration share activity commenced on April 15, 1993.
(f)Not annualized.
(g)Commencement of operations.
(h)GS Short Duration Government Fund Administration shares were redeemed in
full on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
(i)Service share activity commenced on April 10, 1996.
(j)Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
(k)Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and not sales
charges. For Class A shares only, total return would be reduced if a sales
charge were taken into account.
(l)Administration and Service share activity commenced on February 28, 1996 and
March 13, 1996 respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the GS Adjustable Rate Government
Fund, GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS
Core Fixed Income Fund:
We have audited the accompanying statements of assets and liabilities of the
GS Adjustable Rate Government Fund, GS Short Duration Government Fund, GS Short
Duration Tax-Free Fund and GS Core Fixed Income Fund (portfolios of Goldman
Sachs Trust, a Massachusetts Business Trust) including the statements of
investments, as of October 31, 1996, and the related statements of operations,
the statements of changes in net assets and the financial highlights for each of
the periods presented. These financial statements and the financial highlights
are the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the GS Adjustable Rate Government Fund, GS Short Duration Government
Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund as of
October 31, 1996, the results of their operations and the changes in their net
assets and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 12, 1996
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
-------------------------------------------------------------------
Annual Report
October 31, 1996
GS Adjustable Rate Government Fund
GS Short Duration Government Fund
GS Short Duration Tax-Free Fund
GS Core Fixed Income Fund
Goldman
Sachs
GST/AR/1096(INST)
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning each Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with a
robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and Treasury
prices remained in a narrow trading range throughout the summer and fall. During
September and October, however, interest rates retreated and the bond market
strengthened. The rebound was primarily due to evidence of a slowing U.S.
economy and strong demand for Treasury bonds from the central banks of China,
Japan and Germany, which accelerated their purchases dramatically toward the end
of the period. By the end of October, prices of 30-year Treasuries broke out of
the trading range that had persisted for over six months.
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 24
Goldman Sachs Government Income Fund 4 Notes to Financial Statements 28
Goldman Sachs Global Income Fund 11 Financial Highlights 36
Goldman Sachs Municipal Income Fund 17
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Treasuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Retail Treasury Bar Chart
<S> <C> <C>
10/31/95 10/31/96
3-Month 5.49% 5.13
6-Month 5.55 5.26
1 5.54 5.4
2 5.61 5.73
3 5.68 5.86
5 5.81 6.07
10 6.02 6.34
30 6.33 6.64
</TABLE>
Source: Bloomberg, L.P.
The yield curve steepened on the short end and shifted upward on the longer
end.
The Dollar's Climb Versus the Mark and the Yen
Continued
During the period under review, the U.S. dollar appreciated against both the
Deutsche mark and Japanese yen, rising more against the yen. The dollar
strengthened relative to the mark as the Bundesbank progressively edged rates
lower during the period to stimulate the sluggish German economy, reaching a 15-
month high against the mark in May. By October, the dollar had retreated
slightly as further Bundesbank cuts became less likely. In contrast, the
dollar's climb against the yen continued through the end of October, when it
reached a three-and-a-half-year high. The yen's weakness was primarily due to
the softness in Japan's economic recovery. However, in November the yen rose
against the dollar as Japanese officials made it clear that they believed the
yen had weakened enough.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a Republican-
controlled Congress, which points toward continued budgetary restraint.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and we
look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head, Goldman Sach Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head, Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Government Income Fund seeks to provide shareholders with
a high level of current income consistent with safety of principal. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
U.S. government securities and in repurchase agreements collateralized by such
securities. The fund may also invest in securities of nongovernmental issuers,
including asset-backed securities, privately issued mortgage-backed securities
and corporate debt obligations. Such securities will be rated triple-A at the
time of investment or, if unrated, deemed to be of comparable quality by Goldman
Sachs Asset Management, the fund's investment adviser. The fund's interest rate
sensitivity is expected to be comparable to that of a five-year bond.
Mortgage-Backed Securities Strengthened Amid Slowing Prepayments
During the 12-month period under review, the performance of mortgage-backed
securities (MBSs) was closely linked to the changing direction of interest
rates. From November 1995 through February 1996, declining interest rates
spurred homeowners to switch to long-term, fixed rate mortgages, resulting in a
high level of refinancing activity and widening spreads between MBSs and
Treasuries. Long-term interest rates began to rise at the end of January and
prepayments peaked in February. Throughout the spring, the mortgage-backed
securities market strengthened due to declining prepayment fears, and adjustable
rate mortgages (ARMs) and fixed rate mortgage pass-throughs continued to do well
when rates stabilized during the summer. However, the direction of interest
rates reversed course beginning in September, and by the end of October, rates
on 30-year mortgages had slipped below 8%. The decline increased some
homeowners' incentive to refinance, but rates continued to be significantly
above their levels of a year earlier and "seasoned" mortgage-backed securities
(securities backed by older mortgages that typically have lower prepayment risk)
continued to do well. In addition, the market's technical balance remained
strong, with prices supported by healthy investor demand coupled with no
significant new issuance.
Performance Review: Fund Performed Well Due to Mortgage-and Asset-Backed
Securities
During the 12-month period ended October 31, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to favorable results from the fund's positions in collateralized
mortgage obligations (CMOs) and asset-backed securities (ABSs). The fund's Class
B shares, which opened on May 1, 1996 when interest rates were still rising,
also achieved positive returns.
The fund performed well compared with its peers. The fund's Class A shares
ranked eighth out of 124 intermediate U.S. government income funds based on
total return for the 12 months ended October 31, 1996, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they were in
existence less than 12 months.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
--------- ---------
<S> <C> <C>
Total Return (based on net asset value) 5.80% 4.85%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 6.56% 3.01%
- --------------------------------------------------------------------------------
Return From Price Depreciation/ -0.76% 1.84%
Appreciation
- --------------------------------------------------------------------------------
Total Return of Lehman Brothers
Government/Mortgage Index 5.74% 5.12%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.36 $14.37
- --------------------------------------------------------------------------------
NAV Change -$0.11 +$0.26
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Portfolio Composition and Investment Strategies
During the period under review, we significantly reduced the portfolio's
holdings of U.S. Treasuries in favor of mortgage-backed and asset-backed
securities.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Agency Debentures 0.4%
Repos/Cash Equivalents 1.1%
U.S. Treasuries 16.2%
Asset-Backed Securities 19.9%
CMOs 22.0%
Fixed Rate Mortgage Pass-Throughs 40.4%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Fixed Rate Mortgage Pass-Throughs. The fund's single largest position as of
October 31, 1996 was in fixed rate mortgage pass-throughs at 40.4% (nearly
unchanged from a year ago), which was overweighted relative to the Index
allocation of 36.4%. Overall, the fund benefited from the sector's incremental
yield compared with similar-duration Treasury securities. Although pass-throughs
suffered from a high rate of mortgage prepayments when the period began, the
sector improved when interest rates began to rise at the end of January.
During the period, we occasionally used mortgage dollar rolls, which helped
the portfolio to benefit from short-term supply and demand imbalances in the
mortgage settlement process. (Mortgage dollar rolls refer to transactions that
involve selling mortgage securities owned by the fund and simultaneously
contracting to buy back similar mortgage securities with the same coupon on a
specified future date -- usually one month forward.) At all times, we "cover"
the mortgage dollar rolls by keeping cash or high-grade liquid debt securities
equal to the dollar amount of the forward commitment in a segregated account
with the fund's custodian.
. CMOs. As of October 31, the fund's allocation in CMOs was 22.0%, up from
7.7% a year ago. These securities included sequential-pay/support CMOs (13.0%),
a position we initiated in February, which offered relative stability and
attractive spreads compared with Treasuries. We cut the portfolio's allocation
in planned amortization class (PAC) CMOs to 5.5% from 6.3% a year ago in favor
of other sectors that offered greater relative value. We also held very small
positions in inverse floaters, interest-only (IO) and principal-only (PO)
securities, discussed below.
. Asset-Backed Securities. The portfolio's ABS holdings, which were primarily
issues backed by credit card and automobile debt, represented 19.9% of the
portfolio, up from 14.3% a year ago. This position consisted of short-term,
triple-A-rated issues that offered attractive incremental yield over similar-
duration Treasuries. The ABS market began the period on a weak note, as concerns
surrounding credit card delinquencies impacted the sector during November and
December 1995. From January through the end of the period, these uncertainties
faded and the sector strengthened. Spreads between ABSs and Treasuries
tightened, as the ABS market benefited from strong investor demand from a
variety of sources: foreign banks, insurance companies and an increasing number
of corporate and CMO "crossover" accounts. ABS supply was robust as well, with a
wide variety of innovative new issues across a range of maturities, collateral
types and structures, but demand kept pace.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. We reduced the
fund's allocation in U.S. Treasuries and repurchase agreements/cash equivalents
to take advantage of securities in other sectors that offered better relative
value. As of October 31, Treasuries accounted for 16.2% of the portfolio,
significantly
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
underweighted relative to the Index (55.4%), while cash equivalents were a 1.1%
position.
. Agency Debentures. During the period, we reduced the fund's holdings in
agency debentures (bonds issued by agencies of the U.S. government) to a scant
0.4% because we determined that the sector's tight spreads compared with
Treasuries did not offer attractive return potential.
. Issuer Composition. The breakdown of the portfolio's mortgage-backed
security holdings by issuer was 23.3% in Federal National Mortgage Association
(FNMA) issues, 14.0% in Government National Mortgage Association (GNMA) issues,
9.8% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 15.3% in
private issues.
. Credit Quality. As of October 31, U.S. government and agency securities
accounted for 66.6% of the portfolio, triple-A-rated securities were 32.3% of
the portfolio and cash equivalents were 1.1% of the portfolio.
. Prudent Use of Derivatives. As noted, sequential-pay/ support and PAC CMOs,
which are generally considered to be lower risk derivative instruments,
accounted for 13.0% and 5.5% of the portfolio, respectively. The portfolio also
held inverse floaters (1.3%) for their potential to add incremental yield, as
well as a "combo" consisting of minor positions in interest-only and principal-
only CMOs. When IOs are held along with POs, they can produce a position with a
similar risk profile as a fixed rate mortgage pass-through but with a higher
yield. In addition, we used futures as a tool to help manage the portfolio's
duration.
. Duration. The fund's duration as of October 31 was 4.5 years, in line with
the Index. We carefully manage the fund's duration to approximate that of the
Index rather than attempting to make interest rate predictions. Instead, we seek
excess return over the Index through our sector weightings and specific security
selection.
Fund Outlook
We have a cautiously optimistic view of the mortgage pass-through market in
general. Certain segments continue to be attractively valued, and we believe
that our current seasoned holdings should fare well relative to other sectors if
interest rates continue to fall and prepayments increase. We have a neutral
outlook for the CMO sector in general, which we believe does not offer
significant value over mortgage pass-throughs. However, we continue to identify
specific CMO securities that present attractive investment opportunities. In the
ABS market, significant spread premiums relative to comparably rated corporate
securities are expected to continue to buoy investor demand. In addition, Fed
surveys indicate that banks have been tightening their underwriting standards
over the last three quarters, which should help to allay lingering investor
concerns surrounding consumer credit card delinquencies. During the coming year,
we will continue to actively allocate the portfolio's assets among the various
fixed income sectors as their relative value changes.
Distribution Policy
The fund's Class A shares paid out monthly distributions of approximately
$0.92 per share during the 12-month period ended October 31, 1996. From their
inception on May 1, 1996 through October 31, 1996, the fund's Class B shares
paid out approximately $0.41 per share. Dividends are declared daily and paid on
a monthly basis. The fund distributes substantially all of its taxable income,
as is required for all investment companies.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
We thank you for your support and look forward to continuing to serve your
investment needs in the future.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Erica Adelberg
Erica Adelberg
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Government Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Government Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares), is
compared with its benchmarks--the Lehman Brothers Mutual Fund
Government/Mortgage Index ("Lehman Gov't/MBS Index") and the Lehman Brothers
Mutual Fund General U.S. Government Index ("Lehman U.S. Gov't Index"). All
performance data shown represents past performance and should not be considered
indicative of future performance which will fluctuate as market conditions
change. The investment return and principal value of an investment will
fluctuate with changes in market conditions so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
HYPOTHETICAL $10,000 INVESTMENT
Class A/(a)/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Lehman
(no sales (w/sales Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3/1/93 $10,000 $ 9,550 $10,000 $10,000
10/31/93 10,506 10,033 10,584 10,699
10/31/94 10,192 9,734 10,267 10,220
10/31/95 11,710 11,183 11,819 11,792
10/31/96 12,392 11,834 12,500 12,395
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares Lehman Lehman
(no redemption (w/redemption Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
10/31/96 10,485 9,985 10,512 10,508
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(b)/
- -----------------------------------------------------------------------------
<S> <C> <C>
Class A, excluding sales 5.80% 6.72%
charge
- -----------------------------------------------------------------------------
Class A, including sales 1.06% 5.41%
charge
- -----------------------------------------------------------------------------
Class B, excluding
redemption charge N/A 4.85%/(c)/
- -----------------------------------------------------------------------------
Class B, including
redemption charge N/A (0.15%)/(c)/
- -----------------------------------------------------------------------------
</TABLE>
/a/ For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
/b/ Class A and Class B shares commenced operations February 10, 1993 and May 1,
1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
8
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--55.5%
Federal Home Loan Mortgage Corp.(FHLMC)--10.3%
$ 3,000,000 7.50% TBA 30-Yr/(a)/ $ 3,010,290
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--16.5%
$ 989,360 7.00 02/01/26 $ 970,493
831,317 8.50 07/01/26 860,147
168,683 8.50 09/01/26 174,533
1,000,000 7.00 TBA 30-Yr/(a)/ 1,034,680
2,000,000 8.00 TBA 30-Yr/(a)/ 2,040,000
- --------------------------------------------------------------------------------
$ 5,079,853
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA)--14.1%
$ 939,735 7.00% 08/15/23 $ 927,115
353,966 9.00 TBA 30-Yr/(a)/ 377,748
1,363,733 7.50 TBA 30-Yr/(a)/ 995,228
2,000,000 8.00 TBA 30-Yr/(a)/ 2,045,000
- --------------------------------------------------------------------------------
$ 4,345,091
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--26.4%
Interest Only--0.7%
FNMA Interest-Only Stripped Security, Series 151, Class 2
$ 712,363/(b)/ 9.50% 07/25/22 $ 225,926
- --------------------------------------------------------------------------------
Inverse Floater--1.3%
FNMA Remic Trust, Series 1992-62, Class S
404,038 10.00%/(c)/ 05/25/99 413,699
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC)--5.4%
FNMA Remic Trust, Series 1993-160, Class PG
1,000,000 6.30% 09/25/18 987,500
GE Capital Mortgage Services, Inc. Series 1994-11, Class A1
693,546 6.50 03/25/24 694,191
- --------------------------------------------------------------------------------
$ 1,681,691
- --------------------------------------------------------------------------------
Principal Only--1.4%
FNMA Remic Trust, Series G-35, Class N
575,000/(e)/ 5.28% 10/25/21 415,369
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--2.9%
Citicorp Mortgage Securities Series 1993-11, Class A6
907,177 6.25% 09/25/08 880,207
- --------------------------------------------------------------------------------
Support--13.2%
Bear Stearns Mortgage Securities, Inc., Series 1996-7, Class AD
$ 988,793 6.50% 11/27/23 900,395
GE Capital Mortgage Services, Inc. Series 1994-10, Class A22
996,703 6.50 03/25/24 874,966
Housing Securities, Inc. Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,370,928
Prudential Securities Series 1995-2, Class A
916,596 5.76 11/15/15 918,243
- --------------------------------------------------------------------------------
$ 4,064,532
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,681,424
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $16,959,996) $17,106,368
- --------------------------------------------------------------------------------
Asset-Backed Securities--16.6%
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
$ 720,000 6.23% 06/15/03 $ 717,746
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 593,870
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 629,077
MBNA Master Credit Card Trust, Series 1991-1, Class A
245,000 7.75 10/15/98 245,688
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
304,971 6.55 11/20/01 306,780
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
540,182 6.85 06/15/01 544,666
Premier Auto Trust, Series 1993-6, Class A2
403,341 4.65 11/02/99 398,675
Premier Auto Trust, Series 1994-1, Class A3
310,533 4.75 02/02/00 308,592
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 483,000
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 875,583
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $5,174,476) $ 5,103,677
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
===============================================================================
<S> <C> <C> <C>
U.S. Government Agency Obligations--0.4%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 110,000 8.20% 01/16/98 $ 110,636
- -------------------------------------------------------------------------------
Total Government Agency Obligations
(Cost $113,163) $ 110,636
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--15.9%
United States Treasury Bonds/(d)/
$ 360,000 8.75% 05/15/17 $ 440,550
280,000 8.75 08/15/20 345,668
United States Treasury Notes/(d)/
2,210,000 7.38 11/15/97 2,249,360
700,000 5.88 04/30/98 702,184
700,000 6.88 08/31/99 717,500
United States Treasury Principal-Only Stripped Securities/(e)/
230,000 6.41 11/15/04 138,344
1,550,000 6.95 05/15/20 307,570
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $4,910,644) $ 4,901,176
- -------------------------------------------------------------------------------
Repurchase Agreement--27.0%
Joint Repurchase Agreement Account/(d)/
$8,400,000 5.58% 11/01/96 $ 8,400,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $8,400,000) $ 8,400,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $38,555,545/(f)/) $38,632,147
===============================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(/g/) Month Gain
- -------------------------- ------------- ----------------- -----------
Euro Dollars 3 September 1997 $2,850
5 Year U.S. Treasury Notes 4 December 1996 3,000
10 Year U.S. Treasury Notes 2 December 1996 8,313
U.S. Long Term Bond 14 December 1996 60,437
------------
$74,600
===============================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 260,565
Gross unrealized loss for investments in which cost exceeds
value (195,408)
- -------------------------------------------------------------------------------
Net unrealized gain $ 65,157
===============================================================================
</TABLE>
/(a)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally +/-2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(b)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(c)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(d)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(e)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(f)/The aggregate cost for federal income tax purposes is $38,566,990.
/(g)/Each 10-Year U.S. Treasury Note, 5-Year Treasury Note and U.S. Treasury
Bond contract represents $100,000 in notional par value. Each Euro Dollar
contract represents $1,000,000 in notional par value. The total notional
amount and market value are $5,000,000 and $2,936,825, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Global Income Fund seeks high total return, composed of
both current income and capital appreciation. The fund is permitted to invest in
government and other high-quality (double-A or better) fixed income securities
issued in the United States and in foreign markets. The fund has the additional
flexibility to invest in sovereign (government) debt rated single-A (or better)
or deemed to be of comparable quality. The maximum duration of the fund is 7.5
years and its approximate interest rate sensitivity is comparable to that of a
six-year bond. Under normal market conditions, the fund's neutral position is to
be fully hedged into U.S. dollars to best serve the needs of U.S. shareholders.
However, the fund may engage in currency transactions, both to hedge exchange
rate risk and to seek to enhance returns.
European Bond Markets Achieved the Strongest Performance While Treasuries Lagged
During the 12 months ended October 31, 1996, global bonds generally
performed well, particularly during the second half of the period, with a number
of markets achieving extremely strong returns. Most international bond markets
have outperformed the United States, thus illustrating the benefits of
diversification.
The European higher yielding bonds (Italy, Spain and Sweden) were the best
performers of all the major bond markets during the period, while most of the
other European bond markets achieved good, albeit more modest, returns (hedged
into U.S. dollars). In general, European bond markets benefited from an
accommodative environment of sluggish economic growth and low inflation.
European bonds were also buoyed by tighter fiscal policies, as several European
countries attempted to reduce their deficits enough to qualify for European
monetary union. To counter less government spending, several countries (notably
Germany) attempted to stimulate economic growth by lowering their interest
rates.
The total return of Japanese Government Bonds (JGBs) during the period
under review was lower than those of most European bond markets but still
favorable (hedged into U.S. dollars). After lackluster performance during the
first half of the period amid fears of accelerating growth, JGBs experienced a
volatile, halting recovery when Japan's economy showed signs of weakening during
the summer and fall of 1996.
U.S. Treasuries underperformed all of the major bond markets. Though
Treasuries performed well in November and December 1995, accelerating economic
growth triggered a sharp correction from January through May 1996. The U.S. bond
market partially recovered when it rallied during September and October, but it
continued to lag. Within the dollar bloc, Canadian bonds did particularly well
during the period, reflecting a continuing easing of monetary policy by the Bank
of Canada, a strong currency and a relatively weak economy.
Performance Review: Favorable Country Allocations Benefited Fund Performance
During the period under review, the Goldman Sachs Global Income Fund's
Class A and Institutional shares outperformed the fund's benchmark, the J.P.
Morgan Global Government Bond Index (hedged into U.S. dollars) (the "Index").
The Index covers 14 major bond markets and reflects their currency exposures.
That favorable performance relative to the benchmark was primarily due to the
fact that during most of the period the fund was overweighted in European bonds
and moderately underweighted in U.S. Treasuries.
The fund's Class B shares, which began operations on May 1, 1996 while U.S.
interest rates were still rising, underperformed the benchmark.
- --------------------------------------------------------------------------------
11
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B* Institutional
(10/31/95- (5/1/96- (10/31/95-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net asset 11.05% 6.24% 11.55%
value)
- --------------------------------------------------------------------------------
Return From Monthly 10.50% 2.68% 11.07%
Distributions
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.55% 3.56% 0.48%
- --------------------------------------------------------------------------------
Total Return of J.P. Morgan 10.06% 6.53% 10.06%
Global Government Bond Index
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.53 $14.53 $14.52
- --------------------------------------------------------------------------------
NAV Change +$0.08 +$0.50 +$0.07
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Though the portfolio is typically fully hedged into U.S. dollars, we
occasionally employed currency strategies during the period. These included the
initiation of a long position in the U.S. dollar against the yen and European
currencies, which helped the fund's performance when the dollar strengthened
during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Sweden 1.9%
Denmark 2.5%
Spain 2.6%
Netherlands 2.6%
Ireland 2.7%
Italy 5.7%
U.K. 6.3%
Japan 9.0%
Germany 15.0%
Cash 15.4%
U.S. 36.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Dollar Bloc. As of October 31, 1996, U.S. Treasuries were the fund's sole
allocation in the dollar bloc countries. However, during the period, we
intermittently held positions in Canadian and Australian bonds.
U.S. During most of the period, the portfolio was underweighted in U.S.
Treasuries relative to the benchmark, which worked to its advantage when the
U.S. market was impacted by rising interest rates. In September and October, we
raised the fund's Treasury allocation, and the shift helped performance when the
Treasury market rallied during those months. As of October 31, the portfolio
held a 36.3% Treasury allocation, in line with the benchmark.
Other Dollar Bloc. The fund began the period overweighted in Canada (7.7%
as of October 31, 1995). However, we reduced the position in January and
liquidated the remainder in May on the expectation that Canada's current round
of interest rate easing had run its course, which proved not to be the case. In
July, we reestablished an overweighting in Canada, then sold the position the
following month after the market rallied. During September and October, the
Canadian bond market rose again on weaker economic news, but the fund did not
participate. Though the fund was not invested in Australia as of October 31, it
held an overweighted position at times during the period, which contributed to
performance when the market strengthened in anticipation of easing monetary
policy.
. Europe. The fund benefited from being overweighted in Europe during much of
the period. After we sold part of the allocation in the region at a profit, the
fund was slightly underweighted in European bonds relative to the Index, 39.3%
versus 43.9%, as of October 31.
Germany. Germany's economic growth was anemic during the first half of the
period, with real GDP declining during the fourth quarter of 1995 and the first
quarter of 1996. To help stimulate growth amid a tight fiscal policy, the
Bundesbank aggressively cut interest rates, which proved only modestly
successful as high unemployment and weak manufacturing activity continued to
persist. To
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
participate in Germany's favorable bond market environment, we significantly
overweighted our holdings at 15.0% (versus 9.6% for the Index), preferring
Germany over France in the core European markets.
Italy, Spain and Sweden. During the period, we increased the fund's
allocation in the higher yielding European markets, then trimmed its exposure
after these markets became less favorably valued. In January, we initiated a
position in Italy, which was attractive due to its tight fiscal policy, expected
interest rate cuts and better than anticipated inflation data. As of October 31,
Italy was overweighted relative to the benchmark, 5.7% versus 5.2%, and it
significantly benefited the fund as it proved to be the best performing bond
market during the period. Spain, another top-performing bond market, was cut to
a 2.6% position as of October 31 after we determined the market fully reflected
expectations that Spain would meet the criteria for European monetary union. We
also benefited by establishing and maintaining an overweighted position in
Sweden during most of the period, then subsequently reduced the position to
1.9%, nearly in line with the benchmark.
U.K. The U.K.'s economy was sluggish during much of the period, but by
September economic activity began to rebound, particularly in the consumer
sector. In anticipation of renewed inflationary pressures, as well as political
uncertainty related to the forthcoming general election, we sold approximately
half of the portfolio's U.K. position during the period. As of October 31, the
portfolio's 6.3% U.K. weighting was in line with the benchmark.
Ireland, the Netherlands and Denmark. Small, new positions added during the
period included Ireland (2.7%), the Netherlands (2.6%) and Denmark (2.5%). Like
the rest of Europe, these countries had attractive bond market environments, and
they contributed to the fund's performance. We believe Ireland is particularly
attractive as it has an exemption on its debt level, enabling it to join
European monetary union (EMU) on the first round.
France. Over the course of the year we reduced the fund's position in
France, finally liquidating our remaining holdings in July, in favor of German
bonds that we believed were more attractively valued. Unfortunately, this
strategy was not successful when France subsequently outperformed Germany.
Belgium. Belgium, a 3.5% allocation last year, performed well and we
trimmed the position over the course of the year. In October, we sold the fund's
remaining holdings in Belgium in favor of the Netherlands, which our analysis
determined offered greater total return potential.
. Japan. JGBs accounted for 9.0% of the portfolio, significantly
underweighted compared with the benchmark (15.1%), which benefited the fund when
JGBs were weak during the first half of the period, but did not work in its
favor when JGBs rebounded in the second half of the year. However, the fund
partially participated in the Japanese bond rally through a call option on JGBs,
as well as its direct investments.
. Cash Equivalents. The fund's allocation in cash equivalents was 15.4%,
approximately the same as a year ago (16.4%). We anticipate reducing the
position as we identify attractive investment opportunities.
. Credit Quality. The portfolio was 100% invested in triple-A-rated
securities as of the end of the period.
. Duration. As of October 31, the fund's duration of 4.4 years was
approximately a half year lower than that of the benchmark. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's net asset value [NAV] should move in relation
to interest rate fluctuations.) The duration difference was primarily due to the
portfolio's cash equivalent position and its underweighting in Japan.
- --------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
Fund Outlook
Going forward, we expect European bonds to continue to outperform U.S.
Treasuries, in terms of both capital gains and yields. In general, European
economies are weaker than that of the United States, with slow growth, high
unemployment and tight fiscal policies. Germany's economic recovery appears
intact, which makes us somewhat more cautious on German bonds at current low
yield levels. Nevertheless, German bonds still offer excess returns over cash,
provided German monetary policy remains on hold. Longer term, we favor the U.K.
gilt, as we believe the market has overreacted to the U.K.'s lack of
participation in European monetary union and its recent political uncertainty.
We also have a positive longer term view of the higher yielding markets of Italy
and Spain, though they have not offered investors a sufficient risk premium in
recent months. As of this writing, we are neutral on U.S. Treasuries, but we
will be watching for signs that the U.S. Federal Reserve expects to preempt any
potential inflationary pressure with tighter monetary policy in the near future.
Our analysis indicates that after their spectacular run, Canadian bonds do not
offer attractive relative value, but we are considering reestablishing a
position in Australia, which is experiencing slowing growth and waning
inflationary pressures. We expect to remain underweighted in Japan because we
anticipate that its economic recovery will resume despite recent weakness,
opening the possibility for monetary tightening. With JGBs currently yielding
just under 3%, our analysis indicates that we would not be adequately
compensated for their level of risk.
Distribution Policy
During the 12-month period under review, the fund's Class A and
Institutional shares paid out distributions of $1.43 and $1.50 per share,
respectively. From their inception on May 1, 1996 through October 31, 1996, the
fund's Class B shares paid out $0.36 per share. The fund declares and pays
dividends on a monthly basis. The fund distributes substantially all of its
taxable income, as is required for all investment companies.
As always, we will utilize the resources of Goldman, Sachs & Co.'s London-
based Economics Research Group for economic and market trend analysis as we
continue to seek out attractive global bond investment opportunities. We
appreciate your investment in the Goldman Sachs Global Income Fund and look
forward to continuing to help you achieve your investment goals.
Sincerely,
/s/ Stephen C. Fitzgerald
Stephen C. Fitzgerald
Portfolio Manager, Fixed Income Investments
/s/ Andrew F. Wilson
Andrew F. Wilson
Portfolio Manager, Fixed Income Investments
/s/ Gareth I. Evans
Gareth I. Evans
Portfolio Manager, Currency
Goldman Sachs Global Income Fund
London, November 29, 1996
- --------------------------------------------------------------------------------
14
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Global Income Fund (assuming both the maximum
sales charge of 4.5% and no sales charge for the Class A shares, the first year
maximum redemption fee of 5% and no redemption fee for the Class B shares and
net asset value for the Institutional shares) is compared with its benchmark--
the J.P. Morgan Global Government Bond Index hedged to U.S. Dollars ("J.P.
Morgan GGB Index-$ Hedged"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
HYPOTHETICAL $10,000 INVESTMENT
[CHART APPEARS HERE]
Class A Shares (a)
<TABLE>
<CAPTION>
Class A Shares Class A Shares J.P. Morgan GGB Index-
(no sales charge) (w/sales charge) $ Hedged
<S> <C> <C> <C>
09/01/91 $10,000 $9,500 $10,000
10/31/91 $10,145 $9,688 $10,263
10/31/92 $11,034 $10,538 $11,156
10/31/93 $12,220 $11,670 $12,509
10/31/94 $11,672 $11,146 $12,051
10/31/95 $13,432 $12,827 $13,903
10/31/96 $14,921 $14,250 $15,306
</TABLE>
Class B Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares J.P. Morgan GGB
(no redemption charge) (w/redemption charge) Index-$ Hedged
<S> <C> <C> <C>
05/01/96 $10,000 $10,000 $10,000
10/31/96 $10,624 $10,124 $10,653
</TABLE>
Institutional shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional J.P. Morgan GGB
Shares Index-$ Hedged
<S> <C> <C>
08/01/95 $10,000 $10,000
10/31/95 $10,442 $10,351
10/31/96 $11,651 $11,395
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
Average Annual Total Return
----------------------------------------------------
One Year Five Year Since Inception(b)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, excluding
sales charge 11.05% 8.01% 8.02%
- ---------------------------------------------------------------------------
Class A, including
sales charge 6.08% 7.02% 7.08%
- ---------------------------------------------------------------------------
Class B, excluding
redemption charge N/A N/A 6.24%(c)
- ---------------------------------------------------------------------------
Class B, including
redemption charge N/A N/A 1.24%(c)
- ---------------------------------------------------------------------------
Institutional Class 11.55% N/A 12.95%
- ---------------------------------------------------------------------------
</TABLE>
(a) For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations of
the Class A shares.
(b) The Class A, Class B and Institutional shares commenced operations August 2,
1991, May 1, 1996 and August 1, 1995, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount (a) Rate Date Value
================================================================================
<S> <C> <C> <C>
Debt Obligations--83.2%
British Pound Sterling--6.2%
United Kingdom Treasury
BPS 9,000,000 8.50% 12/07/05 $ 15,573,120
- --------------------------------------------------------------------------------
Danish Krone--2.5%
Kingdom of Denmark
DKK 33,000,000 9.00% 11/15/00 $ 6,415,484
- --------------------------------------------------------------------------------
Deutschemark--14.8%
Federal Republic of Germany
DEM 8,000,000 7.12% 12/20/02 $ 5,742,980
7,500,000 6.75 07/15/04 5,245,292
33,000,000 6.50 10/14/05 22,549,455
3,500,000 7.38 01/03/05 2,528,510
Treuhandanstalt
2,000,000 6.50 04/23/03 1,388,437
- --------------------------------------------------------------------------------
$ 37,454,674
- --------------------------------------------------------------------------------
Irish Pound--2.7%
Republic of Ireland
IEP 4,000,000 8.00% 10/18/00 $ 6,905,421
- --------------------------------------------------------------------------------
Italian Lira--5.4%
Republic of Italy
ITL 19,000,000,000 10.50% 11/01/00 $ 13,851,419
- --------------------------------------------------------------------------------
Japanese Yen--8.9%
International Bank for Reconstruction &
Development
JPY 700,000,000 6.75% 06/18/01 $ 7,536,474
Japanese Developmental Bank
1,400,000,000 6.50 09/20/01 15,019,116
- --------------------------------------------------------------------------------
$ 22,555,590
- --------------------------------------------------------------------------------
Netherlands Guilder--2.5%
Dutch Government Bond
NLG 10,000,000 7.00% 06/15/05 $ 6,350,937
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 500,000,000 10.30% 06/15/02 $ 4,448,842
Kingdom of Spain
200,000,000 10.15 01/31/06 1,804,930
- --------------------------------------------------------------------------------
$ 6,253,772
- --------------------------------------------------------------------------------
Swedish Krona--1.8%
Kingdom of Sweden
SEK 32,000,000 6.00% 02/09/05 $ 4,489,558
- --------------------------------------------------------------------------------
United States Dollar--35.9%
United States Treasury Notes
USD 10,000,000 6.88% 07/31/99 $ 10,243,700
18,000,000 5.25 01/31/01 17,507,880
17,000,000 6.38 03/31/01 17,196,520
8,200,000 6.25 02/15/03 8,229,438
10,000,000 7.88 11/15/04 10,975,000
12,000,000 6.50 08/15/05 12,125,640
14,000,000 7.00 07/15/06 14,616,840
- --------------------------------------------------------------------------------
$ 90,895,018
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $206,293,080) $210,744,993
- --------------------------------------------------------------------------------
Short-Term Obligations--15.4%
Euro-Time Deposit
USD 38,987,507 5.50% 11/01/96 38,987,507
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $38,987,507) $ 38,987,507
- --------------------------------------------------------------------------------
Total Investments
(Cost $245,280,587/(b)/ ) $249,732,500
================================================================================
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $6,414,087
Gross unrealized loss for investments in which cost
exceeds value (2,188,683)
- --------------------------------------------------------------------------------
Net unrealized gain $4,225,404
================================================================================
</TABLE>
/(a)/ The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
BPS = British Pound Sterling ITL = Italian Lira
NLG = Netherlands Guilder JPY = Japanese Yen
DKK = Danish Krone ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
IEP = Irish Pound USD = United States Dollar
/(b)/ The aggregate cost for federal income tax purposes is $245,507,096. The
percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Municipal Income Fund seeks to provide a high level of
current income that is exempt from regular federal income tax, consistent with
the preservation of capital. In pursuit of its objective, the fund invests in a
diversified portfolio of municipal securities with a weighted average credit
quality of double-A or better. The fund buys only investment-grade securities
or, if unrated, deemed to be of comparable quality. Under normal interest rate
conditions, the fund's duration is expected to be within one year of its
benchmark, the Lehman Brothers 15-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a 15-year bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a 15-year municipal bond (as
calculated from data provided by Municipal Market Data, an independent municipal
market information provider) rose approximately 0.50%, while yields declined
from 5.35% on October 31, 1995 to 5.30% on October 31, 1996.
The municipal bond market began the period under review on a weak note. Tax
reform uncertainty impacted investor demand during November and December 1995,
while municipal bond supply was high due to seasonably heavy year-end issuance
and relatively low interest rates. The market environment improved during
January and February 1996, when fading tax reform concerns helped to revive
investor interest in the sector and issuance declined. From March through the
end of the period, the market's technical balance was generally healthy, though
occasional spikes in supply periodically overwhelmed demand and briefly impacted
performance. The largest of these surges occurred in June when supply rose to
its highest level since late 1995, but subsequently both new issuance and
secondary supply fell dramatically from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (who control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[YIELD CURVE LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year of Maturity 10/31/96 10/31/95
---------------- -------- --------
<S> <C> <C>
1997 3.6 3.9
1998 3.9 4.1
1999 4.15 4.2
2000 4.3 4.3
2001 4.4 4.4
2002 4.5 4.5
2003 4.6 4.6
2004 4.7 4.7
2005 4.8 4.8
2006 4.9 4.95
2007 5 5.05
2008 5.1 5.15
2009 5.2 5.25
2010 5.25 5.35
2011 5.3 5.4
2012 5.35 5.45
2013 5.4 5.5
2014 5.4 5.55
2015 5.45 5.55
2016 5.45 5.55
2017 5.45 5.55
2018 5.5 5.55
2019 5.5 5.6
2020 5.5 5.6
2021 5.5 5.6
2022 5.5 5.6
2023 5.5 5.6
2024 5.5 5.6
2025 5.5 5.6
</TABLE>
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review: Term Structure, Sector Weightings and Security Selection
Contributed to the Fund's Favorable Performance
During the period under review, the fund's Class A shares outperformed
their benchmark, the Lehman Brothers 15-Year Municipal Bond Index (the "Index").
The fund's Class B shares, which opened on May 1, 1996 while interest rates were
still rising, also performed well but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We are pleased to report that the fund's Class A shares outperformed most of
their peers. For the 12 months ended October 31, 1996, Class A shares ranked in
the top 20% of general municipal debt funds (36 out of 228) based on total
return, according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results. Class B shares were not included because they
were not in existence during the entire 12-month period.)
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
-------- --------
<S> <C> <C>
Total Return (based on net asset value) 6.13% 4.40%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 4.72% 1.98%
- --------------------------------------------------------------------------------
Return From Price Appreciation 1.41% 2.42%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal
Bond Index 5.99% 4.80%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.37 $14.37
- --------------------------------------------------------------------------------
NAV Change +$0.20 +$0.34
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
. The portfolio's neutral term structure is "credit-barbelled," emphasizing
high-quality bonds with maturities of 20 to 30 years on the long end of the
yield curve and lower quality bonds with four to ten year maturities on the
short end of the curve. However, during the period, we regularly adjusted the
term structure to take advantage of changing market conditions. For example,
when the municipal bond yield curve flattened during September and the beginning
of October, we sold securities in the 20- to 30-year range in favor of 15- to
20-year bonds. In mid-October, the yield curve steepened as we anticipated, and
the fund's 15- to 20-year bonds outperformed 20- to 30-year bonds. By the end of
the month, when longer maturity bonds had become more attractively valued, we
reestablished a more evenly distributed maturity structure.
. In September, we underweighted the fund's municipal bond position relative
to the Index when our analysis indicated that municipal bonds had become
expensive compared with Treasuries. We replaced a small percentage of the fund's
duration with U.S. Treasury bond futures contracts, which we preferred over
buying Treasuries directly because they allowed us to participate in a Treasury
rally without incurring taxable net investment income. This strategy proved
successful when municipal bonds underperformed Treasuries in October, and we
returned the fund to its 100% municipal bond weighting after municipals had
cheapened to an attractive level at the end of the month.
. The fund's performance also benefited from our extensive credit analysis.
Our research helped us identify specific investment opportunities, such as
"story" bonds. These securities are often misunderstood or incorrectly valued,
but can have unique security structures and attractive yield potential.
Portfolio Composition and Investment Strategies:
Revenue Bonds Were Stressed Over GOs
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Variable Rate Demand Notes 7.6%
General Obligations 5.5%
Insured Revenue Bonds 34.7%
Revenue Bonds 27.9%
Insured General Obligations 24.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of October 31, the fund held a 62.6% position in a combination of insured and
uninsured revenue bonds, overweighted compared with the Index (53.9%). (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. As of October 31, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 29.8% versus 45.6%. Though the fund's total
GO allocation was little changed from a year ago, we did increase its weighting
in insured GOs (to 24.3% versus 12.6% last year) and reduced uninsured GOs (to
5.5% versus 16.6% last year) due to security-specific investment opportunities.
. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. The position
accounted for 7.6% of the portfolio, nearly unchanged from last year.
. Credit Quality. During the period, the fund's average credit quality has
remained double-A. However, in contrast to last year's emphasis on triple-A-
rated bonds, this year the fund's credit quality was structured like a
"barbell," with higher quality securities at the long end of the yield curve and
lower quality securities (but still investment grade) at the short end. As of
October 31, 70.5% of the fund was invested in triple-A-rated securities, nearly
the same as a year ago, while double-A- and single-A-rated securities were
reduced to 9.3% and 1.8%, respectively. In the late spring of 1996, we initiated
a new position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 18.4% of the portfolio by the
end of the period. We used extensive credit research to identify specific
securities that offered higher yields than average triple-B-rated securities,
but still were of sound credit quality. The triple-B-rated position benefited
the fund's performance during the period by enabling us to lock in above-market
yields and providing greater price appreciation potential relative to the
market. Each of these positions is monitored carefully, and we will remain
vigilant for any changes in their credit quality.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
During the period under review, the fund's Class A shares paid out
distributions of $0.65 per share. The fund's Class B shares, which opened on May
1, 1996, paid out $0.27 per share from their inception through October 31, 1996.
Dividends are declared daily and paid on a monthly basis. The fund intends to
distribute substantially all of its investment company tax-exempt and taxable
income, as required by tax law.
- --------------------------------------------------------------------------------
19
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We value your investment in the Goldman Sachs Municipal Income Fund and we
look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Municipal Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
20
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Municipal Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares) is
compared with its benchmark--the Lehman Brothers 15-Year Municipal Bond Index
("Lehman 15-Year Muni Index"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
HYPOTHETICAL $10,000 INVESTMENT
Class A /(a)/
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman 15-year
Date (no sales charge) (w/sales charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
8/1/93 $10,000 $9,550 $10,000
- --------------------------------------------------------------------------------
10/31/93 $10,455 $9,984 $10,385
- --------------------------------------------------------------------------------
10/31/94 $9,878 $9,434 $9,860
- --------------------------------------------------------------------------------
10/31/95 $11,241 $10,735 $11,414
- --------------------------------------------------------------------------------
10/31/96 $11,933 $11,395 $12,100
- --------------------------------------------------------------------------------
</TABLE>
Class B
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman
(no redemption (w/redemption 15-year
Date charge) charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
- --------------------------------------------------------------------------------
Oct 31, 96 10,440 9,940 10,480
- --------------------------------------------------------------------------------
</TABLE>
-----------------------------------
Average Annual Total Return
-----------------------------------
One Year Since Inception/(b)/
--------------------------------------------------------
Class A, excluding
sales charge 6.13% 5.27%
--------------------------------------------------------
Class A, including
sales charge 1.35% 3.80%
--------------------------------------------------------
Class B, excluding
redemption charge N/A 4.40%/(c)/
--------------------------------------------------------
Class B, including
redemption charge N/A (0.60%)/(c)/
--------------------------------------------------------
/(a)/For comparative purposes, Class A initial investment is assumed to be made
on the first day of the month following the Fund's commencement of
operations.
/(b)/Class A and Class B commenced operations July 20, 1993 and May 1, 1996,
respectively.
/(c)/An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
21
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations--102.2%
Arizona--5.1%
Maricopa County, AZ Unified School District No. 41 GO
(FSA)(AAA/Aaa)
$2,500,000 6.25% 07/01/15 $ 2,653,300
- --------------------------------------------------------------------------------
California--8.1%
Contra Costa, CA Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $ 2,022,980
San Buenaventura, CA Sewer Revenue RB (FGIC)
(AAA/Aaa)
2,255,000 5.50 03/01/15 2,231,435
- --------------------------------------------------------------------------------
$ 4,254,415
- --------------------------------------------------------------------------------
Colorado--4.8%
Englewood MFH RB (BBB)
$2,500,000 6.65% 12/01/26 $ 2,499,750
- --------------------------------------------------------------------------------
Connecticut--3.9%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $ 2,072,220
- --------------------------------------------------------------------------------
Florida--2.8%
Escambia County, FL Housing Authority, Single Family
(GNMA/FNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $ 1,464,949
- --------------------------------------------------------------------------------
Illinois--19.1%
Chicago, IL GO Series A-2 (AMBAC) (AAA/Aaa) (e)
$1,750,000 6.25% 01/01/14 $ 1,877,873
Cook County, IL GO(FGIC) (AAA/Aaa)
2,000,000 5.75 11/15/12 2,015,720
Lake County, IL Unified School District No. 116 GO (FSA) (AAA/Aaa)
2,000,000 7.60 02/01/14 2,428,340
1,525,000 6.10 02/01/16 1,588,089
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,109,780
- --------------------------------------------------------------------------------
$10,019,802
- --------------------------------------------------------------------------------
Indiana--9.5%
East Allen, IN Elementary School Building Corp. RB (FSA)
(AAA/Aaa)
$3,115,000 5.88% 07/01/12 $ 3,178,079
Indiana Transportation Finance Authority RB Series A
(MBIA) (AAA/Aaa)
1,500,000 7.25 06/01/15 1,789,305
- --------------------------------------------------------------------------------
$ 4,967,384
================================================================================
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Kentucky--2.0%
Nelson County, KY Industrial Building RB for Mabex
Universal Corp. Project AMT (A3)
$1,000,000 6.50% 04/01/05 $ 1,066,790
- --------------------------------------------------------------------------------
Maine--1.5%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 725,000 6.80% 12/01/07 $ 765,462
- --------------------------------------------------------------------------------
Michigan--3.6%
Detroit, MI GO (BBB-)
$1,885,000 5.70% 05/01/02 $ 1,907,714
- --------------------------------------------------------------------------------
New York--9.0%
New York State Municipal Bond Agency RB, Series A (BBB+)
$1,610,000 6.60% 03/15/01 $ 1,699,854
New York State Thruway Authority Highway & Bridges RB
(BBB/Baa1)
1,000,000 5.25 04/01/03 1,004,630
Syracuse, NY IDA RB (AA)
2,000,000 5.13 10/15/02 2,005,600
- --------------------------------------------------------------------------------
$ 4,710,084
- --------------------------------------------------------------------------------
North Dakota--3.8%
Mercer County, ND PCRB for Basin Electric Power 2nd
Series (AMBAC) (AAA/Aaa) (e)
$2,000,000 6.05% 01/01/19 $ 2,055,380
- --------------------------------------------------------------------------------
Ohio--8.9% Akron, OH COPs (a) (BBB) (c)
$2,000,000 6.90% 12/01/16 $ 1,438,500
Kent State University RB (MBIA) (AAA/Aaa)
2,280,000 5.50 05/01/28 2,181,504
Trumbull County, OH GO (AMBAC) (AAA/Aaa)
1,000,000 5.75 12/01/03 1,061,870
- --------------------------------------------------------------------------------
$ 4,681,874
- --------------------------------------------------------------------------------
Texas--8.8%
Denison, TX Waterworks & Sewer RB (AAA/Aaa)
$1,250,000 5.50% 09/01/08 $ 1,258,525
1,250,000 5.40 09/01/09 $ 1,258,475
East Texas Criminal Justice Facilities Financing Corp. RB
(AMBAC) (AAA/Aaa)
$2,000,000 5.75 11/01/09 $ 2,032,560
Fort Bend, TX Independent School District RB (AAA/Aaa)
50,000 5.00 02/15/18 46,226
- --------------------------------------------------------------------------------
$ 4,595,786
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
22
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations(continued)
Washington--7.1%
Chelan County, WA Public Utility RB (AAA/Aaa)/c/
$2,500,000 6.35% 07/01/28 $ 2,540,125
Washington State Series C GO (AA/Aa)
1,155,000 6.50 07/01/00 1,232,373
- --------------------------------------------------------------------------------
$ 3,772,498
- --------------------------------------------------------------------------------
Wisconsin--4.2%
Wisconsin Housing & Economic Development Authority RB,
Series B (AA/Aa)/e/
$2,060,000 7.10% 09/01/15 $ 2,181,623
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $52,677,902) $53,669,031
- --------------------------------------------------------------------------------
Short-Term Obligations--8.4%
Alabama--6.5%
Columbia County, AL IDB/b/ (A/A2)
$1,200,000 3.65% 11/01/96 $ 1,200,000
Parrish, AL IDB/b/ (A/A1)
2,200,000 3.65 11/01/96 2,200,000
- --------------------------------------------------------------------------------
$ 3,400,000
- --------------------------------------------------------------------------------
Wyoming--1.9%
Converse, WY PCRB/b/ (AAA)
$1,000,000 3.65% 11/01/96 $ 1,000,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $4,400,000) $ 4,400,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $57,077,902/d/) $58,069,031
================================================================================
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 1,018,643
Gross unrealized loss for investments in which cost
exceeds value (27,514)
- --------------------------------------------------------------------------------
Net unrealized gain $ 991,129
================================================================================
/a/The interest rate disclosed for these securities represents effective
yields to maturity.
/b/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/c/When-issued security.
/d/The amount stated also represents aggregate cost for federal income tax
purposes.
/e/Portions of these securities are being segregated for when-issued securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal
Bond Assurance Corp.
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty
Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
================================================================================
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
23
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
========================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $38,555,545, $245,280,587
and $57,077,902) $38,632,147 $249,732,500 $58,069,031
Receivables:
Investment securities sold 3,011,458 -- --
Interest 255,950 4,572,733 688,717
Forward foreign currency exchange contracts -- 1,073,237 --
Fund shares sold 38,729 23,757 12,145
Foreign tax withheld -- 100,251 --
Cash 17,149 248 48,127
Variation margin 6,788 -- --
Deferred organization expenses, net 23,998 -- 30,090
Other assets 65,284 31,883 29,773
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 42,051,503 255,534,609 58,877,883
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 11,129,422 -- 6,076,685
Forward foreign currency exchange contracts -- 1,816,332 --
Fund shares repurchased 14,381 124,500 128,184
Investment adviser fees 6,423 94,713 18,124
Administration fees -- 32,334 6,857
Authorized dealer service fees 6,166 44,409 9,224
Distribution fees 151 35,488 154
Accrued expenses and other liabilities 57,538 211,388 116,255
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 11,214,081 2,359,164 6,355,483
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 30,678,648 247,410,169 52,495,830
Accumulated undistributed net investment income 53,331 6,704,225 60,331
Accumulated net realized loss on investment transactions (45,759) (4,636,687) (1,024,890)
Accumulated net realized foreign currency gain -- 43,634 --
Net unrealized gain on investments and futures 151,202 4,864,862 991,129
Net unrealized loss on translation of assets and liabilities denominated in foreign
currencies -- (1,210,758) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets $30,837,422 $253,175,445 $52,522,400
==================================================================================================================================
Net asset value, offering /(a)/ and redemption price per share
Class A $14.36 $14.53 $14.37
Class B $14.37 $14.53 $14.37
Institutional -- $14.52 --
==================================================================================================================================
Shares Outstanding
Class A 2,131,467 13,670,270 3,637,437
Class B 16,317 17,603 17,778
Institutional -- 3,735,251 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 2,147,784 17,423,124 3,655,215
==================================================================================================================================
</TABLE>
/(a)/Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $15.04, $15.21 and $15.05 for Government Income, Global Income
and Municipal Income, respectively. At redemption, Class B shares are
subject to a contingent deferred sales charge, assessed on the amount equal
to the lesser of the current net asset value or the original purchase price
of the shares.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Trust
- ------------------------------------------------------------------------------
Statements of Operations
For the Year Ended October 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
======================================
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $2,048,891 $18,287,214 $2,869,729
- ------------------------------------------------------------------------------
Total income 2,048,891 18,287,214 2,869,729
- ------------------------------------------------------------------------------
Expenses:
Investment adviser fees 148,120 1,965,605 211,283
Administration fees 44,433 393,263 79,231
Authorized dealer service fees 74,171 549,289 132,051
Distribution fees 74,281 549,538 132,304
Custodian fees 44,987 210,420 36,172
Transfer agent fees 72,237 121,212 90,284
Professional fees 58,897 92,538 60,094
Registration fees 14,992 63,673 32,549
Amortization of deferred organization
expenses 18,848 46,256 17,593
Trustee fees 478 3,073 707
Other 8,763 78,430 27,214
- ------------------------------------------------------------------------------
Total expenses 560,207 4,073,297 819,482
Less--expenses reimbursable and fees
waived by Goldman Sachs (411,644) (1,241,452) (370,128)
- ------------------------------------------------------------------------------
Net expenses 148,563 2,831,845 449,354
- ------------------------------------------------------------------------------
Net investment income 1,900,328 15,455,369 2,420,375
- ------------------------------------------------------------------------------
Realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions:
Net realized gain (loss) from:
Investment transactions 115,970 9,268,666 1,390,846
Futures transactions (68,389) -- (151,156)
Foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on:
Investments and options (332,205) 54,149 (513,085)
Futures 74,600 -- --
Translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions (210,024) 12,079,256 726,605
- ------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $1,690,304 $27,534,625 $3,146,980
==============================================================================
</TABLE>
/(a)/Net of $96,252 in foreign withholding tax for the Global Income
Fund.
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,900,328 $ 15,455,369 $ 2,420,375
Net realized gain from investment transactions 47,581 9,268,666 1,239,690
Net realized loss from foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on investments, futures and options (257,605) 54,149 (513,085)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,690,304 27,534,625 3,146,980
- ------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,898,372) (22,455,377) (2,418,570)
Class B (3,324) (3,052) (1,805)
Institutional Class -- (4,050,770) --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,901,696) (26,509,199) (2,420,375)
- ------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 8,922,548 39,747,372 6,389,765
Reinvestment of dividends and distributions 1,614,587 16,968,046 1,484,778
Cost of shares repurchased (8,990,920) (82,019,748) (9,875,982)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 1,546,215 (25,304,330) (2,001,439)
- ------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 1,334,823 (24,278,904) (1,274,834)
Net assets:
Beginning of year 29,502,599 277,454,349 53,797,234
- ------------------------------------------------------------------------------------------------------------------------
End of year $ 30,837,422 $ 253,175,445 $ 52,522,400
========================================================================================================================
Accumulated undistributed net investment income $ 53,331 $ 6,704,225 $ 60,331
========================================================================================================================
Summary of share transactions:
Shares sold 624,626 2,811,314 449,496
Reinvestment of dividends and distributions 112,977 1,198,568 104,201
Shares repurchased (628,175) (5,784,097) (694,794)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 109,428 (1,774,215) (141,097)
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,357,262 $ 19,658,884 $ 2,466,930
Net realized gain from investment transactions 603,048 5,556,002 938,332
Net realized gain from foreign currency related transactions -- 18,804,029 --
Net change in unrealized gain on investments 902,391 14,759,004 3,055,111
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies -- (15,288,240) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,862,701 43,489,679 6,460,373
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (1,361,620) (20,883,123)(a) (2,466,930)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,361,620) (20,883,123) (2,466,930)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 15,973,014 53,349,100 11,879,853
Reinvestment of dividends and distributions 1,123,498 13,008,610 1,551,121
Cost of shares repurchased (3,546,816) (208,094,050) (11,000,210)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 13,549,696 (141,736,340) 2,430,764
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 15,050,777 (119,129,784) 6,424,207
Net assets:
Beginning of year 14,451,822 396,584,133 47,373,027
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $29,502,599 $ 277,454,349 $ 53,797,234
====================================================================================================================================
Accumulated undistributed net investment income $ 36,251 $ 16,641,827 $ 42,738
====================================================================================================================================
Summary of share transactions:
Shares sold 1,139,008 3,822,903 876,447
Reinvestment of dividends and distributions 80,152 935,191 113,767
Shares repurchased (253,583) (15,079,626) (816,569)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 965,577 (10,321,532) 173,645
====================================================================================================================================
</TABLE>
(a) The Global Income Fund distributed $20,322,640 and $560,483 from net
investment income for the Class A and Institutional class of shares,
respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end, management
investment company. Included in this report are the financial statements for the
Goldman Sachs Government Income Fund (Government Income), the Goldman Sachs
Global Income Fund (Global Income) and the Goldman Sachs Municipal Income Fund
(Municipal Income), collectively, "the Funds" or individually a "Fund."
Government Income and Municipal Income are diversified portfolios whereas Global
Income is a non-diversified portfolio. As of October 31, 1996, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. As of October 31, 1996, there outstanding no Service shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in debt securities, other than money market instruments, held by the
Funds are valued on the basis of dealer-supplied quotations or by a pricing
service approved by the Board of Trustees if such prices are believed by the
investment adviser to accurately represent market value. The prices derived by a
pricing agent reflect broker/dealer-supplied valuations and electronic data
processing techniques. If those prices are not deemed by the Fund's Investment
Adviser to be representative of the market values at the time the net asset
value is calculated, then such securities will be valued at fair value as
described below. Options and futures contracts are valued at the last sale price
on the market where any such option or futures contract is principally traded.
Forward foreign currency exchange contracts are valued at the mean between the
last bid and asked quotations supplied by a dealer in such contracts. All other
securities and other assets, including debt securities, for which prices are
supplied by a pricing agent but are not deemed by the Fund's Investment Adviser
to be representative of market values, restricted securities and securities for
which no market quotation is available, but excluding money market instruments
with a remaining maturity of sixty days or less, are valued at fair value as
determined in good faith pursuant to procedures established by the Board of
Trustees. Money market instruments held by the Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which
approximates market value.
Investments in portfolio securities held by Government Income and Municipal
Income for which accurate market quotations are readily available are valued on
the basis of quotations furnished by a pricing service or provided by dealers in
such securities. Portfolio securities held by Government Income and Municipal
Income, for which accurate market quotations are not readily available are
valued at fair value using methods determined in good faith under procedures
established by the Trust's Board of Trustees and may include yield equivalents
or a pricing matrix. Exchange traded options and futures contracts will be
valued by the investment adviser at the last sale price on the exchange where
such contracts and options are principally traded. Short-term debt obligations
maturing in sixty days or less are valued at amortized cost.
B. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account principal prepayment
experience and estimates of future principal prepayments. Certain mortgage
security paydown gains and losses are taxable as ordinary income. Such paydown
gains and losses increase or decrease taxable ordinary income available for
distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
For Municipal Income, market premiums on other long-term debt securities are
amortized to interest income while for Global Income, market discounts on other
long-term debt securities are accreted to interest income.
C. Foreign Currency Translations
- --------------------------------
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized and unrealized gain (loss) on foreign currency transactions will
represent: (i) foreign exchange gains and losses from the sale and holdings of
foreign currencies and investments; (ii) gains and losses between trade date and
settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
interest recorded and the amounts actually received.
D. Forward Foreign Currency Exchange Contracts
- ----------------------------------------------
Global Income may enter into forward foreign exchange contracts for the purchase
or sale of a specific foreign currency at a fixed price on a future date as a
hedge or cross-hedge against either specific transactions or portfolio
positions. Global Income may also purchase and sell forward contracts to seek to
increase total return. All commitments are "marked-to-market" daily at the
applicable translation rates and any resulting unrealized gains or losses are
recorded in the Fund's financial statements. The Fund records realized gains or
losses at the time the forward contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
E. Mortgage Dollar Rolls
- ------------------------
Government Income and Global Income may enter into mortgage "dollar rolls" in
which the Fund sells securities in the current month for delivery and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund loses the right to receive principal and interest paid on the
securities sold but benefits to the extent of any price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
- --------------------------------------------------------------------------------
29
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
F. Option Accounting Principles
- -------------------------------
When call or put options are written, an amount equal to the premium received is
recorded as an asset and as an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current market value of the
option written. When a written option expires on its stipulated expiration date,
or a closing purchase transaction has been entered into, a gain or loss is
realized without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished.
Upon the purchase of a call option or a protective put option, the premium paid
is recorded as an investment, and subsequently marked-to-market to reflect the
current market value of the option. If an option which has been purchased
expires on the stipulated expiration date, a loss is realized in the amount of
the cost of the option. If a closing sale transaction has been entered into, a
gain or loss is realized, depending on whether the sale proceeds from the
closing sale transaction are greater or less than the cost of the option.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices, currency exchange rates in the case of
Global Income or to seek to increase total return. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return to the extent permitted by such
regulations. The use of futures contracts involve, to varying degrees, elements
of market risk which may exceed the amounts recognized in the Statements of
Assets and Liabilities.
Payments for futures contracts ("variation margin") are made or received by the
Funds each day, dependent on the daily fluctuations in the value of the
contract, and are recorded for financial reporting purposes, as unrealized gains
or losses. When entering into a closing transaction, the Funds will realize a
gain or loss equal to the difference between the value of the futures contract
to sell and the futures contract to buy. Futures contracts are valued at the
most recent settlement price, unless such price does not reflect the fair market
value of the contract, in which case the position will be valued using methods
as approved by the Funds' Board of Trustees.
Certain risks may arise upon entering into futures contracts. The predominant
risk is that changes in the value of the futures contract that may not directly
correlate with changes in the value of the underlying securities. The risk may
decrease the effectiveness of the Funds' hedging strategies and may also result
in a loss to the Funds.
H. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all investment company tax-exempt and taxable income to its
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of a portfolio's distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from paid-in capital, depending on the type
of book/tax differences that may exist.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. Federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ------------ ----------------
<S> <C> <C>
Global Income $4,471,734 2002
Municipal Income $1,534,884 2002
</TABLE>
I. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
J. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are allocated to the portfolios based on each portfolio's
relative average net assets for the period.
Class A and Class B shareholders of the Funds bear all expenses and fees
relating to their respective distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. Transfer
agent fees are subject to separate arrangements for each class.
3. Agreements
- -------------
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as each Fund's investment adviser
pursuant to Investment Advisory Agreements. Goldman Sachs Asset Management
International ("GSAM International"), an affiliate of Goldman Sachs, acts as
subadviser under a Subadvisory Agreement for Global Income. Under the Investment
Advisory and Subadvisory Agreements, GSAM and GSAM International, subject to the
general supervision of the Trust's Board of Trustees, manage the Funds'
portfolios. As compensation for the services rendered pursuant to the Investment
Advisory Agreements and the assumption of the expenses related thereto, GSAM is
entitled to a fee, computed daily and payable monthly at an annual rate equal to
.50%, .25% and .40% of average daily net assets of Government Income, Global
Income and Municipal Income, respectively. As compensation for the services
rendered pursuant to the Subadvisory Agreement, GSAM International is entitled
to a subadvisory fee from Global Income of .50% of the average daily net assets.
GSAM serves as each Fund's administrator pursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreement, GSAM is entitled to
a fee, computed daily and payable monthly at an annual rate equal to .15% of
each Fund's average daily net assets.
GSAM has voluntarily agreed to limit certain of the Funds' expenses (excluding
advisory, administration, distribution and authorized dealer service fees,
taxes, interest, brokerage, litigation, indemnification and other extraordinary
expenses and with respect to Global Income, transfer agent fees) to the extent
such expenses exceed .00%, .06% and .05% per annum of Government Income, Global
Income and Municipal Income, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to a
Distribution Agreement and as such may receive a portion of the sales load
imposed on the sale of Fund shares. During the year ended October 31, 1996,
Goldman Sachs retained approximately $17,300, $52,600 and $24,900 of sales loads
related to Government Income, Global Income and Municipal Income, respectively.
The Trust, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% and .75% of each Fund's average
daily net assets attributable to Class A and Class B shares, respectively.
- --------------------------------------------------------------------------------
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The Trust, on behalf of each Fund, has adopted an Authorized Dealer Service Plan
(the "Service Plan") pursuant to which Goldman Sachs and Authorized Dealers are
compensated for providing personal and account maintenance services. Each Fund
pays a fee under its Service Plan equal, on an annual basis, up to .25% of the
average daily net assets attributable to the Class A and Class B shares. Goldman
Sachs also serves as the Transfer Agent of the Funds for a fee.
For the year ended October 31, 1996, the advisors, administrators and
distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
<TABLE>
<CAPTION>
Waivers
--------------------------------------
Reimburse-
Admin- Class A Reimburse- ment
Fund Advisor istrator 12b-1 ment Outstanding
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government
Income 74 44 74 220 27
Global
Income 848 -- 56 337 7
Municipal
Income -- -- 132 238 30
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such waivers
and limitations in the future at their discretion.
For the year ended October 31, 1996, Government Income and Municipal Income
incurred commissions expense of approximately $1,200 and $2,750 respectively, in
connection with futures contracts entered into with Goldman Sachs. At October
31, 1996, Goldman Sachs owes approximately $7,000 to Government Income related
to variation margin on futures contracts.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, Global Income participates in a $50,000,000
committed, unsecured revolving line of credit facility. Both facilities are to
be used solely for temporary or emergency purposes. Under the most restrictive
arrangement, each Fund must own securities having a market value in excess of
300% of the total bank borrowings. The interest rate on borrowings is based on
the federal funds rate. The committed facility also requires a fee to be paid
based on the amount of the commitment which has not been utilized. For the year
ended October 31, 1996, the Funds did not have any borrowings under these
facilities.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for the
year ended October 31, 1996, were as follows:
<TABLE>
<CAPTION>
================================================================================
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and
agency obligations $133,097,699 $117,740,548 $ --
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 9,741,716 410,144,747 184,788,273
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 136,922,990 102,151,633 --
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) 3,909,735 446,269,068 189,391,870
================================================================================
</TABLE>
For the year ended October 31, 1996, option transactions in Global Income were
as follows:
<TABLE>
<CAPTION>
Options Purchased Cost
- --------------------------------------------------------------------------------
<S> <C>
Balance outstanding, beginning of period $ --
Options purchased 202,160
Options expired (202,160)
- --------------------------------------------------------------------------------
Balance outstanding, end of period $ --
================================================================================
</TABLE>
32
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At October 31, 1996, Global Income had outstanding forward foreign currency
exchange contracts to sell foreign currencies as follows:
<TABLE>
<CAPTION>
===============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Danish Krone
Expiring 1/22/97 $ 6,348,652 $ 6,443,676 $ (95,024)
Deutschemark
Expiring 11/27/96 37,735,809 38,044,516 (308,707)
Expiring 2/27/97 12,671,000 12,775,513 (104,513)
British Pound Sterling
Expiring 11/14/96 15,423,575 16,184,359 (760,784)
Irish Pound
Expiring 1/8/97 6,842,743 6,964,425 (121,682)
Italian Lira
Expiring 1/29/97 1,326,853 1,335,737 (8,884)
Japanese Yen
Expiring 1/24/97 23,059,781 22,755,697 304,084
Netherlands Guilder
Expiring 1/9/97 6,442,727 6,510,658 (67,931)
Spanish Peseta
Expiring 1/16/97 6,543,897 6,612,046 (68,149)
Swedish Krona
Expiring 1/28/97 4,708,899 4,736,457 (27,558)
Swiss Franc
Expiring 1/29/97 12,952,107 12,453,735 498,372
Expiring 1/29/97 12,083,214 12,109,196 (25,982)
- -------------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $146,139,257 $146,926,015 $(786,758)
===============================================================================
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered.
At October 31, 1996, Global Income had sufficient cash and/or securities to
cover any commitments under these contracts.
Global Income has recorded a "Receivable for forward foreign currency exchange
contracts" and "Payable for forward foreign currency exchange contracts"
resulting from open and closed but not settled forward foreign currency exchange
contracts of $1,073,237 and $1,816,332 respectively, in the accompanying
Statement of Assets and Liabilities. Included in the "Receivable and Payable for
forward foreign currency exchange contracts" are $270,781 and $227,118
respectively, related to forward contracts closed but not settled as of
October 31, 1996.
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $8,675,868 607,156
Reinvestment of dividends and
distributions 1,611,387 112,752
Shares repurchased (8,971,389) (626,797)
----------------------------------
1,315,866 93,111
----------------------------------
Class B Shares
Shares sold 246,680 17,470
Reinvestment of dividends
and distributions 3,200 225
Shares repurchased (19,531) (1,378)
----------------------------------
230,349 16,317
- -------------------------------------------------------------------------------
$1,546,215 109,428
===============================================================================
<CAPTION>
Global Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 15,545,777 1,089,521
Reinvestment of dividends
and distributions 13,419,614 947,846
Shares repurchased (76,216,894) (5,376,065)
----------------------------------
(47,251,503) (3,338,698)
----------------------------------
Class B Shares
Shares sold 265,053 18,628
Reinvestment of dividends
and distributions 1,708 119
Shares repurchased (16,373) (1,144)
----------------------------------
250,388 17,603
----------------------------------
Institutional Shares:
Shares sold 23,936,542 1,703,165
Reinvestment of dividends
and distributions 3,546,724 250,603
Shares repurchased (5,786,481) (406,888)
----------------------------------
21,696,785 1,546,880
- -------------------------------------------------------------------------------
$(25,304,330) (1,774,215)
================================================================================
</TABLE>
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Municipal Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 6,139,212 431,736
Reinvestment of dividends
and distributions 1,482,976 104,074
Shares repurchased (9,874,431) (694,685)
------------------------------------
(2,252,243) (158,875)
------------------------------------
Class B Shares
Shares sold 250,553 17,760
Reinvestment of dividends
and distributions 1,802 127
Shares repurchased (1,551) (109)
------------------------------------
250,804 17,778
- --------------------------------------------------------------------------------
$ (2,001,439) (141,097)
================================================================================
</TABLE>
Share activity for the year ended October 31, 1995 is as follows:
<TABLE>
<CAPTION>
Global Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 22,864,336 1,659,380
Reinvestment of dividends
and distributions 12,448,128 895,996
Shares repurchased (207,889,246) (15,065,279)
-----------------------------------
(172,576,782) (12,509,903)
-----------------------------------
Institutional Shares:
Shares sold 30,484,764 2,163,523
Reinvestment of dividends
and distributions 560,482 39,195
Shares repurchased (204,804) (14,347)
-----------------------------------
30,840,442 2,188,371
- -------------------------------------------------------------------------------
$(141,736,340) (10,321,532)
===============================================================================
</TABLE>
7. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Funds' custodian, or at subcustodians. GSAM monitors the
market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
Government Income, together with other registered investment companies having
advisory agreements with GSAM or its affiliates, transfers uninvested cash
balances into a joint account, the daily aggregate balance of which is invested
in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of October 31, 1996, Government Income had a 0.3% undivided interest in the
repurchase agreement in the joint account which equaled $8,400,000 in principal
amount. As of October 31, 1996, the repurchase agreements in the joint account
along with the corresponding underlying securities (including the type of
security, market value, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
===============================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,686,102, 5.50%-8.50%, 2/1/09-6/1/26; FHLMC: $166,359,033, 5.50%-8.50%,
9/1/98-8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (Treasury
Notes: $942,903,967, 4.38%-8.50%, 11/15/96-8/15/03)
924,700,00 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,658,433, 5.50%-8.00%, 6/1/03-10/1/26; FHLMC:
$465,441,174, 6.00%-9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S
Treasury Interest Only Stripped Securities: $11,653,277, 2/15/98-5/15/02; U.S.
Treasury Notes: $85,997,728, 5.25%-7.75%, 5/15/97-10/15/06; U.S. Treasury
Principal Only Stripped Securities: $33,993,571, 5/15/97-5/15/05; U.S.
Treasury Bills: $41,756,285, 12/12/96-3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price $175,026,979
(U.S. Treasury Notes: $178,694,649, 6.88%-7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- -------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $2,669,700,000
===============================================================================
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
9. Certain Reclassifications
In accordance with Statement of Position 93-2, the Government Income, Global
Income and Municipal Income Funds have reclassified $18,448, $46,256 and
$17,593, respectively, from paid-in capital to accumulated undistributed net
investment income. Additionally, the Global Income Fund has reclassified
$862,007, $207,585 and $380 from accumulated net realized gain, accumulated net
realized foreign currency gain and paid in capital, respectively to accumulated
undistributed net investment income. These reclassifications have no impact on
net asset values of the Funds and are designed to present the Funds' capital
accounts on a tax basis.
10. Other
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(a)/ Distributions to shareholders
============================================================== ========================================
====================================================================================================================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.47 $0.92 $(0.11) -- $0.81 $(0.92) -- --
1996-Class B shares/(c)/ 14.11 0.41 0.26 -- 0.67 (0.41) -- --
1995-Class A shares 13.47 0.94 1.00 -- 1.94 (0.94) -- --
1994-Class A shares 14.90 0.85 (1.28) -- (0.43) (0.85) (0.12) (0.02)
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 14.32 0.56 0.58 -- 1.14 (0.56) -- --
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.45 $0.71 $0.62 $0.18 $1.51 $(1.43) -- --
1996-Class B shares/(c)/ 14.03 0.34 0.41 0.11 0.86 (0.36) -- --
1996-Institutional
shares 14.45 1.15 0.32 0.10 1.57 (1.50) -- --
1995-Class A shares 13.43 0.89 0.92 0.15 1.96 (0.94) -- --
1995- Institutional
shares/(f)/ 14.09 0.22 0.34 0.06 0.62 (0.26) -- --
1994-Class A shares 15.07 0.84 (1.37) (0.12) (0.65) (0.22) (0.16) --
1993-Class A shares 14.69 0.85 1.07 (0.42) 1.50 (0.85) (0.27) --
1992-Class A shares 14.60 1.14 0.45 (0.36) 1.23 (1.14) -- --
For the Period August 2, 1991/(d)/ through October 31,
=========================================================
1991-Class A shares 14.55 0.25 0.23 (0.19) 0.29 (0.24) -- --
<CAPTION>
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
- -----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares -- -- $(0.92) $(0.11) $14.36
1996-Class B shares/(c)/ -- -- (0.41) 0.26 14.37
1995-Class A shares -- -- (0.94) 1.00 14.47
1994-Class A shares (0.01) -- (1.00) (1.43) 13.47
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares -- -- (0.56) 0.58 14.90
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------------------------
For the Years Ended October 31,
===========================================================
1996-Class A shares -- -- $(1.43) $0.08 $14.53
1996-Class B shares/(c)/ -- -- (0.36) 0.50 14.53
1996-Institutional
shares -- -- (1.50) 0.07 14.52
1995-Class A shares -- -- (0.94) 1.02 14.45
1995-Institutional
shares/(f)/ -- -- (0.26) 0.36 14.45
1994-Class A shares -- (0.61) (0.99) (1.64) 13.43
1993-Class A shares -- -- (1.12) 0.38 15.07
1992-Class A shares -- -- (1.14) 0.09 14.69
For the Period August 2, 1991 (d) through October 31,
============================================================
1991-Class A shares -- -- (0.24) 0.05 14.60
<CAPTION>
Ratio of Net
Ratio of net assets
net investment at end
expenses income Portfolio of
Total to average to average turnover period
return /(b/) net assets net assets rate /(h)/ (in 000s)
===================================================================================================
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares 5.80% 0.50% 6.42% 485.09% $30,603
1996-Class B shares/(c)/ 4.85/(g)/ 1.25/(e)/ 5.65/(e)/ 485.09 234
1995-Class A shares 14.90 0.47 6.67 449.53 29,503
1994-Class A shares (2.98) 0.11 6.06 654.90 14,452
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 8.03/(g)/ 0.00/(e)/ 4.87/(e)/ 725.41/(g/ 12,860
- ---------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares 11.05% 1.16% 5.81% 232.15% $198,665
1996-Class B shares/(c)/ 6.24/(g)/ 1.70/(e)/ 5.16/(e)/ 232.15 256
1996-Institutional
shares 11.55 0.65 6.35 232.15 54,254
1995-Class A shares 15.08 1.29 6.23 265.86 245,835
1995-Institutional
shares/(f)/ 4.42/(g)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619
1994-Class A shares (4.49) 1.28 5.73 343.74 396,584
1993-Class A shares 10.75 1.30 5.78 313.88 675,662
1992-Class A shares 8.77 1.37 7.85 270.75 588,893
For the Period August 2, 1991 (d) through October 31,
=========================================================
1991- Class A shares 2.00 0.38 /(g)/ 1.72 /(g)/ 34.22 /(g)/ 388,744
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
------------------------------
Ratio of
net
Ratio of investment
expenses income
to average to average
net assets net assets
==============================================================
- --------------------------------------------------------------
<S> <C> <C>
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.89% 5.03%
1996-Class B shares/(c)/ 2.39/(e)/ 4 .51/(e)/
1995-Class A shares 2.34 4.80
1994-Class A shares 2.86 3.31
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares 4.00/(e)/ 0.87/(e)/
- ------------------------------------------------------------
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.64% 5.33%
1996-Class B shares/(c)/ 2.14 /(e)/ 4.72/(e)/
1996-Institutional
shares 1.11 5.89
1995-Class A shares 1.58 5.94
1995-Institutional
shares/(f)/ 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.53 5.48
1993-Class A shares 1.55 5.53
1992-Class A shares 1.62 7.60
For the Period August 2, 1991 (d) through October 31,
==========================================================
1991-Class A shares 0.44/(g)/ 1.66/(g)/
- ------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations (a) Distributions to shareholders
-------------------------------------------- -----------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $14.17 $0.65 $0.20 -- $0.85 $(0.65) -- --
1996- Class B shares /(c)/ 14.03 0.27 0.34 -- 0.61 (0.27) -- --
1995- Class A shares 13.08 0.67 1.09 -- 1.76 (0.67) -- --
1994- Class A shares 14.64 0.73 (1.51) -- (0.78) (0.73) (0.05) --
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 14.32 0.22 0.32 -- 0.54 (0.22) -- --
<CAPTION>
Distributions to shareholders
----------------------------------------
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares -- -- $(0.65) $0.20 $14.37
1996- Class B shares /(c)/ -- -- (0.27) 0.34 14.37
1995- Class A shares -- -- (0.67) 1.09 14.17
1994- Class A shares -- -- (0.78) (1.56) 13.08
For the Period July 20, 1993
1993- Class A shares -- -- (0.22) 0.32 14.64
<CAPTION>
Ratio of
Ratio of net
net investment
expenses income Portfolio
Total to average to average turnover
return /(b/) net assets net assets rate /(h)/
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares 6.13% 0.85% 4.58% 344.13%
1996- Class B shares /(c)/ 4.40 /(g)/ 1.60 /(e)/ 3.55 /(e)/ 344.13
1995- Class A shares 13.79 0.76 4.93 335.55
1994- Class A shares (5.51) 0.45 5.28 357.54
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 3.73 /(g)/ 0.00 /(e)/ 5.15 /(e)/ 99.99 /(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
---------------------
Net Ratio of
assets net
at end Ratio of investment
of expenses income
period to average to average
(in 000s) net assets net assets
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $52,267 1.55% 3.88%
1996- Class B shares /(c)/ 255 2.05 /(e)/ 3.10 /(e)/
1995- Class A shares 53,797 1.49 4.20
1994- Class A shares 47,373 1.55 4.18
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 30,166 2.42 /(e)/ 2.73 /(e)/
</TABLE>
- ---------------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions, a complete redemption of the investment
at the net asset value at the end of period and no sales charge. Total
return would be reduced if a sales charge for Class A shares or a contingent
deferred sales charge for Class B shares were taken into account.
(c) Class B shares commenced operations on May 1, 1996.
(d) Commencement of operations.
(e) Annualized.
(f) Institutional shares commenced operations on June 1, 1995.
(g) Not annualized.
(h) Includes the effect of mortgage dollar roll transactions for the Government
Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Goldman Sachs Government Income
Fund, Goldman Sachs Global Income Fund and Goldman Sachs Municipal Income Fund:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund (portfolios of Goldman Sachs Trust, a
Massachusetts Business Trust), including the statements of investments, as of
October 31, 1996, and the related statements of operations, the statements of
changes in net assets and the financial highlights for each of the periods
presented. These financial statements and the financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund as of October 31, 1996, the results of their
operations and the changes in their net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
December 12, 1996
- --------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning the Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
================================================================================
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[GOLDMAN SACHS LOGO APPEARS HERE]
================================================================================
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders
- -------------------------------------------------------------------------------
Dear Shareholders:
A return of robust economic growth during the period under review fueled
fears of higher inflation, which pushed Treasury yields higher across the
maturity spectrum. In this semiannual report, we will review the performance of
the Goldman Sachs Fixed Income Funds for the six-month period ended April 30,
1997, as well as provide a brief overview of the U.S. economy and the bond
market. We are pleased to note that during the period, the Goldman Sachs Fixed
Income Funds performed well compared with their peers.
Economic Activity Rebounded, Led by Consumer Spending
After a sluggish third quarter, the pace of economic growth strengthened
during the period. During November and December, consumer spending rebounded,
the trade deficit narrowed and industrial production climbed significantly. As a
result, fourth-quarter real Gross Domestic Product (GDP) growth was 3.8%
(annualized), up from 2.1% in the prior quarter.
Economic activity continued to gain momentum during the first quarter of
1997, with real GDP surging 5.8%, the largest jump in a decade. Signs of
strength were led by a sharp increase in consumer spending, which resulted in
solid sales gains for automobile manufacturers and retailers. In addition,
upbeat reports on factory orders and inventories, construction outlays and labor
market conditions all pointed towards economic acceleration. Despite the growth
spurt, reported inflation remained surprisingly mild during the period.
Furthermore, several economic reports for April came in at the low end of
consensus expectations, which suggested that the economy could moderate during
the second quarter.
The Bond Market Rallied, Then Fell as Inflation Fears Reemerged
The U.S. fixed income market came under pressure during the period under
review. In November, bonds performed well in anticipation of a continued
slowdown in U.S. economic growth. However, the market experienced a reversal in
December when better-than-expected economic data, in particular, robust
employment figures, triggered a sell-off and drove interest rates higher. In
early February, bond prices briefly rebounded, but later faltered as it became
increasingly likely that the U.S. Federal Reserve would raise short term
interest rates in March. By the end of March, the yield on the benchmark 30-year
Treasury bond rose above the psychologically important 7% threshold. Despite the
lackluster performance of the U.S. bond market for the period as a whole, a
sharp rebound at the end of April helped bonds recoup part of their earlier
losses.
The Fed Raised the Federal Funds Rate in March
In March 1997, the Fed raised the federal funds rate by 25 basis points to
5.50%. Though there were few signs of actual inflation, the Fed tightening was
prompted by the economy's pervasive strength. The Fed's action was its first
since a quarter-point cut in January 1996.
During the period under review, the yield curve shifted higher across all
maturities. The yield on six-month Treasury bills rose from 5.26% on October 31,
1996 to approximately 5.52% on April 30, 1997. For the same period, the yield on
the 30-year U.S. Treasury bond rose more dramatically, climbing from 6.64% to
6.95%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 18
Goldman Sachs Government Income Fund 3 Notes to Financial Statements 22
Goldman Sachs Global Income Fund 8 Financial Highlights 29
Goldman Sachs Municipal Income Fund 13
----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
1
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders (continued)
- -------------------------------------------------------------------------------
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
10/31/96 4/30/97
<S> <C> <C>
3-Month 5.14% 5.23%
6-Month 5.26% 5.52%
1 5.40% 5.89%
2 5.73% 6.27%
3 5.86% 6.40%
5 6.07% 6.57%
10 6.34% 6.71%
30 6.64% 6.95%
</TABLE>
Source: Bloomberg, L.P.
The yield curve shifted upward across all maturities and steepened sharply at
the short end.
Outlook: Strengthening Economic Growth May Trigger Further Preemptive Rate Hikes
Despite reports of economic moderation and minimal price acceleration, the
economy's broad-based fundamental strength and resilient equity market make
additional Fed rate increases likely this year. Goldman Sachs' economists
believe that the speed and extent of Fed tightening will depend in large part on
the emergence of conclusive signs that the economy is nearing maximum capacity,
rather than immediate evidence of increased inflationary pressures.
In conclusion, we thank you for your support of the Goldman Sachs Fixed
Income Funds and we look forward to continuing our relationship.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
May 30, 1997
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Government Income Fund seeks to provide shareholders with
a high level of current income consistent with safety of principal. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
U.S. government securities and in repurchase agreements collateralized by such
securities. The fund may also invest in securities of nongovernmental issuers,
including asset-backed securities, privately issued mortgage-backed securities
and corporate debt obligations. Such securities will be rated triple-A at the
time of investment or, if unrated, deemed to be of comparable quality by Goldman
Sachs Asset Management, the fund's investment adviser. The fund's interest rate
sensitivity is expected to be comparable to that of a five-year bond.
Mortgage-Backed Securities Continued to Perform Well
During the period under review, mortgage-backed securities (MBS) performed
very well, buoyed by a surge in investor demand and stable prepayment activity.
Investor interest in the MBS market was triggered primarily by the favorable
interest rate environment. Throughout the period, rates remained in a fairly
tight range, allowing prepayment anxieties to subside. In addition, with other
highly rated fixed income instruments yielding approximately the same as
similar-duration Treasuries, investors turned to the mortgage-backed sector for
yield enhancement. Finally, an increase in collateralized mortgage obligation
(CMO) creation led to steady demand for underlying pass-through securities. As a
result of all of these positive factors, mortgage-backed securities became
increasingly expensive during the period as their yield spreads relative to
Treasuries tightened.
Performance Review
For the six-month period ended April 30, 1997, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to strong results from its investments in mortgage-backed
securities, particularly CMOs. The fund's Class B shares, which have higher
expenses, also achieved positive returns. The net asset value (NAV) of both
classes declined due to rising interest rates during the period.
We are pleased to report that the fund's Class A shares ranked within the
top 10% of intermediate U.S. government income funds (seventh out of 122) based
on total return for the 12 months ended April 30, 1997, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they have been
in existence less than 12 months.)
- -----------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
Total Return (based on net asset value) 1.83% 1.43%
- --------------------------------------------------------------------
Return From Monthly Distributions 3.67% 3.28%
- --------------------------------------------------------------------
Return From Price Depreciation -1.84% -1.85%
- --------------------------------------------------------------------
Total Return of Lehman Brothers 1.81% 1.81%
Government/Mortgage Index
- --------------------------------------------------------------------
NAV (as of 4/30/97) $14.10 $14.11
- --------------------------------------------------------------------
NAV Change -$0.26 -$0.26
- --------------------------------------------------------------------
</TABLE>
Portfolio Composition and Investment Strategies
The primary changes to the portfolio's sector allocations during the period
were a reduction of fixed rate mortgage pass-through and asset-backed securities
in favor of U.S. Treasuries and agency debentures.
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
U.S. Treasuries 36.7%
Fixed Rate Mortgage Pass-Throughs 26.1%
CMO's 13.0%
Asset-Backed Securities 11.0%
Agency Debentures 10.2%
Repos/Cash Equivalents 3.0%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio
held a 36.7% position in U.S. Treasuries, its single largest allocation as of
April 30. The fund's holdings in Treasuries more than doubled as we scaled back
exposure to the mortgage-backed and asset-backed sectors, both of which were
nearing full value.
. Fixed Rate Mortgage Pass-Throughs. As of April 30, the fund's investment in
fixed rate mortgage pass-throughs accounted for 26.1% of the portfolio, down
from 40.4% six months earlier. The sector performed well during the period, as
many of the factors which supported MBS through 1996 remained in place: low
volatility, range-bound interest rates, tight yield spreads on alternative
sectors, and light issuance of corporate and asset-backed securities (ABS).
However, as the MBS market repriced to reflect the favorable environment, we
reduced the position.
We also used mortgage dollar rolls during the period, which helped the
portfolio to benefit from short-term supply and demand imbalances in the
mortgage settlement process. (Mortgage dollar rolls refer to transactions that
involve selling mortgage securities owned by the fund and simultaneously
contracting to buy back similar mortgage securities with the same coupon on a
specified future date -- usually one month forward.) At all times, we "cover"
the mortgage dollar rolls by keeping cash or liquid assets equal to the dollar
amount of the forward commitment in a segregated account with the fund's
custodian.
. CMOs. The CMO market enjoyed strong demand from yield-seeking investors,
while the supply of CMOs, though rising, remained relatively low from a
historical perspective. As the sector became more expensive, we reduced the
fund's allocation to 13.0% from 22.0% last October. Specifically, we cut
sequential-pay/support CMOs to 7.2%, approximately half their weighting six
months ago, and planned amortization class (PAC) CMOs to 4.2% from 5.5%.
. Asset-Backed Securities. As of April 30, the fund's ABS position was 11.0%,
down from 19.9% last October. During the period, the ABS sector experienced some
selling pressure, in part due to negative credit events among selected credit
card and sub-prime auto lenders. Overall, however, the sector performed well:
investor interest remained broad-based, ratings held firm and, relative to
similarly rated spread products, ABSs continued to offer attractive yield
enhancement opportunities.
. Agency Debentures. Agency debentures represented 10.2% of the portfolio as
of the end of the period, constituting an overweighted position compared with
the benchmark's 8.0%. We added to the allocation during the period as
alternative sectors richened.
. Issuer Composition. The portfolio composition of the fund's mortgage-backed
security holdings by issuer was 13.6% in Federal National Mortgage Association
(FNMA) issues and 13.2% in Government National Mortgage Association (GNMA)
issues.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
. Credit Quality. As of April 30, 75.5% of the portfolio was invested in U.S.
government and agency securities, 21.5% of the portfolio was invested in triple-
A-rated securities and 3.0% of the portfolio was invested in cash equivalents.
. Prudent Use of Derivatives. As discussed earlier, the fund held a 7.2%
position in sequential-pay/support CMOs and a 4.2% position in PAC CMOs,
securities that are generally considered to be lower risk derivative
instruments. In addition, the portfolio held small positions in inverse
floaters, interest-only (IO) CMOs and principal-only (PO) CMOs for their
potential to add incremental yield. The portfolio's combined position in these
higher risk derivatives was 1.6% as of the end of the period.
. Duration. We seek excess return over the Index through sector weightings
and specific security selection rather than attempting to make interest rate
predictions. Therefore, we manage the fund's duration to approximate that of the
Index, partly through the use of futures. As of April 30, the fund's duration
was 4.4 years, in line with that of the Index.
Market Outlook
Despite some suggestion of economic moderation, we continue to believe that
interest rates are likely to move higher during the balance of the year. This
expectation is predicated on the economy's broad-based fundamental strength, as
well as the Fed's well-publicized commitment to monetary discipline.
Regarding specific fixed income sectors, investor demand for mortgage-
backed securities remains robust, but lower rates and rising volatility increase
the risk of refinancings and lead us to maintain a cautious outlook for mortgage
pass-throughs over the next few months. Similarly, while CMOs do not generally
offer significant value over mortgage pass-throughs, specific structures within
the CMO market present attractive investment opportunities. In the ABS sector,
anxiety regarding negative credit events during the first quarter appears to be
subsiding. However, we believe the market is now more alert to credit
distinctions among issuers, servicers and collateral types, and has begun
pricing securities accordingly. Consequently, it may become more challenging to
identify unrecognized value within the ABS sector, particularly among the higher
quality issues that we tend to emphasize.
Distribution Policy
The fund's Class A and Class B shares paid out monthly distributions of
approximately $0.52 and $0.47 per share, respectively, during the six-month
period ended April 30, 1997. Dividends are declared daily and paid on a monthly
basis. The fund distributes substantially all of its taxable income, as is
required for all investment companies.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Erica Adelberg
Erica Adelberg
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Government Income Fund
May 30, 1997
- --------------------------------------------------------------------------------
5
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--37.7%
Federal Home Loan Mortgage Corp. (FHLMC)--1.8%
$ 1,000,000 7.00% TBA 15-Yr /(a)/ $ 990,930
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--8.7%
$ 1,000,000/(h)/ 6.50% TBA 7-Yr /(a)/ $ 981,560
1,000,000 7.00 TBA 30-Yr /(a)/ 968,750
1,000,000 7.50 TBA 30-Yr /(a)/ 942,500
2,000,000/(h)/ 7.50 TBA 30-Yr /(a)/ 1,985,000
- --------------------------------------------------------------------------------
$ 4,877,810
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA) --13.0%
$ 238,209 9.00% 10/15/19 $ 253,098
97,383 9.00 12/15/19 103,470
315,821 7.50 04/15/23 314,933
610,646 7.50 07/15/23 608,930
368,845 7.00 08/15/23 359,162
695,669 7.00 10/15/23 677,408
61,762 7.00 11/15/23 60,141
877,541 7.00 12/15/23 854,506
1,005,084 8.00 12/15/26 1,018,690
2,000,000/(h)/ 7.50 TBA 30-Yr /(a)/ 1,982,500
1,000,000/(h)/ 8.00 TBA 30-Yr /(a)/ 1,013,430
- --------------------------------------------------------------------------------
$ 7,246,268
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--14.2%
Interest Only--0.4%
FNMA Interest-Only Stripped Security, Series 151, Class 2/(d)/
$ 643,343 11.30% 07/25/22 $ 213,024
- --------------------------------------------------------------------------------
$ 213,024
- --------------------------------------------------------------------------------
Inverse Floater--0.7%
FNMA Remic Trust, Series 1992-62, Class S
$ 404,038 9.27%/(c)/ 05/25/99 $ 405,941
- --------------------------------------------------------------------------------
$ 405,941
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC) CMOs--2.9%
FNMA Remic Trust, Series 1997-9, Class B
$ 1,000,000 6.50% 10/25/22 $ 962,510
GE Capital Mortgage Services, Inc., Series 1994-11, Class A1
644,342 6.50 03/25/24 644,941
- --------------------------------------------------------------------------------
$ 1,607,451
- --------------------------------------------------------------------------------
Principal Only--1.9%
FNMA Remic Trust, Series G-35, Class N/(d)/
$ 575,000 6.16% 10/25/21 $ 419,376
FNMA Remic Trust, Series 1993-205, Class C/(d)/
750,000 7.23% 09/25/23 625,545
- --------------------------------------------------------------------------------
$ 1,044,921
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--1.4%
Citicorp Mortgage Securities, Series 1993-11, Class A6
$ 818,108 6.25% 09/25/08 $ 788,362
- --------------------------------------------------------------------------------
$ 788,362
- --------------------------------------------------------------------------------
Support--7.0%
GE Capital Mortgage Services, Inc., Series 1994-10, Class A22
$ 996,703 6.50% 03/25/24 $ 865,497
Housing Securities, Inc., Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,329,852
Prudential Securities, Series 1995-2, Class A
797,338 5.77 11/15/15 799,578
Salomon Brothers Mortgage Securities VII, Series 1996-6H, Class A1
1,000,000 6.00 09/30/08 899,840
- --------------------------------------------------------------------------------
$ 3,894,767
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,954,466
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $21,101,884) $ 21,069,474
- --------------------------------------------------------------------------------
Asset-Backed Securities--11.6%
Asset Securitization Corp., Series 1996, Class A1
$ 300,000 6.88% 11/13/26 $ 295,699
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
720,000 6.23 06/15/03 710,546
CPS Auto Grantor Trust, Series 1993-3, Class A
855,634 6.30 08/15/02 850,107
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 589,263
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 622,980
JP Morgan Commercial Mortgage Finance Corp., Series 1997-C4
500,000 7.32 12/26/28 498,614
Morgan Stanley Capital Commercial Mortgage, Inc. Series 1997-C1
500,000 7.46 05/15/06 506,875
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
224,429 6.55 11/20/01 225,129
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset-Backed Securities(continued)
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
$ 420,638 6.85% 06/15/01 $ 424,099
Premier Auto Trust, Series 1993-6, Class A2
271,484 4.65 11/02/99 269,021
Premier Auto Trust, Series 1994-1, Class A3
176,500 4.75 02/02/00 175,672
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 473,368
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 860,533
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $6,623,680) $ 6,501,906
- --------------------------------------------------------------------------------
U.S. Government Agency Obligations--10.0%
Small Business Administration
$ 1,700,000 7.15% 03/01/17 $ 1,685,176
1,400,000 7.50 04/01/17 1,416,562
Sri Lanka Aid/(c)/
2,500,000 6.06 02/21/16 2,464,075
- --------------------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $5,562,500) $ 5,565,813
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--35.6%
United States Treasury Bonds
$ 140,000 8.75% 05/15/17 $ 165,484
270,000/(e)/ 8.88 08/15/17 322,988
3,450,000 8.75 05/15/20 4,109,813
180,000 8.75 08/15/20 214,565
690,000/(e)/ 7.63 02/15/25 740,025
United States Treasury Notes
1,460,000/(e)/ 7.38 11/15/97 1,471,636
700,000 5.88 04/30/98 699,342
5,650,000/(e)/ 6.88 08/31/99 5,712,659
3,700,000 6.13 07/31/00 3,664,739
1,100,000 5.63 11/30/00 1,070,091
1,200,000 7.50 02/15/05 1,256,436
United States Treasury Principal-Only Stripped Securities/(d)/
300,000 6.85 05/15/05 174,777
1,550,000 7.23 05/15/20 302,790
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $20,041,673) $ 19,905,345
- --------------------------------------------------------------------------------
Repurchase Agreement--19.9%
Joint Repurchase Agreement Account/(e)/
$ 11,100,000 5.49% 05/01/97 $ 11,100,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $11,100,000) $ 11,100,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $64,429,737/(f)/) $ 64,142,538
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long (Short)/(g)/ Month Gain (Loss)
- --------------------------- ------------------ -------------- -------------
<S> <C> <C> <C>
Euro Dollars 3 September 1997 $375
5 Year U.S. Treasury Notes 19 June 1997 4,312
U.S. Long Term Bond 3 June 1997 6,282
-------------
$10,969
- --------------------------------------------------------------------------------
</TABLE>
Federal Income Tax Information:
<TABLE>
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 118,460
Gross unrealized loss for investments in which cost
exceeds value (509,387)
- --------------------------------------------------------------------------------
Net unrealized loss $ (390,927)
- --------------------------------------------------------------------------------
</TABLE>
/(a)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally + / -2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(b)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(c)/Variable rate security. Coupon rate disclosed is that which is in effect at
April 30, 1997.
/(d)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(e)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(f)/The aggregate cost for federal income tax purposes is $64,533,465.
/(g)/Each 5-Year U.S. Treasury Note and U.S. Long Term Bond contract represents
$100,000 in notional par value. Each Euro Dollar contract represents
$1,000,000 in notional par value. The total notional amount and market
value at risk are $5,200,000 and $3,032,288, respectively. The
determination of notional amounts as presented here are indicative only of
volume of activity and not a measure of market risk.
/(h)/When-issued security.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Global Income Fund seeks high total return, composed of
both current income and capital appreciation. The fund is permitted to invest in
government and other high-quality (double-A or better) fixed income securities
issued in the United States and in foreign markets. The fund has the additional
flexibility to invest in sovereign (government) debt rated single-A (or better)
or deemed to be of comparable quality. The maximum duration of the fund is 7.5
years and its approximate interest rate sensitivity is comparable to that of a
six-year bond. Under normal market conditions, the fund's neutral position is to
be fully hedged into U.S. dollars to best serve the needs of U.S. shareholders.
However, the fund may engage in currency transactions, both to hedge exchange
rate risk and to seek to enhance returns.
Special Event
To accommodate different clients' needs and preferences, on March 12, 1997,
the fund opened a new share class (Service).
Favorable Economic Factors Helped European Bonds While Rising Rates Impacted
Treasuries
Global bonds began the period under review on a strong note, but weakened
during the first quarter of 1997. European bonds were the best performers during
the period, while the United States lagged along with the dollar bloc markets.
The economic fundamentals that supported most European bonds throughout
1996 -- particularly weak economic growth and contained inflation -- remained
intact during the period. This favorable backdrop, plus yield convergence ahead
of European monetary union (EMU), helped the higher yielding bonds of Spain
achieve the best performance of all the major bond markets (hedged into U.S.
dollars). The "core" European markets such as Germany also fared well due to
increased expectations of tighter fiscal policies to help them meet EMU
criteria. In contrast, the U.K. gilt underperformed most European bonds as
sharply accelerating growth triggered fears of higher inflation. In Japan, the
performance of Japanese Government Bonds (JGBs) trailed nearly all of the major
European markets but still fared reasonably well (hedged into U.S. dollars). The
Japanese market strengthened following a sharp November sell-off when continued
weakness in the financial sector made near-term rate hikes by the Bank of Japan
unlikely.
In the United States, stronger than expected economic growth pushed yields
higher and prompted the Federal Reserve to raise the federal funds rate by a
quarter-percentage point in March. As a result, U.S. Treasuries posted the
poorest performance of all the major bond markets.
Performance Review: Country Allocations Contributed to Performance
During the period under review, the Goldman Sachs Global Income Fund's
Institutional shares outperformed the fund's benchmark, the J.P. Morgan Global
Government Bond Index (hedged into U.S. dollars) (the "Index"). The Index covers
14 major bond markets and reflects their currency exposures. The fund's
favorable results were primarily due to its overweighting in German bonds, one
of the strongest European markets during the period, and its underweighting in
the United States, the weakest market.
The fund's Class A and B shares, which have higher expenses than the
Institutional shares, lagged the benchmark. The fund's Service shares achieved
positive performance since their inception on March 12, 1997; however, a partial
period of approximately 1 1/2 months is obviously too brief a period to measure
performance meaningfully.
The fund's Institutional and Class A shares fared well compared with their
peers. For the 12-month period ended April 30, the Institutional and Class A
shares ranked 25th and 29th, respectively, out of 133 global income funds based
on total return, according to Lipper Analytical Services, Inc. (Please note that
Lipper rankings do not take sales charges into account and that past
- -------------------------------------------------------------------------------
8
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
performance is not a guarantee of future results. Class B and Service shares
were not ranked for this period because they were in existence less than 12
months.)
We are also pleased to announce that for the five-year period ended April
30, 1997, the fund's Class A shares were rated "four stars" (out of 641 taxable
bond funds) by Morningstar, Inc., an independent rating agency./1/
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
Institu-
Class A Class B tional Service*
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Total Return (based on net
asset value) 3.22% 2.94% 3.50% 0.21%
- ----------------------------------------------------------------------------------------------------------------------
Return From Monthly 2.80% 2.59% 3.08% 0.01%
Distributions
- ----------------------------------------------------------------------------------------------------------------------
Return From Price 0.42% 0.35% 0.42% 0.20%
Appreciation
- ----------------------------------------------------------------------------------------------------------------------
Total Return of J.P. 3.47% 3.47% 3.47% 0.50%
Morgan Global
Government Bond Index
- ----------------------------------------------------------------------------------------------------------------------
NAV (as of 4/30/97) $14.59 $14.58 $14.58 $14.59
- ----------------------------------------------------------------------------------------------------------------------
NAV Change +$0.06 +$0.05 +$0.06 -$0.10
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period. Performance and net asset value
(NAV) change are from its inception date on 3/12/97.
- ------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Class A shares received "four stars"
for both the three- and one-year periods and were rated among 1,193 and 1,709
taxable bond funds for the three- and one-year periods, respectively. The
Morningstar ratings apply only to the fund's Class A shares; the fund's Class B,
Institutional and Service shares have not been rated. Class B and Service shares
are subject to additional fees and expenses that may have the effect of lowering
performance and may affect any future Morningstar rating. Morningstar rates each
fund against its peers in the same category. In all, there are four Morningstar
categories (domestic equity, international equity, taxable bond and municipal).
Morningstar ratings range from five stars (highest) to one star (lowest). Funds
with five-star ratings are in the top 10% of their category, four-star ratings
in the next 22.5%, three stars the next 35%, two stars the next 22.5% and one
star the lowest 10% of their categories.
During the period, we successfully employed several currency strategies
relative to our neutral position, which is to be fully hedged into U.S. dollars.
The main contributors to the positive currency performance were the fund's long
U.S. dollar positions against the yen and long positions in the high-yielding
European currencies against the Deutschemark and Swiss franc. The U.S. dollar
was supported by strong growth and rising short-term rates while the high-
yielding European currencies benefited from the EMU process gaining momentum.
Portfolio Composition and Investment Strategies
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
U.S. 33.1%
Germany 11.0%
Cash 10.7%
Japan 10.4%
U.K. 10.1%
Australia 8.5%
Italy 6.3%
Sweden 4.3%
France 3.0%
Spain 2.6%
</TABLE>
* The percentages shown are of total portfolio investments that have settled
and include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Dollar Bloc. As of April 30, 1997, the fund was slightly underweighted in
the dollar bloc countries (e.g., U.S., Canada and Australia) relative to the
Index, 41.6% versus 44.3%.
U.S. In the U.S., Treasury prices came under pressure when accelerating
economic growth drove bond yields
- -------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
higher and prompted a Fed rate hike. As noted, the fund was underweighted in
Treasuries, which significantly benefited its performance relative to the Index.
As of April 30, 33.1% of the portfolio was invested in U.S. Treasuries compared
with a 40.2% allocation for the benchmark.
Other Dollar Bloc. The fund was not invested in Australia when the period
began, but we took advantage of improving bond fundamentals and a widening of
the Australia/U.S. bond yield differential by reestablishing a position in
December 1996. As of April 30, Australian bonds accounted for 8.5% of the
portfolio, overweighted compared with the benchmark's 1.2%. The fund also
briefly held a position in Canada, which performed well and was sold at a
profit.
. Europe. European bonds were the strongest performers and they contributed
to the fund's favorable results during the period. As of April 30, the region
accounted for 37.3% of the portfolio compared with a 41.4% weighting for the
Index.
Germany. Despite a pickup in growth in mid-1996, the period under review
was marked by a return of softening economic activity. The most dramatic
indication of Germany's continuing economic difficulties was a record increase
in unemployment in January to levels last seen in 1933. The belief that an end
of the Bundesbank's very easy monetary policy was not in sight continued to
support the bond market. The fund held an overweighted position in Germany
relative to the Index, 11.0% versus 8.9%.
Spain, Sweden and Italy. When the period began, increased optimism
regarding EMU particularly benefited the higher-yielding bonds of Spain and
Sweden. Though the prospects for EMU dimmed somewhat during the first quarter,
Spain, a 2.6% position as of April 30, continued to perform well due to
favorable economic fundamentals. Sweden's portfolio weighting was in line with
the Index for most of the period, then increased to 4.3% in April in
anticipation of further rate cuts on the back of favorable inflation reports.
Finally, as of April 30, the portfolio was overweighted in Italy, 6.3% versus
4.9% for the Index, because growth remains muted and we expect it to benefit
from further yield convergence.
U.K. The U.K.'s economy continued to grow at a pace well above that of the
rest of Europe. The prospect of higher rates, as well as concerns surrounding
the general election, raised investor uncertainty and impacted the performance
of the U.K. gilt. However, we increased the portfolio's U.K. position in January
in the belief that the forward interest rate curve reflected an overly
pessimistic view of potential monetary tightening. By April 30, the U.K. was
10.1% of the portfolio, overweighted compared with the benchmark (6.4%).
France. Though the fund was not invested in France during most of the
period, we established a 3.0% position in April, as we believed that the
underperformance of shorter term bonds in that market presented an attractive
investment opportunity relative to Germany.
Ireland, Denmark and the Netherlands. During the period, we sold the
portfolio's small positions in Ireland, Denmark and the Netherlands after they
performed well and fulfilled our return expectations.
. Japan. The fund significantly underweighted Japan relative to the Index
(10.4% versus 14.3%) because economic growth, though muted, continued to point
towards economic recovery. To a significant extent, the Japanese bond market
shrugged off signs of strengthening growth as being "front loading" ahead of the
consumption tax hike on April 1. Instead, the market focused on the need for a
continuation of low rates to assist the troubled financial sector.
. Cash Equivalents. We reduced the fund's cash equivalent position to 10.7%,
down from 15.5% six months ago, in favor of attractive investment opportunities.
. Credit Quality. Throughout the period, the portfolio was 100% invested in
triple-A-rated securities.
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
. Duration. As of the end of the period, the fund's duration was shorter
than that of the Index, 4.7 years compared with 5.1 years, primarily due to its
underweighting in Japan and its cash equivalent position. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's NAV should move in relation to interest rate
fluctuations.)
Distribution Policy
During the six-month period under review, the fund's Class A, B and
Institutional shares paid out distributions of $0.40, $0.37 and $0.44 per share,
respectively. From their inception on March 12 through April 30, the fund's
Service shares paid out $0.13 per share. The fund declares and pays dividends on
a monthly basis. The fund distributes substantially all of its taxable income,
as is required for all investment companies.
Fund Outlook
The rapid pace of U.S. economic growth during the past two quarters leads
us to expect further Fed tightening. Despite early signs of a possible slowdown
in the second quarter, we continue to believe that bond yields will need to rise
from current levels to ensure that inflationary pressures remain in check.
European growth remains modest, but even more importantly, inflation
appears to be set for further declines (excluding the U.K.). Provided EMU
remains on track, short rates across Europe appear likely to stay at current
levels for a sustained period. Consequently, we expect European bonds to provide
reasonable returns, outperforming the weaker U.S. bond market. In the U.K., a
25-basis-point rate hike and greater independence for the Bank of England has
established the new Labor government's anti-inflation credentials. Any policy
that moves towards a closer relationship with continental Europe will further
highlight the fundamentally cheap levels for U.K. gilts relative to other
European bonds.
In Japan, a rate hike in the near future remains unlikely but JGBs are
vulnerable to the threat of a change in government policy or an asset allocation
shift. For example, the weakness of the life insurance companies may force the
authorities to consider the cost of maintaining historically low short-term
rates. Furthermore, the strong performance of the equity market at the end of
the period may prompt an asset allocation shift away from bonds into equities,
putting further upward pressure on Japanese yields.
/s/ Stephen C. Fitzgerald
Stephen C. Fitzgerald
Portfolio Manager, Fixed Income Investments
/s/ Andrew F. Wilson
Andrew F. Wilson
Portfolio Manager, Fixed Income Investments
/s/ Gareth I. Evans
Gareth I. Evans
Portfolio Manager, Currency
Goldman Sachs Global Income Fund
London, May 30, 1997
- -------------------------------------------------------------------------------
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount(a) Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--87.7%
Australian Dollar--8.4%
Commonwealth of Australia
AUD 21,700,000 10.00% 02/15/06 $ 19,262,621
- --------------------------------------------------------------------------------
British Pound Sterling--9.8%
United Kingdom Treasury
BPS 8,000,000 8.50% 12/07/05 $ 13,833,063
5,300,000 7.50 12/07/06 8,528,207
- --------------------------------------------------------------------------------
$ 22,361,270
- --------------------------------------------------------------------------------
Deutschemark--10.8%
Federal Republic of Germany
DEM 28,000,000 7.50% 11/11/04 $ 18,101,859
2,000,000 6.50 10/14/05 1,216,538
9,000,000 6.25 04/26/06 5,383,994
- --------------------------------------------------------------------------------
$ 24,702,391
- --------------------------------------------------------------------------------
French Franc--3.0%
Government of France
FRF 40,000,000 4.75% 03/12/02 $ 6,851,366
- --------------------------------------------------------------------------------
Italian Lira--6.1%
Republic of Italy
ITL 22,000,000,000 9.50% 05/01/01 $ 13,922,058
- --------------------------------------------------------------------------------
Japanese Yen--10.2%
International Bank for Reconstruction & Development
JPY 1,400,000,000 4.50% 06/20/00 $ 12,132,194
700,000,000 6.75 06/18/01 6,665,813
500,000,000 4.50 03/20/03 4,497,873
- --------------------------------------------------------------------------------
$ 23,295,880
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 700,000,000 10.15% 01/31/06 $ 5,841,114
- --------------------------------------------------------------------------------
Swedish Krona--4.2%
Kingdom of Sweden
SEK 50,000,000 5.50% 04/12/02 $ 6,157,023
30,000,000 6.00 02/09/05 3,586,638
- --------------------------------------------------------------------------------
$ 9,743,661
- --------------------------------------------------------------------------------
United States Dollar--32.7%
United States Treasury Notes
USD 15,000,000 5.25% 01/31/01 $ 14,392,950
17,000,000 6.38 03/31/01 16,909,730
8,200,000 6.25 02/15/03 8,059,042
10,000,000 7.88 11/15/04 10,684,400
4,000,000 6.50 08/15/05 3,940,640
14,700,000 7.00 07/15/06 14,947,989
6,200,000 6.50 10/15/06 6,098,258
- --------------------------------------------------------------------------------
$ 75,033,009
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $204,539,209) $ 201,013,370
- --------------------------------------------------------------------------------
Short-Term Obligations--13.6%
State Street Bank & Trust Euro-Time Deposit
USD 31,090,625 5.66% 05/01/97 31,090,625
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $31,090,625) $ 31,090,625
- --------------------------------------------------------------------------------
<CAPTION>
Contracts Description Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Options--0.0%
FRF 60,000,000 Government of France 4.75% Call, $ 71,961
exp 7/97, Strike yield 4.85%
FRF 40,000,000 Government of France 4.75% Put, $ 39,750
exp 7/97, Strike yield 4.85%
- --------------------------------------------------------------------------------
Total Options
(Cost $124,428) $ 111,711
- --------------------------------------------------------------------------------
Total Investments
(Cost $235,754,262(b)) $ 232,215,706
- --------------------------------------------------------------------------------
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value $ 1,972,384
exceeds cost
Gross unrealized loss for investments in which cost (5,579,488)
exceeds value
- --------------------------------------------------------------------------------
Net unrealized loss $ (3,607,104)
- --------------------------------------------------------------------------------
</TABLE>
(a)The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
AUD = Australian Dollar JPY = Japanese Yen
BPS = British Pound Sterling ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
FRF = French Franc USD = United States Dollar
ITL = Italian Lira
/(b)/The aggregate cost for federal income tax purposes is $235,822,810.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Municipal Income Fund seeks to provide a high level of
current income that is exempt from regular federal income tax, consistent with
the preservation of capital. In pursuit of its objective, the fund invests in a
diversified portfolio of municipal securities with a weighted average credit
quality of double-A or better. The fund buys only investment-grade securities
or, if unrated, securities deemed to be of comparable quality. Under normal
interest rate conditions, the fund's duration is expected to be within one year
of its benchmark, the Lehman Brothers 15-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a 15-year bond.
A Stable Municipal Bond Market
The municipal market has remained at relatively rich levels compared with
the taxable market since the end of 1996, as light primary and secondary supply
has been consumed easily by stable demand. The average price of a 15-year
municipal bond (as calculated from data provided by Municipal Market Data, an
independent municipal market information provider) declined approximately 1.07%,
while yields rose from 5.30% on October 31, 1996 to 5.40% on April 30, 1997.
Supply increased throughout most of the period, though it remained light
compared with historical averages. In November, municipal bond issuance was up
30% versus the prior three-month average. As is typical, increased supply
continued in early December due to the approaching year-end. The 1997 new issue
supply has followed historical early-month patterns, with January and February
supply well below annual averages (slightly more than $10 billion each month)
and March and April supply closer to normal levels ($13 to $14 billion).
Demand from individual investors (who control approximately two-thirds of
municipal bond ownership either through mutual funds or direct investment)
remained stable, but not strong, as long-term municipal yields were below the
psychologically significant 6% level. While yields have not yet cracked that
barrier, President Clinton's reelection and the loss of Republican momentum have
put talk of tax reform and talk of significant changes in the tax-exempt status
of municipal bonds on the back burner, comforting some of the investors
concerned about the market. In addition, the emergence of "nontraditional"
buyers during April has helped support the long end of the market.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Yield
Year of Maturity 4/30/97 10/31/96
<S> <C> <C>
1998 3.85% 3.90%
1999 4.40% 4.15%
2000 4.60% 4.30%
2001 4.70% 4.40%
2002 4.80% 4.50%
2003 4.85% 4.60%
2004 4.90% 4.70%
2005 4.95% 4.80%
2006 5.00% 4.90%
2007 5.05% 5.00%
2008 5.10% 5.10%
2009 5.20% 5.20%
2010 5.30% 5.25%
2011 5.35% 5.30%
2012 5.40% 5.35%
2013 5.45% 5.40%
2014 5.50% 5.40%
2015 5.50% 5.45%
2016 5.55% 5.45%
2017 5.55% 5.45%
2018 5.55% 5.50%
2019 5.55% 5.50%
2020 5.60% 5.50%
2021 5.60% 5.50%
2022 5.60% 5.50%
2023 5.60% 5.50%
2024 5.60% 5.50%
2025 5.60% 5.50%
2026 5.60% 5.50%
2027 5.60% 5.50%
</TABLE>
The yield curve steepened and shifted upward at the short end, remained nearly
the same in the mid-range, and shifted marginally upward at the longer end, in
contrast to six months ago.
Performance Review: The Fund's Positive Performance Reflects Active Management
of Term Structure, Sector Weightings and Security Selection
During the period under review, the fund's Class A shares outperformed
their benchmark, the Lehman Brothers 15-Year Municipal Bond Index (the "Index").
The fund's Class B shares also performed well, although slightly below the
Index.
We are pleased to report that the fund's Class A shares outperformed most
of their peers. For the one-year period ended April 30, 1997, Class A shares
ranked in the top 10% of general municipal debt funds (20 out of 231) based on
total return, according to Lipper Analytical Services, Inc. The fund's Class B
shares were not in existence for the entire one-year period and were not
included in the ranking. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.)
- -------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
Class A Class B
------- -------
<S> <C> <C>
Total Return (based on net asset 2.57% 2.18%
value (NAV))
- --------------------------------------------------------------------------------
Return From Monthly Distributions 2.36% 1.97%
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.21% 0.21%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal 2.49% 2.49%
Bond Index
- --------------------------------------------------------------------------------
NAV (as of 4/30/97) $14.40 $14.40
- --------------------------------------------------------------------------------
NAV Change +$0.03 +$0.03
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
As always, we did not make any bets on the direction of interest rates, but
rather kept the fund's duration in line with the Index, occasionally using
municipal and Treasury futures contracts to manage sector allocation and
duration.
. The portfolio's structure is "credit-barbelled," emphasizing high-quality
bonds with maturities of 20 to 30 years on the long end of the yield curve and
lower quality bonds with four- to 10-year maturities on the short end of the
curve. This strategy allows us to extract extra yield from the shorter end of
the market while maintaining higher quality on the more interest-rate-sensitive
long end of the market. However, during the period, we regularly adjusted the
credit and term structure to take advantage of changing market conditions.
. During the period, we employed several strategies using municipal and/or
treasury futures contracts. These trades are designed to exploit relative
pricing discrepancies between different markets, and are not designed to incur
additional interest rate risk. The fund stood at a 100% municipal bond weighting
(no Treasury or municipal contracts) at the end of the reporting period,
indicating attractive opportunities across the length of the municipal yield
curve.
. The fund's performance also benefited from our extensive credit analysis.
Our research helped us identify specific investment opportunities, such as
"story" bonds. These securities are often misunderstood or incorrectly valued,
but can have unique security structures and attractive yield potential.
Portfolio Composition and Investment Strategies:
Emphasis on Revenue Bonds
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Revenue Bonds 44.1%
Insured Revenue Bonds 35.4%
Insured General Obligations 20.5%
</TABLE>
* The percentages shown are of total portfolio investments that have settled
and include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of April 30, the fund held a 79.5% position in a combination of insured and
uninsured revenue bonds, overweighted compared with the Index (53.9%). (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. As of April 30, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 20.5% versus 45.6%. Though the fund's total
GO allocation of 20.5% was down from 29.8% six months ago, the GO category is
now exclusively
- -------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- -------------------------------------------------------------------------------
weighted in insured GOs. Security-specific investment opportunities and the
relative cheapness of bond insurance for issuers enable the fund to purchase
higher yielding insured GOs without sacrificing quality.
. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. VRDNs fell
from 7.6% to 4.4% of the portfolio. The 4.4% VRDN allocation consists of 3.0%
GOs and 1.4% Revenue-Backed VRDNs.
. Credit Quality. During the period, the fund's average credit quality has
remained double-A. The fund's credit quality maintained a "barbell" structure,
with higher quality securities at the long end of the yield curve and lower
quality securities (but still investment grade) at the short end, though there
have been slight increases in the double-A and single-A categories. As of April
30, 59.8% of the fund was invested in triple-A-rated securities, down from 70.5%
six months ago, while double-A- and single-A-rated securities were increased to
14.4% and 9.8% from 9.3% and 1.8%, respectively. We continued to maintain a
position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 16.0% of the portfolio, down
slightly from 18.4%. We used extensive credit research to identify specific
securities that offered higher yields than average triple-B-rated securities,
but still were of sound credit quality. The triple-B-rated position benefited
the fund's performance during the period by enabling us to lock in above-market
yields and providing greater price appreciation potential relative to the
market. Each of these positions is monitored carefully, and we will remain
vigilant for any changes in their credit quality.
Market Outlook
Our long-term outlook for municipal bond supply is essentially neutral, as
rates are at high levels compared with one year ago. As a result, the current
rate environment encourages neither supply (low rates bring refinancing) nor
demand (high rates attract buyers). At this point, the municipal market does not
perceive any real threats from the federal budget accord. Without any
fundamental problems in view for tax-exempts, we are left with technical forces
as the key driver in relative market performance.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the period
under review, the fund's Class A and B shares paid out distributions of $0.34
and $0.32 per share, respectively. The fund intends to distribute substantially
all of its investment company tax-exempt and taxable income, as required by tax
law.
We value your investment in the Goldman Sachs Municipal Income Fund and we
look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Municipal Income Fund
May 30, 1997
- -------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--95.6%
Arizona--7.6%
Maricopa County MFH IDA (A)
$1,795,000 5.85% 01/01/08 $1,824,546
Maricopa County Unified School District No. 41 GO (FSA)
(AAA/Aaa)
2,500,000 6.25 07/01/15 2,618,500
- --------------------------------------------------------------------
$4,443,046
- --------------------------------------------------------------------
California--3.4%
Contra Costa Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $2,014,700
- --------------------------------------------------------------------
Colorado--4.3%
Englewood MFH RB (BBB)/(d)/
$2,500,000 6.65% 12/01/26 $2,495,575
- --------------------------------------------------------------------
Connecticut--3.6%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $2,107,780
- --------------------------------------------------------------------
Florida--6.7%
Escambia County Housing Authority, Single Family
Multi-County (FNMA/GNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $1,460,070
Santa Rosa Bay Bridge Authority RB (BBB-)
2,500,000 6.25 07/01/28 2,472,900
- --------------------------------------------------------------------
$3,932,970
- --------------------------------------------------------------------
Illinois--14.6%
Chicago Midway Airport RB (MBIA)(AAA/Aaa)
$2,500,000 5.50% 01/01/10 $2,498,800
Lake County Unified School District No. 116 GO (FSA)
(AAA/Aaa)
2,000,000 7.60 02/01/14 2,423,180
1,525,000 6.10 02/01/16 1,555,988
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,104,080
- --------------------------------------------------------------------
$8,582,048
- --------------------------------------------------------------------
Indiana--7.0%
Indiana Bond Bank for Hendricks County RB (AA-)/(b)/
$1,420,000 6.00% 02/01/12 $1,472,540
Indiana Transportation Airport Series A RB (AAA/Aaa)
2,500,000 6.00 11/01/11 2,618,025
- --------------------------------------------------------------------
$4,090,565
- --------------------------------------------------------------------
Kentucky--1.8%
Nelson County Industrial Building RB for Mabex
Universal Corp. Project (A3)
$1,000,000 6.50% 04/01/05 $1,060,850
- --------------------------------------------------------------------
Louisiana--4.3%
South Louisiana Port RB for Cargill Corp. (Aa3)
$2,500,000 5.85% 04/01/17 $2,499,950
- --------------------------------------------------------------------
Maine--1.2%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 675,000 6.80% 12/01/07 $ 721,177
- --------------------------------------------------------------------
Missouri--3.6%
St. Louis Municipal Finance Leasehold RB (A/Aa3)
$2,100,000 5.30% 07/15/02 $2,128,854
- --------------------------------------------------------------------
Nevada--3.1%
Washoe County GO (MBIA)(AAA/Aaa)
$2,000,000 5.00% 06/01/17 $1,822,080
- --------------------------------------------------------------------
New York--3.4%
Syracuse IDA RB (AA)
$2,000,000 5.13% 10/15/02 $1,992,580
- --------------------------------------------------------------------
North Dakota--3.5%
Mercer County PCRB for Basin Electric & Power 2nd
Series (AMBAC) (AAA/Aaa)/(d)/
$2,000,000 6.05% 01/01/19 $2,051,720
- --------------------------------------------------------------------
Ohio--1.0%
Cuyahoga County for Rock & Roll Hall of Fame RB (BBB)
$ 600,000 5.45% 12/01/05 $ 594,018
- --------------------------------------------------------------------
Oklahoma--4.0%
Holdenville IDA RB (BBB/Baa)
$1,245,000 5.95% 07/01/02 $1,279,001
Tulsa County Public Facilities RB (A-)
1,000,000 6.60 11/01/08 1,070,250
- --------------------------------------------------------------------
$2,349,251
- --------------------------------------------------------------------
Pennsylvania--3.5%
Bethlehem School District GO Bond (MBIA)(AAA/Aaa)
$2,000,000 6.00% 03/01/16 $2,035,940
- --------------------------------------------------------------------
South Carolina--2.5%
Piedmont Municipal Power Agency RB (MBIA)(AAA/Aaa)
$1,465,000 5.50% 01/01/10 $1,461,718
- --------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations(continued)
Tennessee--2.6%
McMinnville Housing Authority RB (A2)
$1,550,000 6.00% 10/01/09 $ 1,551,240
- --------------------------------------------------------------------
Texas--5.2%
Denison Water & Sewer RB (AMBAC)(AAA/Aaa)
$1,000,000 5.50% 09/01/09 $ 1,014,700
East Texas Criminal Justice Facilities Financing Corp.
RB (AMBAC) (AAA/Aaa)
2,000,000 5.75 11/01/09 2,035,100
- --------------------------------------------------------------------
$ 3,049,800
- --------------------------------------------------------------------
Washington--8.7%
Chelan County Public Utility RB (MBIA)(AAA/Aaa)
$2,500,000 6.35% 07/01/28 $ 2,586,650
Washington State Public Power Supply System Series A RB
(AMBAC)(AAA/Aaa)
2,500,000 5.70 07/01/11 2,491,850
- --------------------------------------------------------------------
$ 5,078,500
- --------------------------------------------------------------------
Total Debt Obligations
(Cost $55,481,930) $ 56,064,362
- --------------------------------------------------------------------
Short-Term Obligations--5.0%
Alabama--0.7%
Phenix City IDA RB (Toronto Dominion LOC)(AA)/(a)/
$ 400,000 5.05% 05/01/97 $ 400,000
- --------------------------------------------------------------------
New York--3.4%
New York GO (Kredietbank LOC)(AA-)/(a)/
$2,000,000 4.45% 05/01/97 $ 2,000,000
- --------------------------------------------------------------------
Texas--0.9%
Sabine River PCRB (Union Bank of Switzerland
LOC)(AA+)/(a)/
$ 500,000 5.55% 05/01/97 $ 500,000
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $2,900,000) $ 2,900,000
- --------------------------------------------------------------------
Total Investments
(Cost $58,381,930/(c)/) $58,964,362
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value $739,962
exceeds cost
Gross unrealized loss for investments in which cost (157,530)
exceeds value
- --------------------------------------------------------------------
Net unrealized gain $582,432
- --------------------------------------------------------------------
</TABLE>
/(a)/ Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/(b)/ When-issued security.
/(c)/ The amount stated also represents aggregate cost for federal income
tax purposes.
/(d)/ Portions of these securities are being segregated for when-issued
securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Abbreviations:
<S> <C>
AMBAC --Insured by American Municipal
Bond Assurance Corp.
FNMA --Insured by Federal National
Mortgage Association
FSA --Financial Security Assurance Co.
GNMA --Insured by Government National
Mortgage Association
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $64,429,737, $235,754,262 and $58,381,930) $64,142,538 $232,215,706 $58,964,362
Cash, at value 94,169 324,863 90,406
Receivables:
Investment securities sold 1,004,854 -- --
Interest 587,522 3,982,620 1,009,894
Forward foreign currency exchange contracts -- 2,735,490 --
Fund shares sold 664,318 373,902 93,800
Variation margin 6,413 -- --
Foreign tax withheld -- 87,755 --
Deferred organization expenses, net 14,677 -- 21,390
Other assets 63,375 3,239 9,208
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 66,577,866 239,723,575 60,189,060
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 10,549,108 8,691,808 1,387,075
Forward foreign currency exchange contracts -- 1,125,990 --
Fund shares repurchased 23,074 332,497 10,350
Income distribution 81,478 7,496 92,940
Investment adviser fees 10,999 82,520 19,312
Administration fees -- 28,132 7,242
Authorized dealer service fees 10,285 38,021 9,984
Distribution fees 1,290 30,045 169
Accrued expenses and other liabilities 19,056 98,644 12,103
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,695,290 10,435,153 1,539,175
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 56,393,312 222,342,678 58,551,259
Accumulated undistributed net investment income 53,331 6,196,133 60,331
Accumulated net realized loss on investment transactions (287,837) (989,524) (544,137)
Accumulated net realized foreign currency gain -- 3,713,328 --
Net unrealized gain (loss) on investments and futures (276,230) 682,535 582,432
Net unrealized loss on translation of assets and liabilities denominated
in foreign currencies -- (2,656,728) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $55,882,576 $229,288,422 $58,649,885
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:/(a)/
Class A $14.10 $14.59 $14.40
Class B $14.11 $14.58 $14.40
Institutional -- $14.58 --
Service -- $14.59 --
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Class A 3,754,506 11,765,253 4,031,092
Class B 208,089 75,162 42,867
Institutional -- 3,870,161 --
Service -- 6,466 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 3,962,595 15,717,042 4,073,959
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $14.76, $15.28 and $15.08 for Government Income, Global Income
and Municipal Income, respectively. At redemption, Class B shares are
subject to a contingent deferred sales charge, assessed on the amount
equal to the lesser of the current net asset value or the original
purchase price of the shares.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Operations
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $ 1,346,191 $ 7,675,570 $1,514,540
- ----------------------------------------------------------------------------------------------------------------------------------
Total income 1,346,191 7,675,570 1,514,540
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 98,534 915,292 109,080
Administration fees 29,560 183,102 40,904
Authorized dealer service fees 49,266 235,877 68,174
Distribution fees 51,745 237,238 69,406
Custodian fees 31,954 76,892 20,721
Transfer agent fees 42,728 53,004 44,706
Professional fees 30,344 40,805 29,494
Registration fees 13,207 28,146 14,522
Amortization of deferred organization expenses 9,321 -- 8,700
Trustee fees 332 2,324 553
Other 6,659 23,235 6,641
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 363,650 1,795,915 412,901
Less--expenses reimbursable and fees waived by Goldman Sachs (261,399) (513,953) (179,441)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 102,251 1,281,962 233,460
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income 1,243,940 6,393,608 1,281,080
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions (102,548) 3,647,163 384,465
Futures transactions 19,662 -- 96,288
Foreign currency related transactions -- 3,669,694 --
Net change in unrealized gain (loss) on:
Investments (363,801) (4,182,327) (408,697)
Futures (63,631) -- --
Translation of assets and liabilities denominated in foreign currencies -- (1,445,970) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, futures and foreign
currency transactions (510,318) 1,688,560 72,056
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 733,622 $ 8,082,168 $1,353,136
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Net of $94,607 in foreign withholding tax for the Global Income Fund.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
-------------------------------------------
<S> <C> <C> <C>
From operations:
Net investment income $ 1,243,940 $ 6,393,608 $1,281,080
Net realized gain (loss) from investment transactions (82,886) 3,647,163 480,753
Net realized gain from foreign currency related transactions -- 3,669,694 --
Net change in unrealized gain (loss) on investments and futures (427,432) (4,182,327) (408,697)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- (1,445,970) --
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 733,622 8,082,168 1,353,136
- -------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,217,324) (5,196,561) (1,272,366)
Class B (26,616) (15,612) (8,714)
Institutional Class -- (1,688,968) --
Service Class -- (559) --
Net realized gain on investment transactions
Class A (157,412) -- --
Class B (1,780) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,403,132) (6,901,700) (1,281,080)
- -------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 32,392,263 19,707,735 10,342,628
Reinvestment of dividends and distributions 1,137,480 4,631,079 756,256
Cost of shares repurchased (7,815,079) (49,406,305) (5,043,455)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 25,714,664 (25,067,491) 6,055,429
- -------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 25,045,154 (23,887,023) 6,127,485
Net assets:
Beginning of period 30,837,422 253,175,445 52,522,400
- -------------------------------------------------------------------------------------------------------------------------------
End of period $ 55,882,576 $ 229,288,422 $58,649,885
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income $ 53,331 $ 6,196,133 $ 60,331
- -------------------------------------------------------------------------------------------------------------------------------
Summary of share transactions:
Shares sold 2,285,678 1,345,225 716,106
Reinvestment of dividends and distributions 80,099 316,808 52,251
Shares repurchased (550,966) (3,368,115) (349,613)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 1,814,811 (1,706,082) 418,744
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
From operations:
Net investment income $ 1,900,328 $ 15,455,369 $ 2,420,375
Net realized gain from investment transactions 47,581 9,268,666 1,239,690
Net realized loss from foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on investments and futures (257,605) 54,149 (513,085)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,690,304 27,534,625 3,146,980
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,898,372) (22,455,377) (2,418,570)
Class B (3,324) (3,052) (1,805)
Institutional Class -- (4,050,770) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,901,696) (26,509,199) (2,420,375)
- ---------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 8,922,548 39,747,372 6,389,765
Reinvestment of dividends and distributions 1,614,587 16,968,046 1,484,778
Cost of shares repurchased (8,990,920) (82,019,748) (9,875,982)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 1,546,215 (25,304,330) (2,001,439)
- ---------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 1,334,823 (24,278,904) (1,274,834)
Net assets:
Beginning of year 29,502,599 277,454,349 53,797,234
- ---------------------------------------------------------------------------------------------------------------------------------
End of year $ 30,837,422 $ 253,175,445 $ 52,522,400
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income $ 53,331 $ 6,704,225 $ 60,331
- ---------------------------------------------------------------------------------------------------------------------------------
Summary of share transactions:
Shares sold 624,626 2,811,314 449,496
Reinvestment of dividends and distributions 112,977 1,198,568 104,201
Shares repurchased (628,175) (5,784,097) (694,794)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 109,428 (1,774,215) (141,097)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end, management
investment company. Included in this report are the financial statements for the
Goldman Sachs Government Income Fund (Government Income), the Goldman Sachs
Global Income Fund (Global Income) and the Goldman Sachs Municipal Income Fund
(Municipal Income), collectively, "the Funds" or individually a "Fund."
Government Income and Municipal Income are diversified portfolios whereas Global
Income is a non-diversified portfolio. As of April 30, 1997, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. Effective May 1, 1997, the Trust was reorganized from a
Massachusetts business trust to a Delaware business trust and various
operational changes were approved, including updating certain investment
restrictions and amending the management contracts.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations for
which accurate market quotations are readily available are valued on the basis
of quotations furnished by a pricing service or provided by dealers in such
securities. Portfolio securities for which accurate market quotations are not
readily available are valued based on yield equivalents, pricing matrix or other
sources, under valuation procedures established by the Trust's Board of
Trustees. Short-term debt obligations maturing in sixty days or less are valued
at amortized cost.
B. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account principal prepayment
experience and estimates of future principal prepayments. Certain mortgage
security paydown gains and losses are taxable as ordinary income. Such paydown
gains and losses increase or decrease taxable ordinary income available for
distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
For Municipal Income, market premiums on other long-term debt securities are
amortized to interest income while for Global Income, market discounts on other
long-term debt securities are accreted to interest income.
C. Foreign Currency Translations
- --------------------------------
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized and unrealized gain (loss) on foreign currency transactions
will represent: (i) foreign exchange
- -------------------------------------------------------------------------------
22
<PAGE>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
gains and losses from the sale and holdings of foreign currencies and
investments; (ii) gains and losses between trade date and settlement date on
investment securities transactions and forward exchange contracts; and (iii)
gains and losses from the difference between amounts of interest recorded and
the amounts actually received.
D. Forward Foreign Currency Exchange Contracts
- ----------------------------------------------
Global Income may enter into forward foreign exchange contracts for the purchase
or sale of a specific foreign currency at a fixed price on a future date as a
hedge or cross-hedge against either specific transactions or portfolio
positions. Global Income may also purchase and sell forward contracts to seek to
increase total return. All commitments are "marked-to-market" daily at the
applicable translation rates and any resulting unrealized gains or losses are
recorded in the Fund's financial statements. The Fund records realized gains or
losses at the time the forward contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
E. Mortgage Dollar Rolls
- ------------------------
Government Income and Global Income may enter into mortgage "dollar rolls" in
which the Fund sells securities in the current month for delivery and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund loses the right to receive principal and interest paid on the
securities sold but benefits to the extent of any price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
F. Option Accounting Principles
- -------------------------------
The Funds may purchase or write call and put options to hedge against changes in
security prices. When call or put options are written, an amount equal to the
premium received is recorded as a liability in the Statement of Assets and
Liabilities which is subsequently marked-to-market to reflect the current value
of the written option. Upon the purchase of a call option or a protective put
option, the premium paid is recorded as an investment, and subsequently
marked-to-market to reflect the current market value of the option. If a closing
transaction has been entered into, a gain or loss may be realized on the written
or purchased option. When options expire, the premium received from a written
option is treated as a realized gain while the cost of a purchased option is
treated as a realized loss. If an option is exercised, the premium paid or
received will be offset against the proceeds on the sale or the purchase cost of
the underlying security to determine realized gains or losses. Gains and losses
are reported in the Statement of Operations.
Certain risks arise upon entering into options contracts. The risk in
writing a call option is that the Fund gives up the opportunity to profit if the
underlying security's market value increases beyond the exercise price and the
option is exercised. The risk in writing a put option is that the Fund may
realize a loss if the market price of an underlying security declines and the
option is exercised. A premium must be paid for purchased options regardless of
whether or not the option is exercised. The Fund also has the risk of not being
able to enter into a closing transaction if a liquid secondary market does not
exist.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices,
- -------------------------------------------------------------------------------
23
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
currency exchange rates (in the case of Global Income) or to seek to increase
total return.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Payments for futures contracts ("variation margin") are paid or received by the
Funds daily, dependent on the daily fluctuations in the value of the contracts,
and are recorded for financial reporting purposes, as unrealized gains or
losses. When contracts are closed, the Funds realize a gain or loss equal to the
difference between the value of the futures contract to sell and the value of
the futures contract to buy. Gains and losses are reported in the Statement of
Operations.
The use of futures contracts involve, to varying degrees, elements of
market and counterparty risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities. Changes in the value of the futures
contract may not directly correlate with changes in the value of the underlying
securities decreasing the effectiveness of the Funds' hedging strategies
potentially resulting in a loss.
H. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute
substantially all investment company tax-exempt and taxable income to its
shareholders each year. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial
reporting purposes is determined in accordance with income tax rules. Therefore,
the source of a portfolio's distributions may be shown in the accompanying
financial statements as either from or in excess of net investment income or net
realized gain on investment transactions, or from paid-in capital, depending on
the type of book/tax differences that may exist.
The Funds, at their most recent tax year-ends (October 31, 1996 for Global
Income and December 31, 1996 for Government Income and Municipal Income) had
approximately the following amounts of capital loss carryforwards for U.S.
federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ---------------- --------------
<S> <C> <C>
Global Income $4,471,734 2004
Municipal Income $ 702,691 2004
</TABLE>
I. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
J. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are generally allocated to the portfolios based on each
portfolio's relative average net assets for the period.
Class A and Class B shareholders of the Funds bear all expenses and fees
relating to their respective distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. Transfer
agent fees are subject to separate arrangements for each class. Shareholders of
Service shares bear all expenses and fees paid to service organizations for
their services with respect to such shares as well as other expenses (subject to
expense limitations) which are directly attributable to such shares.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as each Fund's investment adviser
pursuant to Investment Advisory Agreements. Goldman Sachs Asset Management
International ("GSAM International"), an affiliate of Goldman Sachs, acts as
subadviser under a Subadvisory Agreement for Global Income. Under the Investment
Advisory and Subadvisory Agreements, GSAM and GSAM International, subject to the
general supervision of the Trust's Board of Trustees, manage the Funds'
portfolios. As compensation for the services rendered pursuant to the Investment
Advisory Agreements and the assumption of the expenses related thereto, GSAM is
entitled to a fee, computed daily and
- -------------------------------------------------------------------------------
24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
payable monthly at an annual rate equal to .50%, .25% and .40% of average daily
net assets of Government Income, Global Income and Municipal Income,
respectively. As compensation for the services rendered pursuant to the
Subadvisory Agreement, GSAM International is entitled to a subadvisory fee from
Global Income of .50% of the average daily net assets.
GSAM serves as each Fund's administrator pursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreement, GSAM is entitled to
a fee, computed daily and payable monthly at an annual rate equal to .15% of
each Fund's average daily net assets.
GSAM has voluntarily agreed to limit certain of the Funds' expenses
(excluding advisory, administration, distribution and authorized dealer service
fees, taxes, interest, brokerage, litigation, indemnification and other
extraordinary expenses and with respect to Global Income, transfer agent fees)
to the extent such expenses exceed .00%, .06% and .05% per annum of Government
Income, Global Income and Municipal Income, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to
a Distribution Agreement and as such may receive a portion of the sales load
imposed on the sale of Fund shares. During the period ended April 30, 1997,
Goldman Sachs retained approximately $134,700, $46,600 and $40,300 of sales
loads related to sales of Government Income, Global Income and Municipal Income,
respectively.
The Trust, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% and .75% of each Fund's average
daily net assets attributable to Class A and Class B shares, respectively. The
Trust, on behalf of each Fund, has adopted an Authorized Dealer Service Plan
(the "Service Plan") pursuant to which Goldman Sachs and Authorized Dealers are
compensated for providing personal and account maintenance services. Each Fund
pays a fee under its Service Plan equal, on an annual basis, up to .25% of the
average daily net assets attributable to the Class A and Class B shares. Goldman
Sachs also serves as the Transfer Agent of the Funds for a fee.
For the six months ended April 30, 1997, the advisors, administrators and
distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
<TABLE>
<CAPTION>
Waivers
-------------------------------
Reimburse-
Admin- Class A Reimburse- ment
Fund Advisor istrator 12b-1 ment Outstanding
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government
Income $49 $30 $48 $134 $24
Global
Income 378 -- 38 98 --
Municipal
Income --- -- 68 111 9
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such
waivers and limitations in the future at their discretion.
For the six months ended April 30, 1997, Government Income and Municipal
Income incurred commissions expense of approximately $877 and $500 respectively,
in connection with futures contracts entered into with Goldman Sachs. At April
30, 1997, Goldman Sachs owes approximately $6,400 to Government Income related
to variation margin on futures contracts.
As of May 1, 1997 each Fund's advisory and administration agreements were
combined into a single management agreement encompassing the same services and
fee structure. The investment adviser for Global Income changed from GSAM to
GSAM International.
4. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, Global Income participates in a $50,000,000
committed, unsecured revolving line of credit facility. Both facilities
- -------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
are to be used solely for temporary or emergency purposes. Under the most
restrictive arrangement, each Fund must own securities having a market value in
excess of 300% of the total bank borrowings. The interest rate on borrowings is
based on the federal funds rate. The committed facility also requires a fee to
be paid based on the amount of the commitment which has not been utilized. For
the period ended April 30, 1997, the Funds did not have any borrowings under
these facilities.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for the
six months ended April 30, 1997, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and agency
obligations $89,868,153 $31,460,469 $ --
- --------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 2,626,912 251,582,253 52,647,833
- --------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 66,314,796 46,245,813 --
- --------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and agency
obligations) 2,926,850 234,275,222 50,202,452
- --------------------------------------------------------------------
</TABLE>
At April 30, 1997, Global Income had outstanding forward foreign currency
exchange contracts, both to purchase and sell foreign currencies as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Value on
Foreign Currency Settlement Current Unrealized
Purchase Contracts Date Value (Loss)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Finnish Markka
Expiring 7/10/97 $ 5,769,651 $ 5,743,713 $ (25,938)
Norwegian Krone
Expiring 7/18/97 6,967,220 6,931,393 (35,827)
- ----------------------------------------------------------------------------
Total Foreign Currency
Purchase Contracts $12,736,871 $12,675,106 $ (61,765)
- ----------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
Expiring 6/16/97 $ 19,731,038 $ 19,370,358 $ 360,680
British Pound Sterling
Expiring 5/15/97 22,990,248 22,842,002 148,246
Deutschemark
Expiring 5/23/97 9,189,539 9,098,874 90,665
Expiring 7/10/97 5,769,651 5,746,603 23,048
French Franc
Expiring 7/22/97 19,223,491 18,986,663 236,828
Italian Lira
Expiring 5/23/97 14,576,014 14,452,635 123,379
Japanese Yen
Expiring 7/24/97 46,975,472 46,670,841 304,631
Spanish Peseta
Expiring 6/11/97 5,856,184 5,819,307 36,877
Swedish Krona
Expiring 6/12/97 10,186,641 9,919,416 267,225
Swiss Franc
Expiring 5/23/97 240,202 240,493 (291)
Expiring 5/23/97 11,211,600 11,103,780 107,820
- ----------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $165,950,080 $164,250,972 $1,699,108
- ----------------------------------------------------------------------------
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
At April 30, 1997, Global Income had sufficient cash and/or securities to
cover any commitments under these contracts.
Global Income has recorded a "Receivable for forward foreign currency
exchange contracts" and "Payable for forward foreign currency exchange
contracts" resulting from open and closed but not settled forward foreign
currency exchange contracts of $2,735,490 and $1,125,990 respectively, in the
accompanying Statement of Assets and Liabilities. Included in the "Receivable
and Payable for forward foreign currency exchange contracts" are $1,036,091 and
$1,063,934 respectively, related to forward contracts closed but not settled as
of April 30, 1997.
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the six months ended April 30, 1997 is as follows:
<TABLE>
<CAPTION>
Government Income Global Income Municipal Income
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 2,087,525 $29,588,339 1,091,068 $15,982,653 687,045 $9,922,452
Reinvestment of dividends and
distributions 78,520 1,115,153 240,916 3,522,418 51,831 750,177
Shares repurchased (543,006) (7,702,748) (3,237,001) (47,484,511) (345,221) (4,979,641)
--------------------------------------------------------------------------------------
1,623,039 23,000,744 (1,905,017) (27,979,440) 393,655 5,692,988
--------------------------------------------------------------------------------------
Class B shares
Shares sold 198,153 2,803,924 65,331 958,124 29,061 420,176
Reinvestment of dividends and
distributions 1,579 22,327 715 10,428 420 6,079
Shares repurchased (7,960) (112,331) (8,487) (124,059) (4,392) (63,814)
--------------------------------------------------------------------------------------
191,772 2,713,920 57,559 844,493 25,089 362,441
--------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 182,398 2,673,084 -- --
Reinvestment of dividends and
distributions -- -- 75,139 1,097,674 -- --
Shares repurchased -- -- (122,627) (1,797,735) -- --
--------------------------------------------------------------------------------------
-- -- 134,910 1,973,023 -- --
--------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 6,428 93,874 -- --
Reinvestment of dividends and
distributions -- -- 38 559 -- --
Shares repurchased -- -- -- -- -- --
--------------------------------------------------------------------------------------
-- -- 6,466 94,433 -- --
--------------------------------------------------------------------------------------
Net increase (decrease) 1,814,811 $25,714,664 (1,706,082)$(25,067,491) 418,744 $6,055,429
=====================================================================================-
</TABLE>
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Global Income Municipal Income
- --------------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 607,156 $8,675,868 1,089,521 $15,545,777 431,736 $6,139,212
Reinvestment of dividends and
distributions 112,752 1,611,387 947,846 13,419,614 104,074 1,482,976
Shares repurchased (626,797) (8,971,389) (5,376,065) (76,216,894) (694,685) (9,874,431)
--------------------------------------------------------------------------------------
93,111 1,315,866 (3,338,698) (47,251,503) (158,875) (2,252,243)
--------------------------------------------------------------------------------------
Class B shares
Shares sold 17,470 246,680 18,628 265,053 17,760 250,553
Reinvestment of dividends and
distributions 225 3,200 119 1,708 127 1,802
Shares repurchased (1,378) (19,531) (1,144) (16,373) (109) (1,551)
--------------------------------------------------------------------------------------
16,317 230,349 17,603 250,388 17,778 250,804
--------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 1,703,165 23,936,542 -- --
Reinvestment of dividends and
distributions -- -- 250,603 3,546,724 -- --
Shares repurchased -- -- (406,888) (5,786,481) -- --
--------------------------------------------------------------------------------------
-- -- 1,546,880 21,696,785 -- --
--------------------------------------------------------------------------------------
Net increase (decrease) 109,428 $1,546,215 (1,774,215)$(25,304,330) (141,097) $(2,001,439)
======================================================================================
</TABLE>
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
7. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Funds' custodian.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSAM, transfer uninvested cash balances into joint accounts, the
daily aggregate balance of which is invested in one or more repurchase
agreements. The underlying securities for the repurchase agreements are U.S.
Treasury and agency obligations. At April 30, 1997, Government Income had an
undivided interest in the repurchase agreement in the following joint account
which equaled $11,100,000 in principal amount. At April 30, the repurchase
agreements held in this joint account, along with the corresponding underlying
securities (including the type of security, market value, interest rate and
maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns & Co., dated 4/30/97, repurchase price
$680,103,889 (GNMA: $59,497,211, 7.50%-9.00%,
12/15/21-12/15/26; FNMA: $267,568,394, 5.50%,
02/01/09-04/01/27; FHLMC: $373,405,594, 5.50%-7.50%,
2/01/98-4/01/27)
$680,000,000 5.50% 5/01/97 $680,000,000
Nomura Securities International, Inc. dated 4/30/97,
repurchase price $300,045,833 (FNMA: $182,812,268,
5.94%-8.01%, 7/22/97-5/11/05; FHLMC: $38,631,543,
6.02%-6.75%, 1/28/00-12/04/01, FCSB: $49,581,430,
6.05%-6.25%, 5/10/99-12/03/99, SLMA: $29,222,430,
6.00%, 1/16/01)
300,000,000 5.50 5/01/97 300,000,000
Credit Suisse First Boston, dated 4/30/97, repurchase
price $52,307,845 (U.S. Treasury Bill: $53,475,803,
2/05/98)
52,300,000 5.40 5/01/97 52,300,000
- --------------------------------------------------------------------
Total Joint Repurchase Agreement Account $1,032,300,000
- --------------------------------------------------------------------
</TABLE>
9. Other
As of April 30, 1997, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 16% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
28
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions/(a)/ transactions operations income transactions
--------------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997-Class A shares $14.36 $0.46 $(0.20) -- $0.26 $(0.45) $(0.07)
1997-Class B shares 14.37 0.40 (0.19) -- 0.21 (0.40) (0.07)
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 14.47 0.92 (0.11) -- 0.81 (0.92) --
1996-Class B shares/(c)/ 14.11 0.41 0.26 -- 0.67 (0.41) --
1995-Class A shares 13.47 0.94 1.00 -- 1.94 (0.94) --
1994-Class A shares 14.90 0.85 (1.28) -- (0.43) (0.85) (0.12)
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares 14.32 0.56 0.58 -- 1.14 (0.56) --
GLOBAL INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares $14.53 $0.25 $(0.07) $0.28 $0.46 $(0.40) --
1997-Class B shares 14.53 0.36 (0.02) 0.08 0.42 (0.37) --
1997-Institutional shares 14.52 0.42 (0.02) 0.10 0.50 (0.44) --
1997-Service shares/(i)/ 14.69 0.10 0.02 (0.09) 0.03 (0.13) --
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 14.45 0.71 0.62 0.18 1.51 (1.43) --
1996-Class B shares/(c)/ 14.03 0.34 0.41 0.11 0.86 (0.36) --
1996-Institutional shares 14.45 1.15 0.32 0.10 1.57 (1.50) --
1995-Class A shares 13.43 0.89 0.92 0.15 1.96 (0.94) --
1995-Institutional shares/(f)/ 14.09 0.22 0.34 0.06 0.62 (0.26) --
1994-Class A shares 15.07 0.84 (1.37) (0.12) (0.65) (0.22) (0.16)
1993-Class A shares 14.69 0.85 1.07 (0.42) 1.50 (0.85) (0.27)
1992-Class A shares 14.60 1.14 0.45 (0.36) 1.23 (1.14) --
For the Period August 2, 1991/(d)/through October 31,
- -----------------------------------------------------------------
1991-Class A shares 14.55 0.25 0.23 (0.19) 0.29 (0.24) --
<CAPTION>
Distributions to shareholders
-----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(b)/
-----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997-Class A shares -- -- -- $(0.52) $(0.26) $14.10 1.83%/(g)/
1997-Class B shares -- -- -- (0.47) (0.26) 14.11 1.43/(g)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares -- -- -- (0.92) (0.11) 14.36 5.80
1996-Class B shares/(c)/ -- -- -- (0.41) 0.26 14.37 4.85/(g)/
1995-Class A shares -- -- -- (0.94) 1.00 14.47 14.90
1994-Class A shares (0.02) (0.01) -- (1.00) (1.43) 13.47 (2.98)
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares -- -- -- (0.56) 0.58 14.90 8.03/(g)/
GLOBAL INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares -- -- -- $(0.40) $0.06 $14.59 3.22%/(g)/
1997-Class B shares -- -- -- (0.37) 0.05 14.58 2.94/(g)/
1997-Institutional shares -- -- -- (0.44) 0.06 14.58 3.50/(g)/
1997-Service shares/(i)/ -- -- -- (0.13) (0.10) 14.59 0.21/(g)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares -- -- -- (1.43) 0.08 14.53 11.05
1996-Class B shares/(c)/ -- -- -- (0.36) 0.50 14.53 6.24/(g)/
1996-Institutional shares -- -- -- (1.50) 0.07 14.52 11.55
1995-Class A shares -- -- -- (0.94) 1.02 14.45 15.08
1995-Institutional shares/(f)/ -- -- -- (0.26) 0.36 14.45 4.42/(g)/
1994-Class A shares -- -- (0.61) (0.99) (1.64) 13.43 (4.49)
1993-Class A shares -- -- -- (1.12) 0.38 15.07 10.75
1992-Class A shares -- -- -- (1.14) 0.09 14.69 8.77
For the Period August 2, 1991/(d)/through October 31,
- ---------------------------------------------------------------------
1991-Class A shares -- -- -- (0.24) 0.05 14.60 2.00
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Net Ratio of
Ratio of net assets net
net investment at end Ratio of investment
expenses income Portfolio of expenses income
to average to average turnover period to average to average
net assets net assets rate/(h)/ (in 000s) net assets net assets
--------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997-Class A shares 0.50%/(e)/ 6.34%/(e)/ 182.25%/(g)/ $52,946 1.83%/(e)/ 5.01%/(e)/
1997-Class B shares 1.25/(e)/ 5.37/(e)/ 182.25/(g)/ 2,937 2.33/(e)/ 4.29/(e)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 0.50 6.42 485.09 30,603 1.89 5.03
1996-Class B shares/(c)/ 1.25/(e)/ 5.65/(e)/ 485.09 234 2.39/(e)/ 4.51/(e)/
1995-Class A shares 0.47 6.67 449.53 29,503 2.34 4.80
1994-Class A shares 0.11 6.06 654.90 14,452 2.86 3.31
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares 0.00/(e)/ 4.87/(e)/ 725.41/(g)/ 12,860 4.00/(e)/ 0.87/(e)/
GLOBAL INCOME FUND
- ---------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares 1.17%/(e)/ 5.12%/(e)/ 136.72%/(g)/ $171,668 1.60%/(e)/ 4.69%/(e)/
1997-Class B shares 1.71/(e)/ 4.73/(e)/ 136.72/(g)/ 1,095 2.10/(e)/ 4.34/(e)/
1997-Institutional shares 0.65/(e)/ 5.64/(e)/ 136.72/(g)/ 56,431 1.04/(e)/ 5.25/(e)/
1997-Service shares/(i)/ 1.15/(e)/ 5.85/(e)/ 136.72/(g)/ 94 1.54/(e)/ 5.46/(e)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 1.16 5.81 232.15 198,665 1.64 5.33
1996-Class B shares/(c)/ 1.70/(e)/ 5.16/(e)/ 232.15 256 2.14/(e)/ 4.72/(e)/
1996-Institutional shares 0.65 6.35 232.15 54,254 1.11 5.89
1995-Class A shares 1.29 6.23 265.86 245,835 1.58 5.94
1995-Institutional shares/(f)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.28 5.73 343.74 396,584 1.53 5.48
1993-Class A shares 1.30 5.78 313.88 675,662 1.55 5.53
1992-Class A shares 1.37 7.85 270.75 588,893 1.62 7.60
For the Period August 2, 1991/(d)/through October 31,
- -----------------------------------------------------------------
1991-Class A shares 0.38/(g)/ 1.72/(g)/ 34.22/(g)/ 388,744 0.44/(g)/ 1.66/(g)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(a)/ Distributions to shareholders
------------------------------------------------------------- ------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions/a/ transactions operations income transactions
---------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares $14.37 $0.34 $0.03 -- $0.37 $(0.34) --
1997-Class B shares 14.37 0.28 0.03 -- 0.31 (0.28) --
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares 14.17 0.65 0.20 -- 0.85 (0.65) --
1996-Class B shares/(c)/ 14.03 0.27 0.34 -- 0.61 (0.27) --
1995-Class A shares 13.08 0.67 1.09 -- 1.76 (0.67) --
1994-Class A shares 14.64 0.73 (1.51) -- (0.78) (0.73) (0.05)
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares 14.32 0.22 0.32 -- 0.54 (0.22) --
<CAPTION>
Distributions to shareholders
----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(b)/
------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares -- -- -- $(0.34) $0.03 $14.40 2.57%/(g)/
1997-Class B shares -- -- -- (0.28) 0.03 14.40 2.18/(g)/
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares -- -- -- (0.65) 0.20 14.37 6.13
1996-Class B shares/(c)/ -- -- -- (0.27) 0.34 14.37 4.40/(g)/
1995-Class A shares -- -- -- (0.67) 1.09 14.17 13.79
1994-Class A shares -- -- -- (0.78) (1.56) 13.08 (5.51)
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares -- -- -- (0.22) 0.32 14.64 3.73/(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Net Ratio of
Ratio of net assets net
net investment at end Ratio of investment
expenses income Portfolio of expenses income
to average to average turnover period to average to average
net assets net assets rate/(h)/ (in 000s) net assets net assets
------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares 0.85%/(e)/ 4.70%/(e)/ 90.46%/(g)/ $58,033 1.51%/(e)/ 4.04%/(e)/
1997-Class B shares 1.60/(e)/ 3.92/(e)/ 90.46/(g)/ 617 2.01/(e)/ 3.51/(e)/
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares 0.85 4.58 344.13 52,267 1.55 3.88
1996-Class B shares/(c)/ 1.60/(e)/ 3.55/(e)/ 344.13 255 2.05/(e)/ 3.10/(e)/
1995-Class A shares 0.76 4.93 335.55 53,797 1.49 4.20
1994-Class A shares 0.45 5.28 357.54 47,373 1.55 4.18
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares 0.00/(e)/ 5.15/(e)/ 99.99/(g)/ 30,166 2.42/(e)/ 2.73/(e)/
</TABLE>
- ---------------------------
/(a)/ Includes the balancing effect of calculating per share amounts.
/(b)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions, a complete redemption of the
investment at the net asset value at the end of period and no sales
charge. Total return would be reduced if a sales charge for Class A
shares or a contingent deferred sales charge for Class B shares were
taken into account.
/(c)/ Class B shares commenced operations on May 1, 1996.
/(d)/ Commencement of operations.
/(e)/ Annualized.
/(f)/ Institutional shares commenced operations on June 1, 1995.
/(g)/ Not annualized.
/(h)/ Includes the effect of mortgage dollar roll transactions for the
Government Income Fund.
/(i)/ Service Class shares commenced operations on March 12, 1997.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Semiannual Report is authorized for distribution to prospective investors
only when preceded or accompanied by a Goldman Sachs Trust Prospectus which
contains facts concerning the Fund's objectives and policies, management,
expenses and other information.
- --------------------------------------------------------------------------------
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
John P. McNulty
Mary P. McPherson
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser,
Distributor and Transfer Agent
FISARRET
The Goldman Sachs
Fixed Income Funds
- --------------------------------------------------------------------------------
Semiannual Report
April 30, 1997
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders
- -------------------------------------------------------------------------------
Dear Shareholders:
A return of robust economic growth during the period under review fueled
fears of higher inflation, which pushed Treasury yields higher across the
maturity spectrum. In this semiannual report, we will review the performance of
the Goldman Sachs Fixed Income Funds for the six-month period ended April 30,
1997, as well as provide a brief overview of the U.S. economy and the bond
market. We are pleased to note that during the period, the Goldman Sachs Fixed
Income Funds performed well compared with their peers.
Economic Activity Rebounded, Led by Consumer Spending
After a sluggish third quarter, the pace of economic growth strengthened
during the period. During November and December, consumer spending rebounded,
the trade deficit narrowed and industrial production climbed significantly. As a
result, fourth-quarter real Gross Domestic Product (GDP) growth was 3.8%
(annualized), up from 2.1% in the prior quarter.
Economic activity continued to gain momentum during the first quarter of
1997, with real GDP surging 5.8%, the largest jump in a decade. Signs of
strength were led by a sharp increase in consumer spending, which resulted in
solid sales gains for automobile manufacturers and retailers. In addition,
upbeat reports on factory orders and inventories, construction outlays and labor
market conditions all pointed towards economic acceleration. Despite the growth
spurt, reported inflation remained surprisingly mild during the period.
Furthermore, several economic reports for April came in at the low end of
consensus expectations, which suggested that the economy could moderate during
the second quarter.
The Bond Market Rallied, Then Fell as Inflation Fears Reemerged
The U.S. fixed income market came under pressure during the period under
review. In November, bonds performed well in anticipation of a continued
slowdown in U.S. economic growth. However, the market experienced a reversal in
December when better-than-expected economic data, in particular, robust
employment figures, triggered a sell-off and drove interest rates higher. In
early February, bond prices briefly rebounded, but later faltered as it became
increasingly likely that the U.S. Federal Reserve would raise short term
interest rates in March. By the end of March, the yield on the benchmark 30-year
Treasury bond rose above the psychologically important 7% threshold. Despite the
lackluster performance of the U.S. bond market for the period as a whole, a
sharp rebound at the end of April helped bonds recoup part of their earlier
losses.
The Fed Raised the Federal Funds Rate in March
In March 1997, the Fed raised the federal funds rate by 25 basis points to
5.50%. Though there were few signs of actual inflation, the Fed tightening was
prompted by the economy's pervasive strength. The Fed's action was its first
since a quarter-point cut in January 1996.
During the period under review, the yield curve shifted higher across all
maturities. The yield on six-month Treasury bills rose from 5.26% on October 31,
1996 to approximately 5.52% on April 30, 1997. For the same period, the yield on
the 30-year U.S. Treasury bond rose more dramatically, climbing from 6.64% to
6.95%.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Table of Contents
<S> <C>
Market Overview 1
Goldman Sachs Adjustable Rate Government Fund 3
Goldman Sachs Short Duration Government Fund 9
Goldman Sachs Short Duration Tax-Free Fund 14
Goldman Sachs Core Fixed Income Fund 20
Financial Statements 28
Notes to Financial Statements 32
Financial Highlights 39
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
1
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
10/31/96 4/30/97
<S> <C> <C>
3-Month 5.14% 5.23%
6-Month 5.26% 5.52%
1 5.40% 5.89%
2 5.73% 6.27%
3 5.86% 6.40%
5 6.07% 6.57%
10 6.34% 6.71%
15 6.64% 6.95%
</TABLE>
Source: Bloomberg, L.P.
The yield curve shifted upward across all maturities and steepened sharply at
the short end.
Outlook: Strengthening Economic Growth May
Trigger Further Preemptive Rate Hikes
Despite reports of economic moderation and minimal price acceleration, the
economy's broad-based fundamental strength and resilient equity market make
additional Fed rate increases likely this year. Goldman Sachs' economists
believe that the speed and extent of Fed tightening will depend in large part on
the emergence of conclusive signs that the economy is nearing maximum capacity,
rather than immediate evidence of increased inflationary pressures.
In conclusion, we thank you for your support of the Goldman Sachs Fixed
Income Funds and we look forward to continuing our relationship.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
May 30, 1997
- -------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Adjustable Rate Government Fund seeks a high level
of current income consistent with low volatility of principal. The portfolio
ordinarily invests substantially all of its assets in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, with
primary emphasis on adjustable rate mortgage securities (ARMs). Under normal
interest rate conditions, the fund's duration is expected to be in a range
approximately equal to that of a six-month to one-year U.S. Treasury security.
Special Events
As of March 27, 1997, the fund opened a new share class (Service). In
addition, effective May 1, 1997, the name of the GS Adjustable Rate Government
Fund was changed to the Goldman Sachs Adjustable Rate Government Fund. The
fund's objective and investment focus remain the same.
ARM Market Performed Well, Buoyed by Low Volatility and Strong Investor Demand
The ARM market performed well during the period under review, supported by
low volatility and stable prepayments. In addition, investor interest in the
sector increased as opportunities in short-duration alternatives diminished. In
combination, these factors drove ARM spreads approximately 15 basis points
tighter over the period.
Performance Review
During the six-month period ended April 30, the fund's Institutional,
Administration and Class A shares all outperformed the six-month U.S. Treasury
bill and the one-year U.S. Treasury bill. (The fund's duration as of April 30
was 0.7 years, in between that of the six-month and the one-year U.S. Treasury
bill.) The fund's positive performance was due to the tightening of yield
spreads between ARMs and Treasuries, as well as the incremental yield of ARMs
over similar-duration Treasuries.
The fund also performed well compared with its peers. For the 12 months
ended April 30, 1997, the fund's Institutional shares ranked 11th out of 47
adjustable rate mortgage funds based on total return, as tracked by Lipper
Analytical Services, Inc. (Lipper does not rank the fund's Administration,
Service and Class A shares. Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.)
We are pleased to announce that for the three- and five-year periods ended
April 30, 1997, the fund's Institutional shares were rated "five stars" (out of
1,193 taxable bond funds) and "four stars" (out of 641 taxable bond funds),
respectively, according to Morningstar, Inc., an independent rating agency. In
addition, as of April 30, Morningstar rated the fund's Administration shares
"five stars" for the one-year period (out of 1,709 taxable bond funds) and "four
stars" (out of 1,193 taxable bond funds) for the three-year period./1/
- ------------------------------------------------
/1/Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received "five
stars" for the one-year period and were rated among 1,709 taxable bond funds.
The Morningstar ratings apply only to the fund's Institutional and
Administration shares; the fund's Class A and Service shares have not been
rated. Class A and Service shares are subject to additional fees and expenses
which may have the effect of lowering performance and may affect any future
Morningstar rating. Morningstar rates each fund against its peers in the same
category. In all, there are four Morningstar categories (domestic equity,
international equity, taxable bond and municipal). Morningstar ratings range
from five stars (highest) to one star (lowest). Funds with five-star ratings are
in the top 10% of their category, four-star ratings in the next 22.5%, three
stars the next 35%, two stars the next 22.5% and one star the lowest 10% of
their categories.
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
6-Month 1-Year
Institu- Adminis- Treasury Treasury
tional tration Class A Service* Bill Bill
------ ------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Return 3.28% 3.16% 3.16% 0.74% 2.65% 2.56%
(based on net
asset value)
- --------------------------------------------------------------------------------
Return From 2.97% 2.85% 2.85% 0.20% NA NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From 0.31% 0.31% 0.31% 0.54% NA NA
Price
Appreciation
- --------------------------------------------------------------------------------
NAV (4/30/97) $9.86 $9.86 $9.86 $9.86 NA NA
- --------------------------------------------------------------------------------
NAV Change +$0.03 +$0.03 $0.03 $0.02 NA NA
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period. Performance and net asset value
(NAV) change are from its inception date on 3/27/97.
Portfolio Composition and Investment Strategies
Portfolio composition remained similar compared with six months ago, with
the exception of a slight reduction in collateralized mortgage obligations
(CMOs) and an increase in repurchase agreements/cash equivalents.
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
ARMs 85.8%
SBA Floaters 7.4%
Repos/Cash Equivalents 4.8%
CMOs 2.0%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. ARMs. As of April 30, 1997, the fund's primary investment continued to be
in ARMs, which accounted for 85.8% of the portfolio. We emphasized seasoned,
fully indexed one-year Constant Maturity Treasury (CMT) securities that were
issued prior to 1990, which are attractive because of their lower prepayment
risk. (Seasoned issues are less likely to be impacted by prepayments than newly
issued mortgages because homeowners who did not refinance in earlier periods of
lower rates are generally less likely to refinance in the future.)
. SBA Floaters. The portfolio's position in securities backed by Small
Business Administration (SBA) loans was 7.4%, approximately the same as six
months ago. The sector offered incremental yield over similar-duration
Treasuries and increased fund diversification.
. CMOs. We reduced the portfolio's CMO allocation to 2.0%, down from 3.5%
last October. Within the sector, the fund's largest holding was a 1.1% position
in super floaters. Because super floaters are generally considered to be higher
risk than conventional floaters, we use them selectively in seeking to enhance
fund performance. The remainder of the CMO position (0.9%) was invested in a
variety of other structures.
. Duration. We seek excess return over similar-duration U.S. Treasuries
through our sector weightings and specific security selection rather than
attempting to make interest rate predictions. Therefore, we manage the fund's
duration to approximate that of the Index, partly through the use of futures. As
of April 30, the fund's duration was 0.7 years, unchanged from six months ago.
Credit Quality. The fund invests exclusively in securities issued by the U.S.
government, its agencies or instrumentalities, which are considered to be of the
highest credit quality.
Market Outlook
Despite some suggestion of economic moderation, we continue to believe that
interest rates are likely to move higher during the balance of the year. This
expectation is
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
- --------------------------------------------------------------------------------
predicated on the economy's broad-based fundamental strength, as well as the
Fed's well-publicized commitment to monetary discipline.
As of the end of the period, we have a neutral outlook for the ARM sector.
ARMs are currently trading at fair value, reflecting a stable prepayment
outlook. Seasoned one-year CMT ARMs remain attractive as a core holding due to
their prepayment stability in a falling rate environment and reduced cap risk in
a rising rate environment.
Distribution Policy
During the six-month period ended April 30, 1997, the fund's
Institutional, Administration and Class A shares distributed $0.29, $0.28 and
$0.28 per share, respectively. From their inception on March 27 through April
30, the fund's Service shares paid out $0.05 per share.
The fund distributes substantially all of its investment company taxable
income. The dividend is set at the start of each month, based on the income the
fund is expected to generate. However, because the fund invests primarily in
mortgage securities that are subject to prepayments, we cannot precisely predict
the amount of principal and interest that a portfolio will receive. Therefore,
at times a portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy has not affected the management of
the fund or significantly affected its NAV per share.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
Goldman Sachs Adjustable Rate Government Fund
May 30, 1997
- --------------------------------------------------------------------------------
5
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--94.4%
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a)--25.6%
$ 2,499,665 7.41% 07/01/18 $ 2,603,551
1,337,640 7.57 12/01/18 1,390,932
10,052,878 7.45 05/01/19 10,420,411
19,024,919 7.65 11/01/19/(b)/ 19,952,383
4,828,320 7.75 05/01/20 5,061,431
17,560,720 7.50 06/01/20/(b)/ 18,260,339
36,305,075 7.77 02/01/22/(b)/ 38,097,820
6,736,255 7.27 06/01/22 6,940,632
3,743,219 7.48 08/01/22 3,889,430
6,343,944 7.55 09/01/22 6,616,543
5,798,265 7.29 09/01/22 5,961,312
16,426,906 7.65 11/01/22 17,181,558
9,544,724 7.68 06/01/24 10,002,584
3,422,929 7.32 02/01/28 3,543,279
1,677,210 7.68 07/01/30 1,756,089
- -------------------------------------------------------------------------------
$ 151,678,294
- -------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association (FNMA)(a)--53.9%
$ 1,626,928 7.45% 04/01/03 $ 1,648,729
1,063,451 7.81 11/01/14 1,116,453
671,988 7.60 12/01/15 696,771
5,800,505 6.72 03/01/17 5,911,063
3,475,919 7.56 03/01/17 3,625,279
11,078,486 7.04 04/01/17 11,476,093
734,378 7.51 11/01/17 764,216
4,070,446 6.49 03/01/18 4,114,976
755,256 7.67 05/01/18 781,101
1,196,229 7.88 05/01/18 1,250,167
1,291,177 7.32 06/01/18/(c)/ 1,326,271
7,811,611 7.50 06/01/18 8,172,898
4,895,608 7.48 07/01/18 5,117,428
6,964,915 7.61 07/01/18 7,297,907
5,963,754 7.27 08/01/18 6,190,198
3,775,708 7.75 08/01/18 3,964,493
3,424,816 7.60 10/01/18 3,584,275
6,244,935 7.49 11/01/18 6,486,927
1,919,120 7.39 12/01/18 1,992,296
12,663,766 7.67 12/01/18/(b)/ 13,296,954
3,245,589 7.37 06/01/19 3,366,779
4,222,057 7.31 07/01/19 4,376,415
1,572,328 7.40 07/01/19 1,632,768
1,466,614 7.35 08/01/19 1,513,589
4,212,924 7.63 09/01/19 4,404,485
2,660,817 7.31 01/01/20 2,761,848
2,845,244 7.79 03/01/20 2,987,506
8,236,162 7.39 07/01/20 8,548,889
4,385,557 7.67 02/01/21 4,600,713
4,953,699 7.40 04/01/21 5,140,998
69,652,900 7.65 09/01/21/(b)/ 72,928,676
5,721,530 7.10 01/01/22 5,920,639
20,957,781 7.66 02/01/22/(b)/ 21,972,976
13,609,253 7.80 06/01/22 14,266,989
645,000 7.56 08/01/22 661,628
2,036,342 7.73 08/01/22 2,137,202
29,003,668 7.67 09/01/22/(b)/ 30,449,210
1,821,772 7.57 02/01/23 1,868,464
272,046 6.23 12/01/23 268,986
15,812,397 7.56 04/01/25 16,501,660
16,515,667 7.59 09/01/25 17,302,804
3,390,319 7.41 08/01/27 3,523,830
2,373,397 7.43 10/01/27 2,466,102
1,077,506 7.09 07/01/29 1,111,350
- -------------------------------------------------------------------------------
$ 319,529,001
- -------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association (GNMA)(a)--3.9%
$ 1,430,321 7.00% 03/20/16 $ 1,462,732
1,877,843 7.13 08/20/17 1,929,784
975,525 7.13 08/20/18 1,004,186
6,329,270 7.00 02/20/21 6,492,439
3,551,234 6.50 01/20/22 3,624,282
4,539,525 7.13 04/20/22 4,679,978
3,724,927 7.00 03/20/23 3,816,299
- -------------------------------------------------------------------------------
$ 23,009,700
- -------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(a)--7.3%
$ 1,395,750 7.00% 10/25/14 $ 1,435,878
2,310,178 7.00 02/25/15 2,370,450
2,799,672 7.00 04/25/15 2,871,428
1,880,379 7.00 05/25/15 1,928,573
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Adjustable Rate Small Business Administration
(SBA)(continued)
$ 1,022,753 7.00% 08/25/15 $ 1,055,992
1,661,578 7.00 09/25/15 1,709,348
2,041,631 7.00 10/25/15 2,094,591
1,059,044 6.62 09/25/16 1,070,302
4,076,904 6.62 07/25/17 4,121,505
4,036,805 6.62 08/25/17 4,080,967
2,744,035 6.62 08/25/17 2,774,055
1,756,376 6.62 08/25/17 1,775,590
3,752,990 6.62 09/25/17 3,794,048
1,761,608 6.62 10/25/17 1,781,144
1,774,313 6.62 10/25/17 1,793,990
8,582,508 6.62 02/25/18 8,677,688
- -------------------------------------------------------------------------------
$ 43,335,549
- -------------------------------------------------------------------------------
Collateralized Mortgage Obligations--3.7%
Adjustable Rate CMOs/(a)/ --1.8%
FNMA Remic Trust 1990-145, Class A
$ 10,348,000 6.58% 12/25/20 $ 10,437,510
- -------------------------------------------------------------------------------
$ 10,437,510
- -------------------------------------------------------------------------------
Inverse Floater/(a)/--0.0%
FNMA Remic Trust 1991-91, Class S
$ 138,928 8.55% 07/25/98 $ 149,631
- -------------------------------------------------------------------------------
$ 149,631
- -------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only/(a)/--0.0%
FNMA Remic Trust 1992-157, Class SA
$ 1,384,066/(d)/ 55.35% 03/25/04 $ 86,712
- -------------------------------------------------------------------------------
$ 86,712
- -------------------------------------------------------------------------------
Inverse IOette--0.1%
FHLMC Series 1164, Class O
$ 33,045/(d)/ 19.07% 11/15/06 $ 431,596
- -------------------------------------------------------------------------------
$ 431,596
- -------------------------------------------------------------------------------
IOette--0.1%
FNMA Remic Trust 1990-145, Class B
$ 25,428/(d)/ 10.00% 12/25/20 $ 850,208
- -------------------------------------------------------------------------------
$ 850,208
- -------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--0.6%
FHLMC Series 1645, Class B
$ 2,956,606 5.50% 01/15/08 $ 2,730,573
FNMA Remic Trust 1990-65, Class U
185,451 9.50 11/25/06 185,160
FNMA Remic Trust 1991-37, Class E
838,752 8.50 04/25/05 839,801
- -------------------------------------------------------------------------------
$ 3,755,534
- -------------------------------------------------------------------------------
Super Floater CMOs/(a)/ --1.1%
FNMA Remic Trust 1992-157, Class FA
$ 6,813,861 2.16% 03/25/04 $ 6,632,817
- -------------------------------------------------------------------------------
$ 6,632,817
- -------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 22,344,009
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $557,420,929) $ 559,896,552
- -------------------------------------------------------------------------------
Repurchase Agreement--6.2%
Joint Repurchase Agreement Account
$ 36,700,000 5.49% 05/01/97/(b)/ $ 36,700,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $36,700,000) $ 36,700,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $594,120,929)/(e)/ $ 596,596,552
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long (Short)(f) Month Gain (Loss)
- ---------------------------- ---------------- ----------------- -------------
<S> <C> <C> <C>
1-Month Libor 110 May 1997 $(20,500)
1-Month Libor 115 June 1997 21,563
Euro Dollars 325 June 1997 (210,188)
Euro Dollars 285 September 1997 (104,813)
Euro Dollars 145 December 1997 (50,000)
Euro Dollars 10 March 1998 (14,500)
Euro Dollars (20) December 1998 (14,000)
Euro Dollars 10 June 1999 (18,000)
Euro Dollars 20 September 1999 (33,000)
5 Year U.S. Treasury Notes 64 June 1997 (5,781)
10 Year U.S. Treasury Notes (281) June 1997 70,063
------------
$(379,156)
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 3,264,098
Gross unrealized loss for investments in which cost
exceeds value (925,961)
- -------------------------------------------------------------------------------
Net unrealized gain $ 2,338,137
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(b)/ Portions of these securities are being segregated for futures margin
requirements and when-issued securities.
/(c)/ When-issued security.
/(d)/ Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(e)/ The aggregate cost for federal income tax purposes is $594,258,415.
/(f)/ Each Euro dollar contract represents $1,000,000 in notional par value.
Each 1-month Libor contract represents $3,000,000 in notional par value.
Each 5-Year and 10-year U.S. Treasury Note contract represents $100,000
in notional par value. The total notional amount and market value are
$1,524,500,000 and $281,048,344 respectively. The determination of
notional amounts and market value and presented here are indicative only
of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Short Duration Government Fund's primary objective is to
provide a high level of current income by investing in a portfolio that consists
of securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including mortgage-backed securities as well as repurchase
agreements collateralized by such instruments. Secondarily, the fund may, in
seeking current income, also consider the potential for capital appreciation.
Under normal interest rate conditions, the fund's duration is expected to be
within one-half year of its benchmark, the two-year U.S. Treasury security.
Special Events
Effective May 1, 1997, the name of the GS Short Duration Government Fund
was changed to the Goldman Sachs Short Duration Government Fund. In addition, to
accommodate different clients' needs and preferences, the fund added two new
share classes as of May 1: Class A shares, which have a front-end load but no
contingent deferred sales charge (on amounts less than $1 million), and Class B
shares, which are subject to a contingent deferred sales charge but no up-front
sales charge. The fund's investment focus remains the same.
Performance Review
During the six-month period ended April 30, the fund's Institutional,
Administration and Service shares all outperformed their benchmark, the two-year
U.S. Treasury security. Despite a slight decline in net asset value (NAV) due to
the backup in interest rates, the fund's positions in collateralized mortgage
obligations (CMOs) and adjustable rate mortgage (ARM) securities significantly
contributed to performance.
The fund performed very well relative to its peers. For the 12-month period
ended April 30, 1997, the fund's Institutional and Administration shares ranked
third and fifth, respectively, out of 97 short-intermediate U.S. government
funds based on total return, according to Lipper Analytical Services, Inc. In
addition, the fund's Service shares ranked within the top 20% (14th out of 97)
for the same time period. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.) In addition, the fund's Institutional shares were rated "four stars"
(out of 641 taxable bond funds) by Morningstar, Inc., an independent rating
agency, for the five years ended April 30./1/
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on net 2.67% 2.55% 2.42%
asset value)
- -------------------------------------------------------------------------------
Return From Monthly 3.39% 3.27% 3.14%
Distributions
- -------------------------------------------------------------------------------
Return From Price -0.72% -0.72% -0.72%
Depreciation
- -------------------------------------------------------------------------------
Total Return of Two-Year 2.09% 2.09% 2.09%
U.S. Treasury
- -------------------------------------------------------------------------------
NAV (4/30/97) $9.76 $9.78 $9.75
- -------------------------------------------------------------------------------
NAV Change -$0.07 -$0.07 -$0.07
- -------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received "four
stars" for both the three- and one-year periods and were rated among 1,193 and
1,709 taxable bond funds for the three- and one-year periods, respectively. The
Morningstar ratings apply only to the funds' Institutional shares; the fund's
Administration and Service shares have not been rated. The Administration and
Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates each fund against its peers in the same category. In all,
there are four Morningstar categories (domestic equity, international equity,
taxable bond and municipal). Morningstar ratings range from five stars (highest)
to one star (lowest). Funds with five-star ratings are in the top 10% of their
category, four-star ratings in the next 22.5%, three stars the next 35%, two
stars the next 22.5% and one star the lowest 10% of their categories.
- -------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
Portfolio Composition and Investment Strategies
The most significant changes in the portfolio's sector composition
during the period were a reduction in U.S. Treasuries in favor of CMOs and a new
position in agency debentures.
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
CMOs 61.8%
ARMS 19.0%
Fixed Rate Mortgage Pass-Throughs 9.7%
Agency Debentures 4.8%
U.S. Treasuries 3.6%
Repos/Cash Equivalents 1.1%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. CMOs. CMOs accounted for 61.8% of the portfolio, up from 56.9% six
months ago. The CMO sector performed very well during the period, bolstered by
low volatility and strong investor demand. CMOs were particularly attractive to
investors because they offered substantial yield over similar-duration Treasury
and non-Treasury alternatives. Within the sector, the portfolio's positions
included sequential-pay/support CMOs (24.5%) and planned amortization class
(PAC) CMOs (21.2%). These securities were short duration issues that offered
relatively predictable cash flows.
. ARMs. As of April 30, the fund's allocation to ARMs was 19.0%, unchanged
from last October. We emphasized seasoned, fully indexed one-year Constant
Maturity Treasury (CMT) securities that were issued prior to 1990, which are
attractive because of their lower prepayment risk. (Seasoned issues are less
likely to be impacted by prepayments than newly issued mortgages because
homeowners who did not refinance in earlier periods of lower rates are generally
less likely to refinance in the future.)
. Fixed Rate Mortgage Pass-Throughs. The fixed rate mortgage pass-through
sector accounted for 9.7% of the portfolio, up from 7.2% six months ago. We
continued to favor the sector because of its attractive yield enhancement
potential.
. Agency Debentures. We established a new 4.8% position in agency debentures,
which are bonds issued by agencies of the U.S. government. This sector offered
incremental yield over Treasuries and added to portfolio diversification.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. During the
period, we sold more than three-quarters of the fund's Treasury allocation in
favor of other sectors that offered better relative value. By April 30, the
fund's position in the sector was down to 3.6%, while repurchase agreements/cash
equivalents were 1.1%, unchanged from six months ago.
. Issuer Composition. The portfolio's mortgage-backed security composition by
issuer was 47.6% in Federal National Mortgage Association (FNMA) issues, 37.0%
in Federal Home Loan Mortgage Corporation (FHLMC) issues and 5.8% in Government
National Mortgage Association (GNMA) issues.
. Credit Quality. The fund invests exclusively in securities issued by the
U.S. government and its agencies or instrumentalities.
. Prudent Use of Derivatives. The fund's CMO position included several
securities typically considered to be
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
lower risk derivatives. These included sequential-pay/support CMOs and PAC CMOs
(24.5% and 21.2% of the portfolio, respectively), as noted previously, and a
9.0% allocation in CMO floaters (whose coupons reset upward when interest rates
rise). The fund also held a 2.8% position in super floaters (whose coupons reset
higher than conventional floaters when rates rise), a 2.1% position in inverse
floaters (whose coupons reset in the opposite direction of interest rates), and
small positions in PAC interest-only (IO) and inverse IO securities. We invest
in these higher risk derivatives only when we believe such securities will
enhance returns without incurring undue risk. These positions contributed to the
fund's positive performance along with the other CMO securities. In addition, we
used futures as a tool to help manage the portfolio's duration.
Market Outlook
Our outlook is cautious for CMOs: the sector is now trading at fair spreads
relative to equal-duration Treasuries and does not appear to offer significant
tightening potential. Despite the lack of general value, we continue to look for
issues within the CMO market that offer favorable investment characteristics
that are not fully valued by the market. In the ARM market, seasoned one-year
CMT ARMs remain attractive as a core holding relative to other ARM sectors.
Distribution Policy
During the six-month period under review, the fund's Institutional,
Administration and Service shares paid out distributions of $0.33, $0.32 and
$0.30 per share, respectively. The fund distributes substantially all of its
investment company taxable income, as required by tax law.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Short Duration Government Fund
May 30, 1997
- -------------------------------------------------------------------------------
11
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--90.0%
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a)--13.8%
$ 1,862,421 7.38% 08/01/17/(b)/ $ 1,928,183
1,799,630 7.58 12/01/18/(b)/ 1,871,327
7,952,048 7.77 02/01/22/(b)/ 8,344,720
2,036,342 7.73 08/01/22/(b)/ 2,137,202
- -------------------------------------------------------------------------------
$ 14,281,432
- -------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association (FNMA)(a)--11.6%
$ 306,024 9.00% 12/01/97 $ 307,489
2,894,069 6.50 04/01/03/(b)/ 2,853,696
812,321 6.00 01/01/14 762,436
2,961,367 6.00 03/01/14/(b)/ 2,771,662
2,552,281 7.81 11/01/14/(b)/ 2,679,487
2,569,866 7.58 08/01/22 2,636,117
- -------------------------------------------------------------------------------
$ 12,010,887
- -------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (FNMA)--3.2%
$ 504,862 6.00% 10/01/08 $ 484,981
1,032,431 6.00 06/01/09 991,774
1,949,537 6.00 10/01/09/(b)/ 1,878,671
- -------------------------------------------------------------------------------
$ 3,355,426
- -------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--61.4%
Inverse Floater(a)--3.0%
FHLMC Series 1296, Class J
$ 890,613 12.15% 07/15/99 $ 954,683
FHLMC Series 1325, Class C
944,285 6.83 07/15/97 943,086
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 9.27 05/25/99 1,217,824
- -------------------------------------------------------------------------------
$ 3,115,593
- -------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.2%
FHLMC Series 1684, Class JD
$ 2,524,793/(c)/ 3.72% 08/15/20 $ 170,222
FNMA Remic Trust 1993-110, Class SC
2,010,905/(c)/ 3.52 04/25/19 74,564
- -------------------------------------------------------------------------------
$ 244,786
- -------------------------------------------------------------------------------
Planned Amortization - Accrual Bond--1.2%
FHLMC Series 1560, Class X
$ 1,245,394 6.00% 11/15/16 $ 1,234,885
- -------------------------------------------------------------------------------
Planned Amortization Class (PAC) CMOs--21.9%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,937,180
FHLMC Series 1684, Class F
5,000,000 5.75 08/15/20/(b)/ 4,756,650
FNMA Remic Trust 1992-138, Class C
2,375,000 6.00 12/25/18/(b)/ 2,351,986
FNMA Remic Trust, Series 1997-9, Class B
4,000,000 6.50 10/25/22/(b)/ 3,850,040
FNMA Series 1991-31, Class PJ
3,000,000 6.55 10/25/20 2,920,290
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09/(b)/ 5,982,420
- -------------------------------------------------------------------------------
$ 22,798,566
- -------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--1.3%
FHLMC Series 1552, Class JE
$ 7,308,380/(c)/ 7.00% 02/15/14 $ 313,822
FHLMC Series 1587, Class HA
9,090,222/(c)/ 6.50 10/15/08 1,032,104
- -------------------------------------------------------------------------------
$ 1,345,926
- -------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.4%
FNMA Remic Trust 1992-198, Class K
$ 34,647/(c)/ 12.81% 12/25/15 $ 370,318
- -------------------------------------------------------------------------------
Regular Floater CMOs(a)--8.8%
FHLMC Series 1296, Class I
$ 2,493,715 5.16% 07/15/97/(b)/ $ 2,462,544
FHLMC Series 1325, Class B
2,219,071 6.38 07/15/97/(b)/ 2,219,759
FHLMC Series 1684, Class JC
2,524,793 5.28 08/15/20/(b)/ 2,472,706
FNMA Remic Trust 1993-110, Class FC
2,010,905 5.48 04/25/19/(b)/ 1,987,639
- -------------------------------------------------------------------------------
$ 9,142,648
- -------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--24.6%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,046,860
FHLMC Series 1645, Class B
4,927,677 5.50 01/15/08/(b)/ 4,550,956
FNMA Remic Trust 1988-12, Class A
3,743,398 10.00 02/25/18/(b)/ 3,973,692
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
FNMA Remic Trust 1988-12, Class B
$ 2,955,314 4.74% 02/25/18/(b)/ $ 2,840,796
FNMA Remic Trust 1989-12, Class X
1,588,415 10.00 12/25/14 1,642,024
FNMA Remic Trust 1989-18, Class B
1,051,388 9.50 01/25/04 1,081,279
FNMA Remic Trust 1989-59, Class H
3,840,291 7.75 10/25/18/(b)/ 3,882,265
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,351,960
FNMA Series 1989-34, Class E
2,113,584 9.85 08/25/14/(b)/ 2,176,992
- -------------------------------------------------------------------------------
$ 25,546,824
- -------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 63,799,546
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $93,441,725) $ 93,447,292
- -------------------------------------------------------------------------------
Agency Debentures--4.7%
Sri Lanka Aid/(a)/
$ 5,000,000 6.06% 02/21/16/(b)/ $ 4,928,150
- -------------------------------------------------------------------------------
Total Agency Debentures
(Cost $4,925,000) $ 4,928,150
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--3.6%
United States Treasury Notes
$ 3,800,000 5.63% 11/30/00/(b)/ $ 3,696,678
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $3,672,738) $ 3,696,678
- -------------------------------------------------------------------------------
Repurchase Agreement--0.6%
Joint Repurchase Agreement Account
$ 600,000 5.49% 05/01/97/(b)/ $ 600,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $600,000) $ 600,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $102,639,463)/(d)/ $ 102,672,119
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts
Long Unrealized
Type (Short)/(e)/ Settlement Month Gain (Loss)
- ----------------------------- --------------- ----------------- ---------------
<S> <C> <C> <C>
1-Month Libor 14 June 1997 $2,625
1-Month Libor 15 May 1997 (4,125)
Euro Dollars 56 June 1997 (12,525)
Euro Dollars 53 September 1997 30,525
Euro Dollars 55 December 1997 21,750
Euro Dollars 45 March 1998 (23,125)
Euro Dollars 40 June 1998 (35,500)
Euro Dollars 35 September 1998 (15,250)
5 Year U.S. Treasury Notes (71) June 1997 (1,109)
2 Year U.S. Treasury Notes 71 June 1997 (53,250)
10 Year U.S. Treasury Notes (131) June 1997 101,500
U.S. Long Term Bond (4) June 1997 11,843
---------------
$23,359
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value exceeds
cost $ 554,824
Gross unrealized loss for investments in which cost exceeds
value (522,168)
- -------------------------------------------------------------------------------
Net unrealized gain $ 32,656
- -------------------------------------------------------------------------------
</TABLE>
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(b)/ Portions of these securities are being segregated for futures margin
requirements.
/(c)/ Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/ The amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/ Each Euro Dollar contract represents $1,000,000 in notional par value.
Each 1-Month Libor contract represents $3,000,000 in notional par value.
Each 2-Year U.S. Treasury Note contract represents $200,000 in notional
par value. Each 5-Year and 10-Year U.S. Treasury Note and each U.S. Long
Term Bond contract represents $100,000 in notional par value. The total
notional amount and market value are $405,800,000 and $109,850,675,
respectively. The determination of notional amounts and market value as
presented here are indicative only of volume of activity and not a
measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Short Duration Tax-Free Fund seeks to provide a high
level of current income exempt from regular federal income tax, consistent with
relatively low principal volatility, through investments in investment-grade
municipal securities. Under normal interest rate conditions, the fund's duration
will be within one-half year of its benchmark, the Lehman Brothers Three-Year
Municipal Bond Index. The fund's approximate interest rate sensitivity is
comparable to that of a three-year bond.
Special Event
The fund's name was changed to Goldman Sachs Short Duration Tax-Free Fund
from GS Short Duration Tax-Free Fund on May 1, 1997. In addition, Class A and
Class B shares have been added to the existing Institutional, Administration and
Service shares. The fund's focus and investment objective remain the same.
A Strong, Stable Municipal Bond Market
The municipal market has remained at relatively rich levels compared with
the taxable market since the end of 1996, as light primary and secondary supply
has been consumed easily by stable demand. The average price of a three-year
municipal bond (as calculated from data provided by Municipal Market Data, an
independent municipal market information provider) declined approximately 1.25%,
while yields rose from 4.15% on October 31, 1996 to 4.60% on April 30, 1997.
Supply increased throughout most of the period, though it remained light
compared with historical averages. In November, municipal bond issuance was up
30% versus the prior three-month average. As is typical, increased supply
continued in early December due to the approaching year-end. The 1997 new issue
supply has followed historical early-month patterns, with January and February
supply well below annual averages (slightly more than $10 billion each month)
and March and April supply closer to normal levels ($13 to $14 billion).
Demand from individual investors (who control approximately two-thirds of
municipal bond ownership either through mutual funds or direct investment)
remained stable, but not strong, as long-term municipal yields were below the
psychologically significant 6% level. While yields have not yet cracked that
barrier, President Clinton's reelection and the loss of Republican momentum have
put talk of tax reform and talk of significant changes in the tax-exempt status
of municipal bonds on the back burner, comforting some of the investors
concerned about the market. In addition, the emergence of "nontraditional"
buyers during April has helped support the long end of the market.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
4/30/97 10/31/96
<S> <C> <C>
1998 3.85% 3.90%
1999 4.40% 4.15%
2000 4.60% 4.30%
2001 4.70% 4.40%
2002 4.80% 4.50%
2003 4.85% 4.60%
2004 4.90% 4.70%
2005 4.95% 4.80%
2006 5.00% 4.90%
2007 5.05% 5.00%
2008 5.10% 5.10%
2009 5.20% 5.20%
2010 5.30% 5.25%
2011 5.35% 5.30%
2012 5.40% 5.35%
2013 5.45% 5.40%
2014 5.50% 5.40%
2015 5.50% 5.45%
2016 5.55% 5.45%
2017 5.55% 5.45%
2018 5.55% 5.50%
2019 5.55% 5.50%
2020 5.60% 5.50%
2021 5.60% 5.50%
2022 5.60% 5.50%
2023 5.60% 5.50%
2024 5.60% 5.50%
2025 5.60% 5.50%
2026 5.60% 5.50%
2027 5.60% 5.50%
</TABLE>
The yield curve steepened and shifted upward at the short end, remained nearly
the same in the mid-range, and shifted marginally upward at the longer end, in
contrast to six months ago.
Performance Review
The performance of the fund's Institutional shares exceeded the benchmark,
the Lehman Brothers Three-Year Municipal Bond Index (the "Index"), for the
six-month period ended April 30, 1997. The Administration and Service shares
also performed well, but lagged the benchmark.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on 1.91% 1.79% 1.56%
net asset value)
- -------------------------------------------------------------------------------
Return From 2.11% 1.99% 1.86%
Monthly Distributions
- -------------------------------------------------------------------------------
Return From Price -0.20% -0.20% - 0.30%
Depreciation
- -------------------------------------------------------------------------------
Lehman Brothers 3-Year 1.83% 1.83% 1.83%
Municipal Bond Index
- -------------------------------------------------------------------------------
NAV (as of 4/30/97) $9.94 $9.94 $9.94
- -------------------------------------------------------------------------------
NAV Change -$0.02 -$0.02 -$0.03
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
14
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
The fund's positive performance during the period was primarily due to our
emphasis on higher yielding revenue bonds, as well as successful selection of
specific securities and relative value trades. As always, we did not make any
bets on the direction of interest rates, but rather kept the fund's duration in
line with the Index, occasionally using Treasury futures to actively manage
sector allocation.
In our search for incremental yield, we focused on three types of bonds.
The first category was relatively generic, highly liquid securities; the second
included slightly less liquid issues such as insured hospital bonds and
letter-of-credit-backed debt; and the last area was "story" bonds, such as
uninsured hospital and electric utility issues and multifamily housing revenue
bonds, whose value is often unrecognized by the market because they are unique
or generally not well understood. We identified attractive investment
opportunities for the third category through our extensive credit analysis. One
example of this is our purchase of an A-rated hospital bond that our credit
analysis indicated would likely be defeased with the purchase of Treasury
securities placed in an escrow account, thereby significantly enhancing the
credit quality of the security. Our analysis proved correct and the fund
benefited from the appreciation associated with the higher quality.
We are pleased to report that the fund's Institutional shares ranked third
out of 28 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the one-year period ended April 30, 1997 based on
total return. (Lipper did not rank the fund's Administration and Service shares.
Please note that Lipper rankings do not take sales charges into account and that
past performance is not a guarantee of future results.) In addition, as of April
30, 1997, the fund's Institutional and Administration shares were awarded a
"four-star" rating for the three-year period (out of 1,257 municipal bond funds)
by Morningstar, Inc. For the one-year period, the Institutional shares received
a "five-star" rating (out of 1,746 municipal bond funds)./1/
Portfolio Composition and Investment Strategies:
Emphasis on Revenue Bonds
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Revenue Bonds 56.1%
Insured Revenue Bonds 28.1%
Pre-Refunded Bonds 7.8%
Insured General Obligations 6.8%
Variable Rate Demand Notes 1.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ------------------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. For the one-year period, the Administration
shares received four stars and were rated among 1,746 municipal bond funds. Ten
percent of the funds receive the five-star rating. The Morningstar rating
applies only to the fund's Institutional and Administration shares; the fund's
Service shares have not been rated. Service shares are subject to additional
fees that may have the effect of lowering performance and may affect any future
Morningstar rating. Morningstar rates funds against their peers in the same
category. In all, there are four Morningstar categories (domestic equity,
international equity, taxable bond and municipal bond). Morningstar ratings
range from five stars (highest) to one star (lowest). Funds with five-star
ratings are in the top 10% of their category, four-star ratings in the next
22.5%, three stars the next 35%, two stars the next 22.5% and one star the
lowest 10% of their categories.
- -------------------------------------------------------------------------------
15
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- -------------------------------------------------------------------------------
. Revenue Bonds. As of April 30, the portfolio's combined position in insured
and uninsured revenue bonds was significantly overweighted compared with the
Index, 84.2% versus 31.7%. We increased the portfolio's total revenue bond
allocation from 79.7% six months ago because our emphasis on credit analysis
enabled us to identify attractive revenue bonds that offered higher incremental
yield than was available from general obligation bonds. (Revenue bonds pay
interest and principal out of a specific revenue stream, such as sales taxes,
hospital charges, tolls, electric rates and airport fees.)
. Pre-refunded Bonds. Over the course of the year, we re-established the
fund's holdings in pre-refunded bonds to 7.8% from zero. The Index weighting of
pre-refunded bonds was 18.0%.
. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 6.8% of the
portfolio, down from 15.6% six months ago. The allocation as of April 30 was
significantly underweighted versus the Index's 50.2%. GOs are backed by the
general taxing power of a municipality and are typically higher credit quality
but lower yielding than revenue bonds.
. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash equivalents
that we use to manage the portfolio's excess liquidity. VRDNs represented 1.3%
of the fund, down from 4.7% six months ago.
. Duration. As of April 30, the fund's duration was effectively in line with
that of the Index at 2.7 years.
. Credit Quality. During the year, the fund's credit quality allocations
shifted. We continued the trend from the last reporting period by reducing the
portfolio's allocation in triple-A-rated GOs, shifting in favor of
double-A-rated revenue bonds. This allowed us to maintain the fund's targeted
double-A-rated average credit quality and liquidity while achieving higher
overall yields. We structured the portfolio's credit quality allocation like a
"barbell," emphasizing higher credit quality securities in the four- to
five-year maturity range and lower quality securities in the one- to three-year
maturity range. As of April 30, 42.7% of the portfolio was invested in
triple-A-rated bonds, while double-A- and single-A-rated securities accounted
for 30.2% and 27.1%, respectively.
Market Outlook
Our long-term outlook for municipal bond supply is essentially neutral, as
rates are at high levels compared with one year ago. As a result, the current
rate environment encourages neither supply (low rates bring refinancing) nor
demand (high rates attract buyers). At this point, the municipal market does not
perceive any real threats from the federal budget accord. Without any
fundamental problems in view for tax-exempts, we are left with technical forces
as the key driver in relative market performance.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
six-month period ended April 30, 1997, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.21,
$0.20 and $0.19 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- -------------------------------------------------------------------------------
16
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- -------------------------------------------------------------------------------
We value your continued confidence in the Goldman Sachs Short Duration
Tax-Free Fund and look forward to reporting on the fund's progress in the coming
year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Short Duration Tax-Free Fund
May 30, 1997
- -------------------------------------------------------------------------------
17
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--99.7%
Alabama--2.6%
Selma, AL IDB for International Paper Co. PCRB (A-/A3)
$ 1,000,000 4.15% 07/15/08 $ 1,000,000
- -------------------------------------------------------------------------------
Arizona--2.8%
Mesa, Arizona IDA Health Care Facilities (AAA/Aaa)
$ 1,000,000 7.50% 01/01/04 $ 1,055,940
- -------------------------------------------------------------------------------
Arkansas--3.5%
West Memphis, AK Public Utility System RB (MBIA) (AAA/Aaa)
$ 1,310,000 5.25% 12/01/00 $ 1,333,816
- -------------------------------------------------------------------------------
Connecticut--6.6%
Connecticut State Housing Mortgage Revenue Town Colony Project (NR/Aa3)
$ 1,000,000 5.00% 04/01/08 $ 1,000,260
Connecticut State Residential Recovery Authority, Series A RB (AA-/NR)
1,500,000 5.60 11/15/99 1,542,945
- -------------------------------------------------------------------------------
$ 2,543,205
- -------------------------------------------------------------------------------
District of Columbia--2.7%
DC Ref Series A (Big 1) Tcc (AAA/Aaa)
$ 1,000,000 7.70% 06/01/98 $ 1,032,600
- -------------------------------------------------------------------------------
Georgia--5.1%
Burke County, GA Development Authority Oglethorpe Power Corp. (A/A3)/(a)/
$ 2,000,000 4.35% 01/01/01 $ 1,961,500
- -------------------------------------------------------------------------------
Illinois--9.4%
Chicago, IL GO (MBIA) (AAA/Aaa)
$ 1,500,000 5.40% 10/31/00 $ 1,533,405
Illinois Health Facilities Authority Highland Park Hospital, Series A
(AAA/Aaa)
1,000,000 5.20 10/01/01 1,003,770
Illinois Housing Development Authority, Series 1991 A (A+/A1)
1,000,000 7.90 07/01/99 1,057,620
- -------------------------------------------------------------------------------
$ 3,594,795
- -------------------------------------------------------------------------------
Louisiana--2.7%
Louisiana Offshore Deepwater Port Authority Term B RB (A/Baa1)
$ 1,000,000 5.85% 09/01/00 $ 1,030,880
- -------------------------------------------------------------------------------
Maryland--4.2%
Maryland State Health and Higher Educational Facilities Authority
GO(A-/NR)/(c)/
$ 1,600,000 5.50% 01/01/02 $ 1,600,000
- -------------------------------------------------------------------------------
Michigan--3.6%
Wayne Charter County, MI Airport (AAA/Aaa)
$ 1,250,000 6.75% 12/01/19 $ 1,371,775
- -------------------------------------------------------------------------------
Missouri--7.1%
Kansas City Municipal Assistance Corp. (AAA/Aaa)
$ 1,000,000 5.88% 10/15/00 $ 1,036,930
St. Louis, MO Municipal Finance Corp., Series A (A/Aa3)
1,655,000 5.30 07/15/02 1,677,740
- -------------------------------------------------------------------------------
$ 2,714,670
- -------------------------------------------------------------------------------
New York--11.8%
Clifton Park, NY Water Authority System, Series A (AAA/Aaa)
$ 1,500,000 6.38% 10/01/11 $ 1,630,695
New York City Municipal Assistance Corp., Series 62 (AA-/Aa2)
1,500,000 5.50 07/01/08 1,503,885
Syracuse, NY IDA RB (AA/NR)
1,365,000 4.60 10/15/98 1,371,020
- -------------------------------------------------------------------------------
$ 4,505,600
- -------------------------------------------------------------------------------
Oklahoma--5.3%
Southern Oklahoma Memorial Hospital RB (A/A)/(a)/
$ 2,000,000 5.60% 02/01/00 $ 2,048,159
- -------------------------------------------------------------------------------
Pennsylvania--8.9%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB (FGIC)
(AAA/Aaa)
$ 1,500,000 5.75% 06/15/00 $ 1,545,870
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,859,850
- -------------------------------------------------------------------------------
$ 3,405,720
- -------------------------------------------------------------------------------
Tennessee--3.9%
Clarksville, TN Public Building Authority (AA/NR)
$ 1,500,000 4.75% 12/01/00 $ 1,499,940
- -------------------------------------------------------------------------------
Texas--3.9%
Memorial Villages, TX Water Authority (NR/Aa)
$ 1,435,000 7.00% 09/01/00 $ 1,497,968
- -------------------------------------------------------------------------------
Virginia--4.7%
Petersburg, VA Hospital Authority RB GO (NR/A)
$ 1,760,000 5.50% 07/01/99 $ 1,795,658
- -------------------------------------------------------------------------------
Washington--4.2%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$ 1,500,000 7.20% 07/01/02 $ 1,608,840
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Wisconsin--2.6%
Oshkosh, WI Water Rev., Series C (NR/MIG1)/(b)/
$ 1,000,000 4.88% 01/01/00 $ 998,090
- --------------------------------------------------------------------------------
Wyoming--4.1%
Uinta County, WY School District Series A (FSA) (AAA/Aaa)
$ 1,500,000 6.88% 06/01/00 $ 1,593,570
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $38,115,334) $ 38,192,726
- --------------------------------------------------------------------------------
Short-Term Obligations--3.9%
New York City Municipal Water Finance Authority, Series A (A-1+/VMIG1)
$ 1,300,000 4.25% 05/01/97 $ 1,300,000
- --------------------------------------------------------------------------------
Wisconsin State Health Facilities Authority (A-1+/VMIG1)
200,000 4.50 05/01/97 200,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,500,000) $ 1,500,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $39,615,334)/(d)/ $ 39,692,726
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 140,632
Gross unrealized loss for investments in which cost
exceeds value (63,240)
- --------------------------------------------------------------------------------
Net unrealized gain $ 77,392
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Investment Abbreviations:
<S> <C>
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Board
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
/(a)/ Portions of these securities are being segregated for when-issued
securities.
/(b)/ When-issued securities.
/(c)/ Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next reset interest dates.
/(d)/ The amount stated also represents aggregate cost for federal income tax
purposes.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Core Fixed Income Fund seeks to achieve a total
return consisting of capital appreciation and income that exceeds the total
return of its benchmark, the Lehman Brothers Aggregate Bond Index (the "Index"),
through a diversified portfolio of fixed income securities. The fund may invest
in U.S. Treasury, agency, corporate, mortgage-backed and asset-backed
securities, as well as in a limited amount of non-dollar-denominated fixed
income securities. While the fund's performance will be measured against the
Index, the portfolio is not required to hold the same securities or match the
sector weightings of the Index. Every security in the portfolio must be rated at
least investment grade by an independent rating agency or be considered to be of
equivalent quality by Goldman Sachs Asset Management at the time it is
purchased. The fund's approximate interest rate sensitivity is expected to be
comparable to that of a five-year bond.
Special Events
Effective May 1, 1997, the name of the GS Core Fixed Income Fund was
changed to the Goldman Sachs Core Fixed Income Fund. In addition, to accommodate
different clients' needs and preferences, the fund added two new share classes
as of May 1: Class A shares, which have a front-end load but no contingent
deferred sales charge (on amounts less than $1 million), and Class B shares,
which are subject to a contingent deferred sales charge but no up-front sales
charge. The fund's objective and investment focus remain the same.
Performance Review
We are pleased to report that the fund's Institutional and Administration
shares outperformed the Index during the period under review. The fund's
positive performance was primarily due to its overweighting in non-Treasury
sectors compared with the Index. Specifically, mortgage-backed securities and
corporate bonds were the most significant contributors to performance, and
asset-backed securities and emerging market debt also performed very well. The
fund's Service shares achieved positive results, but slightly lagged the
benchmark.
The fund performed well compared with its peers. For the three-year period
ended April 30, 1997, the fund's Institutional shares were rated "four stars"
(out of 1,193 taxable bond funds) by Morningstar, Inc., an independent rating
agency./1/
During the period, the net asset value (NAV) of the fund's Institutional,
Administration and Service shares each fell $0.14 due to rising interest rates.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on 1.87% 1.75% 1.63%
net asset value)
- --------------------------------------------------------------------------------
Return From Monthly 3.30% 3.18% 3.06%
Distributions
- --------------------------------------------------------------------------------
Return From Price -1.43% -1.43% -1.43%
Depreciation
- --------------------------------------------------------------------------------
Total Return of Lehman 1.70% 1.70% 1.70%
Brothers Aggregate
Bond Index
- --------------------------------------------------------------------------------
NAV (as of 4/30/97) $9.71 $9.70 $9.72
- --------------------------------------------------------------------------------
NAV Change -$0.14 -$0.14 -$0.14
- --------------------------------------------------------------------------------
</TABLE>
- -----------------------------------------
/1/Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received "four
stars" for the one-year period and were rated among 1,709 taxable bond funds.
The Morningstar ratings apply only to the fund's Institutional shares; the
fund's Administration and Service shares have not been rated. The Administration
and Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates each fund against its peers in the same category. In all,
there are four Morningstar categories (domestic equity, international equity,
taxable bond and municipal). Morningstar ratings range from five stars (highest)
to one star (lowest). Funds with five-star ratings are in the top 10% of their
category, four-star ratings in the next 22.5%, three stars the next 35%, two
stars the next 22.5% and one star the lowest 10% of their categories.
- -------------------------------------------------------------------------------
20
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
Portfolio Composition and Investment Strategies
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Corporate Bonds 26.7%
Fixed Rate Mortgage Pass-Throughs 20.5%
U.S. Treasuries 17.1%
ABSs 13.2%
CMOs 13.2%
Emerging Market Debt 4.7%
Repos/Cash Equivalents 2.3%
Other Foreign Debt 2.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Corporate Bonds. Corporate bonds were the largest allocation at 26.7% of the
portfolio, overweighted compared with the Index (18.0%). The sector performed
well during the period as the healthy economy caused spreads to tighten across
subsectors. The fund's best performers were industrials, which included selected
cable issues that benefited from positive earnings trends (e.g., Time Warner,
Inc. and Tele-Communications, Inc.), as well as specific finance issues that
fared well due to continuing industry consolidation. We underweighted utilities
due to the regulatory and competitive pressures affecting that industry.
Fixed Rate Mortgage Pass-Throughs. The fund was underweighted in fixed rate
mortgage pass-throughs relative to the Index, 20.5% versus 29.9%. During the
period, the sector was supported by a combination of favorable trends, including
low volatility, range-bound interest rates, tight yield spreads on alternative
sectors, and light issuance of corporate and asset-backed securities (ABS).
After the sector rallied and became more fully priced, we trimmed the fund's
allocation in favor of securities that offered greater relative value.
During the period, we occasionally used mortgage dollar rolls to benefit
from short-term supply and demand imbalances in the mortgage settlement process.
(Mortgage dollar rolls refer to transactions that involve selling mortgage
securities owned by the fund and simultaneously contracting to buy back similar
mortgage securities with the same coupon on a specified future date -- usually
one month forward.) At all times, we "cover" the mortgage dollar rolls by
keeping cash or liquid assets equal to the dollar amount of the forward
commitment in a segregated account with the fund's custodian.
. U.S. Treasuries. We significantly underweighted U.S. Treasuries relative to
the Index, 17.1% compared with 44.5%, to emphasize sectors that offered greater
return potential.
. Asset-Backed Securities. As of April 30, the fund's ABS position was 13.2%,
approximately the same weighting as six months ago. Though negative credit
events among selected credit card and sub-prime auto lenders raised investor
uncertainty during the period, investor interest remained broad-based, ratings
held firm and, relative to similarly rated spread products, ABSs continued to
offer attractive yield enhancement opportunities.
. CMOs. The fund's collateralized mortgage obligation (CMO) holdings performed
very well and significantly contributed to the fund's performance. During the
period, CMOs enjoyed strong demand from yield-seeking investors who found the
sector particularly compelling relative to other high-quality alternatives. As
of the end of the period, CMOs were a 13.2% allocation, up from 9.8% last
October. This increase was primarily in sequential-pay/support CMOs, which
accounted for 8.8% of the portfolio, while the balance was invested in planned
- -------------------------------------------------------------------------------
21
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
amortization class (PAC) CMOs (3.3%) and floaters (1.1%). Sequential-pay/support
CMOs, PAC CMOs and floaters are typically considered to be lower risk derivative
securities.
. Emerging Market Debt. As of April 30, 4.7% of the portfolio was invested in
emerging market debt. Our strategy in the sector is to control exposure by
stressing high-credit-quality, short-duration bonds. We continued to emphasize
Latin American issuers because structural and economic reforms in this region
are helping improve credit fundamentals. During the period, the fund held bonds
from Chile, Colombia, Mexico and the Andean region development bank, as well as
Indonesia. The sector also benefited from substantial global liquidity, which
has helped support the credit-sensitive areas of the lower grade bond markets.
. Other Foreign Debt. During the period, we initiated a 2.3% position in a
10-year, fully hedged Australian government bond that offered attractive
incremental yield over U.S. Treasuries, as well as potential price appreciation
should Australian interest rates decline as we expect.
. Agency Debentures. We sold the fund's allocation to agency debentures (1.5%
as of October 31, 1996) because their risk/reward profile indicated that we were
not being adequately compensated for holding the position.
. Duration. As always, we seek to add incremental return over the Index
through sector weighting and individual security selection rather than
attempting to predict the direction of interest rates. Therefore, we manage the
fund's duration to approximate that of the Index, partly through the use of
financial futures. As of April 30, the fund's duration was in line with the
Index at 4.6 years.
. Credit Quality. As of April 30, 39.7% of the portfolio was invested in
government and agency securities, 21.3% was invested in triple-A-rated
securities, 3.4% was invested in double-A-rated securities and 12.6% was
invested in single-A-rated securities. Triple-B-rated securities (20.7%) and
repurchase agreements/cash equivalents (2.3%) make up the remainder of the
portfolio.
Market Outlook
Though indications of economic moderation emerged in April, the economy's
fundamental strength remains intact, which leads us to believe that interest
rates will move higher during the balance of the year.
In terms of specific fixed income sectors, we have a neutral view of the
corporate market. While we anticipate no near-term deterioration in the
fundamental state of the economy, we are concerned that a series of Fed
tightenings may cause spreads to widen slightly in the near term. In the
mortgage-backed security market, spreads relative to Treasuries have remained
impressively resilient. Nonetheless, mortgage technicals may come under pressure
due to a potential increase in supply as the housing market accelerates during
the summer. We expect the portfolio's allocation to the ABS market to remain
stable in the near future, as it has become more challenging to identify
unrecognized value within the sector, particularly among the higher quality
issues that we tend to emphasize. Finally, we are optimistic regarding the
performance prospects of the emerging market debt sector, as credit trends
continue to improve and global liquidity remains plentiful. In the near future,
Latin America is likely to remain the fund's geographic focus; however, we will
actively seek attractive investment opportunities in other regions to increase
fund diversification.
- -------------------------------------------------------------------------------
22
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
Distribution Policy
During the six-month period under review, the fund's Institutional,
Administration and Service shares distributed $0.32, $0.31 and $0.30 per share,
respectively. Dividends are declared daily and paid on a monthly basis. As
required by tax law, the fund distributes substantially all of its investment
company taxable income.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Mark A. Van Wyk
Mark A. Van Wyk
Portfolio Managers
Goldman Sachs Core Fixed Income Fund
May 30, 1997
- -------------------------------------------------------------------------------
23
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds--25.4%
Finance Bonds--9.8%
BankAmerica Corp.
$ 200,000 6.03% 05/17/99 /(a)/ $ 205,042
300,000 7.75 07/15/02 305,466
Capital One Bank
600,000 6.66 02/03/00 593,580
400,000 6.88 04/24/00 399,284
800,000 6.58 04/17/01 780,976
500,000 6.60 08/20/01 487,010
Conseco Finance
170,000 8.70 11/15/26 169,252
Conseco Inc.
340,000 10.50 12/15/04 394,101
Continental Bank N.A.
525,000 11.25 07/01/01 551,565
Countrywide Funding Corp.
125,000 6.08 07/14/99 123,531
250,000 8.43 11/16/99 259,772
250,000 7.75 08/10/01 257,025
375,000 8.00 12/15/26 354,994
First U.S.A. Bank
160,000 6.13 10/30/97 159,872
Meditrust, Inc.
390,000 7.82 09/10/26 400,082
Mic Finance Trust
360,000 8.38 02/01/27 353,495
Phoenix RE Capital Trust
165,000 8.85 02/01/27 164,594
Security Pacific Corp.
995,000 11.50 11/15/00 /(a)/ 1,133,693
Signet Banking Corp.
240,000 9.63 06/01/99 252,629
Taubman Realty Group
480,000 8.00 07/30/01 489,811
Washington Real Estate Investment Trust
120,000 7.13 08/13/03 118,458
- -------------------------------------------------------------------------------
$ 7,954,232
- -------------------------------------------------------------------------------
Industrial Bonds--14.4%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 515,949
Continental Airlines, Inc.
339,989 7.75% 07/02/14 348,451
553,994 8.56 07/02/14 590,857
Edison Mission Energy Funding Corp.
170,564 6.77 09/15/03 168,785
Ford Capital Corp.
300,000 9.50 07/01/01 326,253
Ford Motor Corp.
300,000 7.00 09/25/01 300,474
General Motors Acceptance Corp.
275,000 7.63 03/09/98 277,989
200,000 7.13 05/10/00 201,840
375,000 9.63 12/15/01 412,492
H + T Master Trust
550,000 8.18 08/15/02 550,000
Harrahs Operations, Inc.
300,000 8.75 03/15/00 301,500
Hertz Corp.
400,000 7.00 07/15/03 391,260
Mitchell Energy and Dev. Corp.
310,000 9.25 01/15/02 328,758
Northwest Airlines Corp.
163,540 8.26 03/10/06 170,804
567,358 8.97 01/02/15 588,117
NWCG Holding Crp
680,000 7.05 06/15/99 586,786
Panamerican Beverage Co.
130,000 8.13 04/01/03 133,416
RJR Nabisco Inc.
175,000 8.00 07/15/01 172,440
550,000 8.63 12/01/02 548,218
Tele-Communications, Inc.
100,000 7.13 02/02/98 100,396
300,000 8.25 01/15/03 304,011
1,135,000 6.27 09/15/03 1,132,912
50,000 6.82 09/15/10 49,846
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,690,128
350,000 9.63 05/01/02 384,776
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds(continued)
Industrial Bonds(continued)
Time Warner, Inc. (continued)
$ 400,000 7.98% 08/15/04 $ 406,440
U.S. Air Inc.
553,242 6.76 04/15/08 528,761
USI American Holdings Corp.
150,000 7.25 12/01/06 145,070
- -------------------------------------------------------------------------------
$ 11,656,729
- -------------------------------------------------------------------------------
Utility Bonds--1.1%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 326,215
Salton Sea Funding
580,000 7.02 05/30/00 580,922
- -------------------------------------------------------------------------------
$ 907,137
- -------------------------------------------------------------------------------
Total Corporate Bonds
(Cost $20,576,762) $ 20,518,098
- -------------------------------------------------------------------------------
Asset-Backed Securities--14.1%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 /(a)/ $ 157,232
Asset Securitization Corp., Series 1996, Class A1
600,000 6.88 11/13/26 /(a)/ 591,398
Asset Securitization Corp., Series 4, Class A
900,000 7.49 04/14/27 914,800
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
177,654 5.80 06/15/02 176,876
Discover Card Master Trust 1996-4, Class A
1,910,000 6.06 10/16/13 /(a)/ 1,942,222
Discover Card Master Trust 1996-4, Class B
1,100,000 6.24 10/16/13 1,108,250
DVI Equipment Lease Trust Series 1996-1, Class A
1,011,139 6.55 07/10/04 1,006,286
General Motors Acceptance Corp. Series 1995, Class A
69,659 7.15 03/15/00 70,203
Navistar Financial Trust, Series 1995-A, Class A2
214,878 6.55 11/20/01 215,549
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
245,032 6.85 06/15/01 247,048
Premier Auto Trust Series 1995-1, Class A4
123,449 7.85 09/04/98 123,680
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 80,625
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20% 02/16/06 667,250
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 565,983
Sears Credit Account Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 302,718
Standard Credit Card Master Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 714,422
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,120,694
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 910,683
World Financial Tower B Series 1996, Class B
498,093 6.91 09/01/13 483,679
- -------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $11,543,903) $ 11,399,598
- -------------------------------------------------------------------------------
Emerging Market Debt--4.4%
Bancoldex
$ 60,000 8.63% 06/02/00 $ 61,372
BCO De Colombia
110,000 8.63 06/02/00 112,516
Bridas Corp.
110,000 12.50 11/15/99 118,581
Empresa Col Petroleos
900,000 7.25 07/08/98 903,438
Financiera Energy Nacional
50,000 9.38 06/15/06 50,504
90,000 9.38 06/15/06 94,271
Instituto de Fomento Industrial
140,000 8.38 07/29/01 141,558
130,000 8.38 07/29/01 131,447
Republic of Colombia
30,000 7.13 05/11/98 30,139
Republic of Croatia
210,000 7.00 02/27/02 204,091
Sampoerna International
120,000 8.38 06/15/06 120,164
United Mexican States
180,000 7.56 08/06/01 181,940
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Emerging Market Debt(continued)
United Mexican States (continued)
$ 650,000 7.62% 08/06/01 $ 657,007
YPF Sociedad Anonima
633,003 7.50 10/26/02 637,687
118,531 7.00 10/26/02 118,835
- -------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $3,558,558) $ 3,563,550
- -------------------------------------------------------------------------------
Government Bonds--3.0%
Australia Commonwealth
AUD 2,400,000 7.50% 07/15/05 $ 1,845,509
Province of Quebec
$ 520,000 13.25 09/15/14 611,666
- -------------------------------------------------------------------------------
Total Government Bonds
(Cost $2,524,905) $ 2,457,175
- -------------------------------------------------------------------------------
Mortgage Backed Obligations--31.9%
Bear Stearns Mortgage Securities, Inc.
$ 2,045,784 6.50% 03/28/09/(a)/ $ 1,883,062
Federal Home Loan Mortgage Corp. (FHLMC)
1,000,000 7.00 TBA-15 Yr./(b)/ 990,938
1,245,394 6.00 11/15/16 1,234,885
1,000,000 6.35 03/25/18 976,870
Federal National Mortgage Association (FNMA)
1,000,000 6.50 TBA-7 Yr./(b)/ 981,560
1,000,000 7.00 TBA-30 Yr./(b)/ 968,750
4,500,000 7.50 TBA-30 Yr./(b)/ 4,466,250
500,000 6.25 07/25/18 486,875
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24/(a)/ 1,771,240
Government National Mortgage Association (GNMA)
3,000,000 7.50 TBA-30 Yr./(b)/ 2,973,750
3,000,000 8.00 TBA-30 Yr./(b)/ 3,040,290
335,213 8.00 02/15/17 344,240
30,057 7.00 11/15/22 29,296
362,778 7.00 12/15/22 353,592
596,838 7.00 12/15/22 581,726
184,742 7.00 01/15/23 179,892
787,526 7.50 03/15/23 785,313
779,931 7.00 05/15/23 759,457
120,766 7.50 08/15/23 120,427
39,068 7.00 11/15/23 38,042
JP Morgan Commercial Mortgage Finance Corp., Series 1997-C4
1,000,000 7.32% 12/26/28 997,227
Morgan Stanley Capital Commercial Mortgage, Inc. Series 1997-C1
900,000 7.46 05/15/06 912,375
Prudential Home Mortgage Securities Corp. 1992-39 A8
1,000,000 7.11 12/25/07 860,550
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $25,637,886) $ 25,736,607
- -------------------------------------------------------------------------------
Sovereign Credit--0.4%
State of Israel
$ 370,000 6.38% 12/15/05 $ 343,748
- -------------------------------------------------------------------------------
Total Sovereign Credit
(Cost $346,061) $ 343,748
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--17.0%
United States Treasury Bonds
$ 330,000 8.75% 05/15/17 $ 390,070
550,000 8.88 08/15/17/(a)/ 657,938
2,230,000 8.75 05/15/20 2,656,488
120,000 7.88 02/15/21/(a)/ 131,174
2,240,000 7.63 02/15/25 2,402,400
United States Treasury Interest-Only Stripped Securities/(c)/
2,250,000 6.99 08/15/09 966,893
350,000 7.04 11/15/10 136,808
United States Treasury Notes
4,000,000 6.88 08/31/99 4,044,360
280,000 5.63 11/30/00 272,387
590,000 7.88 11/15/04/(a)/ 630,380
United States Treasury Principal-Only Stripped Securities/(d)/
40,000 5.78 11/15/97 38,781
410,000 6.81 11/15/04/(a)/ 247,566
5,730,000 7.22 05/15/20 1,119,356
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,742,043) $ 13,694,601
- -------------------------------------------------------------------------------
Yankee Bonds--0.3%
Korea Electric Power
$ 263,790 7.40% 04/01/16 $ 265,088
- -------------------------------------------------------------------------------
Total Yankee Bonds
(Cost $255,077) $ 265,088
- -------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase Agreement--20.1%
Joint Repurchase Agreement Account/(a)/
$ 16,200,000 5.49% 05/01/97 $ 16,200,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $16,200,000) $ 16,200,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $94,385,195)/(e)/ $ 94,178,465
- -------------------------------------------------------------------------------
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(f) Month Gain (Loss)
- ---------------------------- -------------- ----------------- -------------
Euro Dollars 5 June 1997 $4,250
Euro Dollars 8 September 1997 (2,338)
Euro Dollars 5 December 1997 (1,000)
Euro Dollars 5 June 1998 (2,250)
5 Year U.S. Treasury Notes 10 June 1997 (2,828)
10 Year U.S. Treasury Notes 17 June 1997 (12,750)
U.S. Long Term Bond (14) June 1997 42,682
-------------
$25,766
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $382,996
Gross unrealized loss for investments in which cost
exceeds value (704,905)
- ------------------------------------------------------------------------------
Net unrealized loss $(321,909)
- --------------------------------------------------------------------------------
</TABLE>
/(a)/Portions of these securities are being segregated for open TBA purchases,
mortgage dollar rolls, and futures.
/(b)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally + / -2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(c)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/The interest rate disclosed for these securitites represents effective
yields to maturity.
/(e)/The aggregate cost for federal income tax purposes is $94,500,374.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and each U.S. Long Term Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $27,100,000 and $9,088,344, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Adjustable
Rate Short Duration
Government Government
Fund Fund
--------------------------------------
<S> <C> <C>
Assets:
Investments in securities, at value (cost $594,120,929, $102,639,463, $39,615,334
and $94,385,195, respectively) $ 596,596,552 $ 102,672,119
Cash 57,183 89,184
Receivables:
Investment securities sold 295,632 --
Interest 6,240,961 1,042,023
Forward foreign currency exchange contracts -- --
Fund shares sold 2,978,910 203,746
Variation margin -- --
Deferred organization expenses, net -- --
Other assets 64,048 50,879
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 606,233,286 104,057,951
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,032,523 109,251
Investment securities purchased 1,331,393 --
Fund shares repurchased 10,604,905 1,707
Investment adviser fees 191,592 34,620
Transfer agent fees 42,054 --
Authorized dealer service fees 6,616 --
Variation margin 87,000 46,971
Accrued expenses and other liabilities 59,487 15,162
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 13,355,570 207,711
- ------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 643,684,171 117,737,007
Accumulated undistributed (distributions in excess of) net investment income (2,943,415) 599,277
Accumulated net realized loss on investment and futures transactions (49,959,507) (14,542,059)
Accumulated net realized foreign currency loss -- --
Net unrealized gain (loss) on investments and futures 2,096,467 56,015
Net unrealized gain on translation of assets and liabilities denominated in
foreign currencies -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net assets $ 592,877,716 $ 103,850,240
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:
Institutional shares $9.86 $9.76
Administration shares $9.86 $9.78
Service shares $9.86 $9.75
Class A shares (a) $9.86 --
- ------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Institutional shares 55,732,381 10,231,208
Administration shares 424,079 153,792
Service shares 2,171 258,644
Class A shares 3,960,437 --
- ------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value (unlimited
number of shares authorized) 60,119,068 10,643,644
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
---------------------------------
<S> <C> <C>
Assets:
Investments in securities, at value (cost $594,120,929, $102,639,463, $39,615,334
and $94,385,195, respectively) $ 39,692,726 $ 94,178,465
Cash 91,511 94,989
Receivables:
Investment securities sold 145,393 1,331,207
Interest 554,155 1,045,248
Forward foreign currency exchange contracts -- 34,692
Fund shares sold -- 60,750
Variation margin -- 6,750
Deferred organization expenses, net 10,458 41,206
Other assets 51,608 29,277
- -------------------------------------------------------------------------------------------------------------------------
Total assets 40,545,851 96,822,584
- -------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 18,312 43,289
Investment securities purchased 2,144,574 15,935,315
Fund shares repurchased 10,296 --
Investment adviser fees 11,244 26,250
Transfer agent fees 12,983 2,771
Authorized dealer service fees -- --
Variation margin -- --
Accrued expenses and other liabilities 31,430 30,169
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,228,839 16,037,794
- -------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 42,243,143 81,193,439
Accumulated undistributed (distributions in excess of) net investment income 90,133 36,949
Accumulated net realized loss on investment and futures transactions (4,093,656) (267,089)
Accumulated net realized foreign currency loss -- (32,353)
Net unrealized gain (loss) on investments and futures 77,392 (175,768)
Net unrealized gain on translation of assets and liabilities denominated in
foreign currencies -- 29,612
- -------------------------------------------------------------------------------------------------------------------------
Net assets $ 38,317,012 $ 80,784,790
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:
Institutional shares $9.94 $9.71
Administration shares $9.94 $9.70
Service shares $9.94 $9.72
Class A shares (a) -- --
- -------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Institutional shares 3,738,166 7,565,340
Administration shares 11,363 638,323
Service shares 105,100 114,034
Class A shares -- --
- -------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value (unlimited
number of shares authorized) 3,854,629 8,317,697
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Maximum public offering price per share (NAV per share x 1.0152) for Class A
shares of GS Adjustable Rate Government Fund is $10.01.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Operations
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Adjustable Short
Rate Duration
Government Government
Fund Fund
-----------------------------------
<S> <C> <C>
Investment income:
Interest/(a)/ $ 19,521,515 $ 3,571,901
- -----------------------------------------------------------------------------------------------------------------------------------
Total income 19,521,515 3,571,901
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 1,196,772 259,279
Distribution fees 24,001 --
Authorized dealer service fees 24,001 --
Administration share fees 5,231 1,118
Service share fees 10 5,244
Transfer agent fees 143,729 --
Custodian fees 65,396 32,437
Professional fees 30,592 30,169
Registration fees 31,419 29,736
Amortization of deferred organization expenses -- --
Trustees' fees 5,754 990
Other 64,428 26,459
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,591,333 385,432
Less--Expenses reimbursable and fees waived by Goldman Sachs (215,722) (145,719)
- -----------------------------------------------------------------------------------------------------------------------------------
Net expenses 1,375,611 239,713
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 18,145,904 3,332,188
- -----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (301,736) 77,934
Futures transactions (575,601) (78,182)
Foreign currency related transactions -- --
Net change in unrealized gain (loss) on:
Investments 3,237,459 (594,540)
Futures (523,110) (9,522)
Translation of assets and liabilities denominated in foreign currencies -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 1,837,012 (604,310)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 19,982,916 $ 2,727,878
- -----------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
-----------------------------
<S> <C> <C>
Investment income:
Interest/(a)/ $ 846,820 $ 2,713,928
- --------------------------------------------------------------------------------------------------------------------------
Total income 846,820 2,713,928
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 72,141 152,651
Distribution fees -- --
Authorized dealer service fees -- --
Administration share fees 79 4,929
Service share fees 2,452 1,908
Transfer agent fees 7,214 15,265
Custodian fees 24,930 43,131
Professional fees 30,238 29,501
Registration fees 29,353 29,627
Amortization of deferred organization expenses 10,290 12,146
Trustees' fees 332 775
Other 15,581 8,570
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 192,610 298,503
Less--Expenses reimbursable and fees waived by Goldman Sachs (108,922) (119,934)
- --------------------------------------------------------------------------------------------------------------------------
Net expenses 83,688 178,569
- --------------------------------------------------------------------------------------------------------------------------
Net investment income 763,132 2,535,359
- --------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions 46,213 (11,091)
Futures transactions -- (15,366)
Foreign currency related transactions -- (32,353)
Net change in unrealized gain (loss) on:
Investments (125,032) (1,032,929)
Futures -- (72,450)
Translation of assets and liabilities denominated in foreign currencies -- 29,612
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions (78,819) (1,134,577)
- --------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 684,313 $ 1,400,782
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Net of $4,391 in foreign withholding tax for the Core Fixed Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Adjustable Short
Rate Duration
Government Government
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 18,145,904 $ 3,332,188
Net realized gain (loss) from investment and futures transactions (877,337) (248)
Net realized loss from foreign currency related transactions -- --
Net change in unrealized gain (loss) on investments and futures 2,714,349 (604,062)
Net change in unrealized gain on translation of assets and liabilities
denominated in foreign currencies -- --
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 19,982,916 2,727,878
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (16,997,708) (3,409,055)
Administration shares (118,601) (29,022)
Service shares (107) (65,458)
Class A shares (531,120) --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (17,647,536) (3,503,535)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 224,637,176 17,764,086
Reinvestment of dividends and distributions 10,493,073 2,378,322
Cost of shares repurchased (272,256,791) (17,534,072)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from shares transactions (37,126,542) 2,608,336
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (34,791,162) 1,832,679
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of period $ 627,668,878 $ 102,017,561
- ----------------------------------------------------------------------------------------------------------------
End of period $ 592,877,716 $ 103,850,240
- ----------------------------------------------------------------------------------------------------------------
Accumulated undistributed (distributions in excess of) net investment income $ (2,943,415) $ 599,277
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 22,833,196 1,813,884
Reinvestment of dividends and distributions 1,066,128 243,233
Shares repurchased (27,664,736) (1,793,383)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,765,412) 263,734
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 763,132 $ 2,535,359
Net realized gain (loss) from investment and futures transactions 46,213 (26,457)
Net realized loss from foreign currency related transactions -- (32,353)
Net change in unrealized gain (loss) on investments and futures (125,032) (1,105,379)
Net change in unrealized gain on translation of assets and liabilities
denominated in foreign currencies -- 29,612
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 684,313 1,400,782
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (743,379) (2,380,508)
Administration shares (1,285) (127,789)
Service shares (18,468) (23,664)
Class A shares -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (763,132) (2,531,961)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 15,143,248 8,630,772
Reinvestment of dividends and distributions 633,411 2,308,481
Cost of shares repurchased (12,937,480) (2,167,703)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from shares transactions 2,839,179 8,771,550
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase 2,760,360 7,640,371
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of period $ 35,556,652 $ 73,144,419
- ----------------------------------------------------------------------------------------------------------------
End of period $ 38,317,012 $ 80,784,790
- ----------------------------------------------------------------------------------------------------------------
Accumulated undistributed (distributions in excess of) net investment income $ 90,133 $ 36,949
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 1,519,494 880,108
Reinvestment of dividends and distributions 63,471 235,763
Shares repurchased (1,297,285) (220,518)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding 285,680 895,353
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Adjustable Short
Rate Duration
Government Government
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 37,031,818 $ 6,604,446
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519)
Administration shares (220,450) (2,548)
Service shares -- (14,792)
Class A shares (577,779) --
In excess of net investment income
Institutional shares (1,304,006) --
Administration shares (7,930) --
Class A shares (20,794) --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441
Reinvestment of dividends and distributions 18,181,648 4,153,816
Cost of shares repurchased (477,107,914) (47,993,112)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from shares transactions (52,339,892) (1,819,855)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469)
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of year $ 676,133,018 $ 103,760,030
- ----------------------------------------------------------------------------------------------------------------
End of year $ 627,668,878 $ 102,017,561
- ----------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed net investment income $ (3,441,783) $ 770,624
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467
Reinvestment of dividends and distributions 1,856,783 424,274
Shares repurchased (48,741,470) (4,905,357)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616)
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 1,786,304 $ 4,013,477
Net realized gain (loss) from investment and futures transactions 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures (396,071) (75,350)
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,721,871 3,684,707
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (1,766,892) (4,019,797)
Administration shares (2,032) (19,144)
Service shares (17,380) (5,349)
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- (450,016)
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,786,304) (4,494,306)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 22,248,684 21,976,567
Reinvestment of dividends and distributions 1,401,492 4,315,748
Cost of shares repurchased (46,918,400) (7,840,575)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from shares transactions (23,268,224) 18,451,740
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (23,332,657) 17,642,141
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of year $ 58,889,309 55,502,278
- ----------------------------------------------------------------------------------------------------------------
End of year $ 35,556,652 $ 73,144,419
- ----------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed net investment income $ 90,133 $ 33,551
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 2,233,482 2,244,430
Reinvestment of dividends and distributions 140,950 439,299
Shares repurchased (4,727,959) (811,075)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (2,353,527) 1,872,654
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end, management
investment company. Included in this report are the financial statements for the
Goldman Sachs Adjustable Rate Government Fund (Adjustable Rate Government),
Goldman Sachs Short Duration Government Fund (Short Duration Government),
Goldman Sachs Short Duration Tax-Free Fund (Short Duration Tax-Free) and Goldman
Sachs Core Fixed Income Fund (Core Fixed Income), collectively, ("the Funds") or
individually a ("Fund"). The Funds are diversified portfolios of the Trust
offering three classes of shares - Institutional shares, Administration shares
and Service shares. In addition, the Adjustable Rate Government Fund offers
Class A shares. Effective May 1, 1997, the Trust was reorganized from a
Massachusetts business trust to a Delaware business trust and various
operational changes were approved, including updating certain investment
restrictions and amending the management contracts. In addition, Short Duration
Government, Short Duration Tax-Free, and Core Fixed Income added two new share
classes, Class A and Class B, as of May 1.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations for
which accurate market quotations are readily available are valued on the basis
of quotations furnished by a pricing service or provided by dealers in such
securities. Portfolio securities for which accurate market quotations are not
readily available are valued based on yield equivalents, pricing matrix or other
sources, under valuation procedures established by the Trust's Board of
Trustees. Short-term debt obligations maturing in sixty days or less are valued
at amortized cost.
B. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on trade date. Realized gains and losses on
sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account actual principal
prepayment experience and estimates of future principal prepayments. Certain
mortgage security paydown gains and losses are taxable as ordinary income. Such
paydown gains and losses increase or decrease taxable ordinary income available
for distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
Market premiums resulting from the purchase of long-term debt securities are
amortized to interest income over the life of the security with a corresponding
decrease in the cost basis of that security for Short Duration Tax-Free. Market
discounts and market premiums on debt securities, other than mortgage backed
securities, are amortized to interest income over the life of the security with
a corresponding adjustment in the cost basis of that security for Core Fixed
Income Fund.
C. Foreign Currency Translations
- --------------------------------
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
- --------------------------------------------------------------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on foreign currency transactions
will represent: (i) foreign exchange gains and losses from the sale and holdings
of foreign currencies and investments; (ii) gains and losses between trade date
and settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
interest recorded and the amounts actually received.
D. Forward Foreign Currency Exchange Contracts
- ----------------------------------------------
Core Fixed Income may enter into forward foreign exchange contracts for the
purchase or sale of a specific foreign currency at a fixed price on a future
date as a hedge or cross-hedge against either specific transactions or portfolio
positions. Core Fixed Income may also purchase and sell forward contracts to
seek to increase total return. All commitments are "marked-to-market" daily at
the applicable translation rates and any resulting unrealized gains or losses
are recorded in the Fund's financial statements. The Fund records realized gains
or losses at the time the forward contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
E. Mortgage Dollar Rolls
- ------------------------
The Funds, with the exception of Short Duration Tax-Free, may enter into
mortgage "dollar rolls" in which the Fund sells securities in the current month
for delivery and simultaneously contracts with the same counterparty to
repurchase similar (same type, coupon and maturity) but not identical securities
on a specified future date. The Fund loses the right to receive principal and
interest paid on the securities sold. However, the Fund benefits to the extent
of any price received for the securities sold and the lower forward price for
the future purchase (often referred to as the "drop") or fee income plus the
interest earned on the cash proceeds of the securities sold until the settlement
date of the forward purchase. The Fund will hold and maintain in a segregated
account, until the settlement date, cash or liquid, high-grade debt securities
in an amount equal to the forward purchase price. For financial reporting and
tax reporting purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale.
F. Futures Contracts
- --------------------
The Funds may enter into futures transactions to hedge against changes in
interest rates, securities prices, currency exchange rates (in the case of Core
Fixed Income) or to seek to increase total return.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Payments for futures contracts ("variation margin") are paid or received by the
Funds daily, dependent on the daily fluctuations in the value of the contracts,
and are recorded for financial reporting purposes as unrealized gains or losses.
When contracts are closed, the Funds realize a gain or loss equal to the
difference between the value of the futures contract to sell and the value of
futures contract to buy. Gains and losses are reported in the Statement of
Operations.
The use of futures contracts involve, to varying degrees, elements of
market and counterparty risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities. Changes in the value of the futures
contract may not directly correlate with changes in the value of the underlying
securities. This risk may decrease the effectiveness of the Funds' hedging
strategies and potentially result in a loss.
G. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
H. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are generally allocated to the portfolios based on
each portfolio's relative average net assets for the period.
- --------------------------------------------------------------------------------
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
Shareholders of Administration shares and Service shares bear all expenses
and fees paid to service organizations for their services with respect to such
shares as well as other expenses (subject to expense limitations) which are
directly attributable to such shares. For the Adjustable Rate Government Fund,
shareholders of Class A shares bear all expenses and fees relating to the
distribution and authorized dealer service plans as well as other expenses which
are directly attributable to such shares.
I. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of its investment company taxable and tax-exempt income to its
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial
statement purposes as either from or in excess of net investment income or net
realized gain on investment transactions, or from capital, depends on the type
of book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
The Funds, at their most recent tax year-ends (October 31, 1996 for Core
Fixed Income and December 31, 1996 for Adjustable Rate Government, Short
Duration Government and Short Duration Tax-Free) had approximately the following
amounts of capital loss carryforward for U.S. federal tax purposes:
<TABLE>
<CAPTION>
Years of
Fund Amount Expiration
- ------------------------------------ ------------- -------------
<S> <C> <C>
Adjustable Rate Government $49,069,000 2000-2004
Short Duration Government $14,141,000 2002-2004
Short Duration Tax-Free $4,058,000 2002-2003
Core Fixed Income $77,000 2004
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by applicable laws or regulations.
3. Agreements
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman, Sachs &
Co. ("Goldman Sachs"), serves as the investment adviser for the Adjustable Rate
Government and Short Duration Government Funds pursuant to Investment Advisory
Agreements. Goldman Sachs Asset Management ("GSAM"), a separate operating
division of Goldman Sachs, serves as the investment adviser for the Short
Duration Tax-Free and Core Fixed Income Funds pursuant to Investment Advisory
Agreements. Under the Investment Advisory Agreements, the adviser, subject to
the general supervision of the Trust's Board of Trustees, manages the Funds'
portfolios and provides for the administration of the Funds' other affairs. As
compensation for the services rendered under the Investment Advisory Agreements
and the assumption of the expenses related thereto, the adviser is entitled to a
fee, computed daily and payable monthly at an annual rate equal to .40% of
average daily net assets of Adjustable Rate Government, Short Duration Tax-Free
and Core Fixed Income and .50% of average daily net assets of Short Duration
Government. Until further notice, GSFM has voluntarily agreed not to impose .10%
of its investment advisory fee for Short Duration Government.
The adviser has voluntarily agreed to limit certain of the Funds' expenses
(excluding investment advisory fees, taxes, interest, brokerage, litigation,
Administrative and Service Share fees, indemnification and other extraordinary
expenses and with respect to Adjustable Rate Government Class A shares,
distribution and authorized dealer service fees) to the extent that such
expenses exceed .05% per annum of each Fund's average daily net assets.
Goldman Sachs serves as Distributor of the shares of the Funds pursuant to
a Distribution Agreement and receives no compensation in this capacity with the
exception of Adjustable Rate Government Class A shares. During the period ended
April 30, 1997, Goldman Sachs retained approximately $110,300 of sales load
related to Class A shares. Goldman Sachs also serves as Transfer Agent of the
Funds for a fee.
The Trust, on behalf of Adjustable Rate Government, has adopted a
Distribution Plan (the "Plan") pursuant to Rule 12b-1 for the Class A shares.
Under the Plan, Goldman Sachs
- --------------------------------------------------------------------------------
34
<PAGE>
- --------------------------------------------------------------------------------
is entitled to receive a quarterly distribution fee equal, on an annual basis,
to .25% of the average daily net assets of Class A shares. Currently, Goldman
Sachs has agreed to voluntarily waive this distribution fee.
The Trust, on behalf of Adjustable Rate Government, has adopted a non-Rule
12b-1 Authorized Dealer Service Plan (the "Service Plan") pursuant to which
Goldman Sachs and Authorized Dealers are compensated for providing personal and
account maintenance services. Adjustable Rate Government pays a fee under the
Service Plan equal, on an annual basis, to .25% of its average daily net assets
attributable to Class A shares.
For the period ended April 30, 1997, the advisors and distributor have
voluntarily agreed to waive certain fees and reimburse other expenses as
follows(in thousands):
<TABLE>
<CAPTION>
Waivers
---------------
Reimburse-
Class A Reimburse- ment
Fund Advisor 12b-1 ment Outstanding
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustable Rate
Government -- $24 $192 $22
Short Duration
Government $52 -- 94 14
Short Duration
Tax-Free -- -- 109 28
Core Fixed
Income -- -- 120 28
</TABLE>
For the period ended April 30, 1997, Adjustable Rate Government, Short
Duration Government, and Core Fixed Income incurred commission expenses of
approximately $35,000, $8,500, and $900, respectively, in connection with
futures contracts entered into with Goldman Sachs. At April 30, 1997, Adjustable
Rate Government and Short Duration Government had approximately $87,000 and
$47,000, respectively, payable to Goldman Sachs related to variation margin on
futures contracts. Approximately $7,000 relating to variation margin was due to
Core Fixed Income from Goldman Sachs.
As of May 1, 1997, the Funds advisory agreements were changed to management
agreements encompassing the same services and fee structure.
4. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility to be used solely for temporary or emergency purposes. Under the
most restrictive arrangement, each fund must own securities having a market
value in excess of 300% of the total bank borrowings. The interest rate on the
borrowings is based on the federal funds rate. During the six months ended April
30, 1997, the Funds did not have any borrowings under this facility.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for the
six months ended April 30, 1997, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Short
Adjustable Rate Short Duration Duration Core Fixed
Government Government Tax-Free Income
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases of U.S.
Government and agency
obligations $ 150,343,674 $46,763,342 -- $115,895,051
- -----------------------------------------------------------------------------------------------
Purchases (excluding U.S.
Government and agency
obligations) -- -- $39,438,868 22,633,489
- -----------------------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 198,396,859 44,501,257 -- 118,193,576
- -----------------------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and agency
obligations) -- -- 35,970,076 12,305,124
- -----------------------------------------------------------------------------------------------
</TABLE>
At April 30, 1997, Core Fixed Income had an outstanding forward foreign
currency exchange contract, to sell foreign currency as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Value on
Foreign Currency Settlement Current Unrealized
Sell Contract Date Value Gain
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
Expiring 6/16/97 $ 1,897,856 $ 1,863,164 $ 34,692
- -----------------------------------------------------------------------------------------------
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered.
6. Administration and Service Plans
The Funds have adopted Administration and Service Plans. These plans allow for
Administration shares and Service shares, respectively, to compensate service
organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
7. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Funds' custodian.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSFM and GSAM or their affiliates, transfer uninvested cash
balances into a joint account, the daily aggregate balance of which is invested
in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of April 30, 1997, Adjustable Rate Government, Short Duration Government and
Core Fixed Income had undivided interests in the repurchase agreements in the
following joint account which equaled $36,700,000, $600,000 and $16,200,000,
respectively, in principal amount.
As of April 30, 1997, the repurchase agreement in the joint account along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity data) were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns & Co., dated 4/30/97, repurchase price $680,103,889 (GNMA:
$59,497,211, 7.50%-9.00%, 12/15/21-12/15/26; FNMA: $267,568,394, 5.50%-8.00%,
02/01/09-04/01/27; FHLMC: $373,405,594, 5.50%-7.50%, 2/01/98-4/01/27)
$680,000,000 5.50% 5/01/97 $680,000,000
Nomura Securities International, Inc. dated 4/30/97, repurchase price $300,045,833
(FNMA: $182,812,268, 5.94%-8.01%, 7/22/97-5/11/05; FHLMC: $38,631,543, 6.02%-
6.75%, 1/28/00-12/04/01, FCSB: $49,581,430, 6.05%-6.25%, 5/10/99-12/03/99,
SLMA: $29,222,430, 6.00%, 1/16/01)
300,000,000 5.50 5/01/97 300,000,000
Credit Suisse First Boston, dated 4/30/97, repurchase price $52,307,845 (U.S.
Treasury Bill: $53,475,803, 2/05/98)
52,300,000 5.40 5/01/97 52,300,000
- ---------------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $1,032,300,000
- ---------------------------------------------------------------------------------------
</TABLE>
9. Other Matters
As of April 30, 1997, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 33% of the
outstanding shares of the Short Duration Government Fund.
- --------------------------------------------------------------------------------
36
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10. Summary of Share Transactions
Share activity for the six months ended April 30, 1997 is as follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Short Duration Government
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 18,594,775 $182,930,563 1,584,839 $15,518,375
Reinvestment of dividends
and distributions 1,001,545 9,856,991 234,064 2,288,677
Shares repurchased (26,271,346) (258,542,996) (1,756,576) (17,174,153)
-------------------------------------------------------------
(6,675,026) (65,755,442) 62,327 632,899
-------------------------------------------------------------
Administration shares
Shares sold 105,099 1,034,098 136,265 1,337,724
Reinvestment of dividends
and distributions 5,632 55,427 2,467 24,158
Shares repurchased (72,390) (712,347) (10,477) (102,683)
-------------------------------------------------------------
38,341 377,178 128,255 1,259,199
-------------------------------------------------------------
Service shares
Shares sold 2,161 21,270 92,780 907,987
Reinvestment of dividends
and distributions 11 107 6,702 65,487
Shares repurchased (1) (10) (26,330) (257,236)
-------------------------------------------------------------
2,171 21,367 73,152 716,238
-------------------------------------------------------------
Class A shares
Shares sold 4,131,161 40,651,245 -- --
Reinvestment of dividends
and distributions 58,940 580,548 -- --
Shares repurchased (1,320,999) (13,001,438) -- --
-------------------------------------------------------------
2,869,102 28,230,355 -- --
-------------------------------------------------------------
Net increase (decrease) (3,765,412) $(37,126,542) 263,734 $2,608,336
==============================================================
<CAPTION>
Short Duration Tax-Free Core Fixed Income
-------------------------------------------------------------
Shares Dollars Shares Dollars
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 1,341,295 $13,363,572 212,032 $2,070,524
Reinvestment of dividends
and distributions 61,868 617,418 227,665 2,229,551
Shares repurchased (1,159,405) (11,559,759) (186,679) (1,835,467)
-------------------------------------------------------------
243,758 2,421,231 253,018 2,464,608
-------------------------------------------------------------
Administration shares
Shares sold 6,402 63,690 579,102 5,684,739
Reinvestment of dividends
and distributions 116 1,153 5,675 55,281
Shares repurchased -- -- (17,694) (174,314)
-------------------------------------------------------------
6,518 64,843 567,083 5,565,706
-------------------------------------------------------------
Service shares
Shares sold 171,797 1,715,986 88,974 875,509
Reinvestment of dividends
and distributions 1,487 14,840 2,423 23,649
Shares repurchased (137,880) (1,377,721) (16,145) (157,922)
-------------------------------------------------------------
35,404 353,105 75,252 741,236
-------------------------------------------------------------
Class A shares
Shares sold -- -- -- --
Reinvestment of dividends
and distributions -- -- -- --
Shares repurchased -- -- -- --
-------------------------------------------------------------
-- -- -- --
-------------------------------------------------------------
Net increase (decrease) 285,680 $2,839,179 895,353 $8,771,550
============================================================
</TABLE>
37
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(unaudited)
- -------------------------------------------------------------------------------
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Short Duration Government
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 39,981,299 $391,363,204 4,072,082 $39,855,638
Reinvestment of dividends
and distributions 1,780,288 17,432,484 422,559 4,137,041
Shares repurchased (46,666,343) (456,776,795) (4,893,286) (47,875,174)
- ---------------------------------------------------------------------------------------------
(4,904,756) (47,981,107) (398,645) (3,882,495)
- ---------------------------------------------------------------------------------------------
Administration shares
Shares sold 148,981 1,457,872 33,251 326,101
Reinvestment of dividends
and distributions 9,641 94,420 207 2,032
Shares repurchased (138,609) (1,356,764) (7,921) (77,312)
- ---------------------------------------------------------------------------------------------
20,013 195,528 25,537 250,821
- ---------------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 188,134 1,837,702
Reinvestment of dividends
and distributions -- -- 1,508 14,743
Shares repurchased -- -- (4,150) (40,626)
- ---------------------------------------------------------------------------------------------
-- -- 185,492 1,811,819
- ---------------------------------------------------------------------------------------------
Class A shares
Shares sold 1,404,698 13,765,298 -- --
Reinvestment of dividends
and distributions 66,854 654,744 -- --
Shares repurchased (1,936,518) (18,974,355) -- --
- ---------------------------------------------------------------------------------------------
(464,966) (4,554,313) -- --
- ---------------------------------------------------------------------------------------------
Net increase (decrease) (5,349,709) $(52,339,892) (187,616) $(1,819,855)
=============================================================================================
<CAPTION>
Short Duration Tax-Free Core Fixed Income
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 2,085,253 $20,777,050 2,094,833 $20,524,422
Reinvestment of dividends
and distributions 139,126 1,383,351 436,903 4,292,533
Shares repurchased (4,601,865) (45,664,878) (769,104) (7,431,360)
- ---------------------------------------------------------------------------------------------
(2,377,486) (23,504,477) 1,762,632 17,385,595
- ---------------------------------------------------------------------------------------------
Administration shares
Shares sold 10,672 105,302 106,074 1,029,912
Reinvestment of dividends
and distributions 203 2,017 1,847 17,883
Shares repurchased (10,644) (105,478) (36,681) (358,284)
- ---------------------------------------------------------------------------------------------
231 1,841 71,240 689,511
- ---------------------------------------------------------------------------------------------
Service shares
Shares sold 137,557 1,366,332 43,525 422,233
Reinvestment of dividends
and distributions 1,621 16,124 549 5,332
Shares repurchased (115,450) (1,148,044) (5,292) (50,931)
- ---------------------------------------------------------------------------------------------
23,728 234,412 38,782 376,634
- ---------------------------------------------------------------------------------------------
Class A shares
Shares sold -- -- -- --
Reinvestment of dividends
and distributions -- -- -- --
Shares repurchased -- -- -- --
- ---------------------------------------------------------------------------------------------
-- -- -- --
- ---------------------------------------------------------------------------------------------
Net increase (decrease) (2,353,527) $(23,268,224) 1,872,654 $18,451,740
=============================================================================================
</TABLE>
- -------------------------------------------------------------------------------
38
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
--------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. $9.83 $0.2971/(a)/ $0.0216/(a)/ -- $0.3187 $(0.2887) --
1997-Administration
Shares .............. 9.83 0.2844/(a)/ 0.0221/(a)/ -- 0.3065 (0.2765) --
1997-Service
Shares/(m)/ ......... 9.84 0.0527/(a)/ 0.0200/(a)/ -- 0.0727 (0.0527) --
1997-Class A Shares ...... 9.83 0.2766/(a)/ 0.0300/(a)/ -- 0.3066 (0.2766) --
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 9.77 0.5759/(a)/ 0.0772/(a)/ -- 0.6531 (0.5725) --
1996-Administration
Shares .............. 9.77 0.5489/(a)/ 0.0797/(a)/ -- 0.6286 (0.5489) --
1996-Class A Shares ...... 9.77 0.5481/(a)/ 0.0806/(a)/ -- 0.6287 (0.5489) --
1995-Institutional
Shares .............. 9.74 0.5630/(a)/ 0.0717/(a)/ -- 0.6347 (0.5759) --
1995-Administration
Shares .............. 9.74 0.5366/(a)/ 0.0737/(a)/ -- 0.6103 (0.5528) --
1995-Class A
Shares/(c)/.......... 9.79 0.2721/(a)/ (0.0090)/(a) / -- 0.2631 (0.2697) --
1994-Institutional
Shares .............. 10.00 0.4341/(a)/ (0.2455)/(a) / -- 0.1886 (0.4486) --
1994-Administration
Shares .............. 10.00 0.4211/(a)/ (0.2572)/(a) / -- 0.1639 (0.4239) --
1993-Institutional
Shares .............. 10.04 0.4397 (0.0376)/(d) / -- 0.4021 (0.4397) --
1993-Administration
Shares/(e)/.......... 10.02 0.2146 (0.0173)/(d) / -- 0.1973 (0.2146) --
1992-Institutional
Shares .............. 10.03 0.5599 (0.0029)/(d) / -- 0.5570 (0.5470) --
For the Period July 17, 1991/(g)/through October 31,
- ------------------------------------------------------
1991-Institutional
Shares .............. 10.00 0.1531 0.0322/(d)/ -- 0.1853 (0.1553) --
<CAPTION>
Distributions to shareholders
----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. -- -- -- $(0.2887) $0.0300 $9.86 3.28%/(f)/
1997-Administration
Shares .............. -- -- -- (0.2765) 0.0300 9.86 3.16/(f)/
1997-Service
Shares/(m)/ ......... -- -- -- (0.0527) 0.0200 9.86 0.74/(f)/
1997-Class A Shares ...... -- -- -- (0.2766) 0.0300 9.86 3.16/(f)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. (0.0206) -- -- (0.5931) 0.0600 9.83 6.86
1996-Administration
Shares .............. (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1996-Class A Shares ...... (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1995-Institutional
Shares .............. (0.0287) -- -- (0.6046) 0.0301 9.77 6.75
1995-Administration
Shares .............. (0.0275) -- -- (0.5803) 0.0300 9.77 6.48
1995-Class A
Shares/(c)/.......... (0.0134) -- -- (0.2831) (0.0200) 9.77 2.74/(f)/
1994-Institutional
Shares .............. -- -- -- (0.4486) (0.2600) 9.74 1.88
1994-Administration
Shares .............. -- -- -- (0.4239) (0.2600) 9.74 1.63
1993-Institutional
Shares .............. (0.0024) -- -- (0.4421) (0.0400) 10.00 4.13
1993-Administration
Shares/(e)/.......... (0.0027) -- -- (0.2173) (0.0200) 10.00 2.01/(f)/
1992-Institutional
Shares .............. -- -- -- (0.5470) 0.0100 10.04 6.12
For the Period July 17, 1991/(g)/through October 31
- ------------------------------------------------------
1991-Institutional Shares. -- -- -- (0.1553) 0.0300 10.03 2.14/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
---------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. 0.45%/(b)/ 6.08%/(b)/ 25.64% $549,611 0.51%/(b)/ 6.02%/(b)/
1997-Administration
Shares .............. 0.70/(b)/ 5.83/(b)/ 25.64 4,182 0.76/(b)/ 5.77/(b)/
1997-Service
Shares/(m)/ ......... 0.95/(b)/ 5.64/(b)/ 25.64 22 1.01/(b)/ 5.58/(b)/
1997-Class A Shares ...... 0.70/(b)/ 5.61/(b)/ 25.64 39,063 1.01/(b)/ 5.30/(b)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 0.45 5.85 52.36 613,149 0.51 5.79
1996-Administration
Shares .............. 0.70 5.59 52.36 3,792 0.76 5.53
1996-Class A Shares ...... 0.70 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares .............. 0.46 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares .............. 0.71 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares/(c)/.......... 0.69/(b)/ 5.87/(b)/ 24.12 15,203 1.01/(b)/ 5.55/(b)/
1994-Institutional
Shares .............. 0.46 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares .............. 0.71 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares .............. 0.45 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares/(e)/.......... 0.70/(b)/ 3.81/(b)/ 103.74 5,326 0.73/(b)/ 3.78/(b)/
1992-Institutional
Shares .............. 0.42 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g)through October 31,
- ------------------------------------------------------
1991-Institutional
Shares .............. 0.20/(b)/ 7.31/(b)/ 145.67/(b)/ 239,642 1.02/(b)/ 6.49/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. $9.83 $0.3287/(a)/ $(0.0700)/(a)/ -- $0.2587 $(0.3287) --
1997-Administration
Shares .............. 9.85 0.3175/(a)/ (0.0700)/(a)/ -- 0.2475 (0.3175) --
1997-Service Shares ...... 9.82 0.3043/(a)/ (0.0700)/(a)/ -- 0.2343 (0.3043) --
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. 9.82 0.6290/(a)/ 0.0136/(a)/ -- 0.6426 (0.6326) --
1996-Administration
Shares/(h)/.......... 9.86 0.3837/(a)/ 0.0003/(a)/ -- 0.3840 (0.3940) --
1996-Service
Shares/(i)/.......... 9.72 0.3134/(a)/ 0.1018/(a)/ -- 0.4152 (0.3152) --
1995-Institutional Shares. 9.64 0.6652/(a)/ 0.1666/(a)/ -- 0.8318 (0.6518) --
1995-Administration
Shares .............. 9.64 0.2384/(a)/ (0.0433)/(a)/ -- 0.1951 (0.2051) --
1994-Institutional Shares. 10.14 0.5628/(a)/ (0.4592)/(a)/ -- 0.1036 (0.5598) (0.0438)
1994-Administration
Shares .............. 10.14 0.5329/(a)/ (0.4539)/(a)/ -- 0.0790 (0.5352) (0.0438)
1993-Institutional Shares. 10.16 0.5627 (0.0135)/(d)/ -- 0.5492 (0.5627) --
1993-Administration
Shares/(e)/.......... 10.23 0.2725 (0.0900)/(d)/ -- 0.1825 (0.2725) --
1992-Institutional Shares. 10.22 0.6703 (0.0600)/(d)/ -- 0.6103 (0.6703) --
1991-Institutional Shares. 10.00 0.8020 0.2200/(d)/ -- 1.0220 (0.8020) --
1990-Institutional Shares. 10.07 0.8300 (0.0700)/(d)/ -- 0.7600 (0.8300) --
1989-Institutional Shares. 10.10 0.8800 -- -- 0.8800 (0.8800) --
For the Period August 15, 1988/(g)/through October 31,
- ---------------------------------------------------------------
1988-Institutional Shares. 10.00 0.1800 0.1000/(d)/ -- 0.2800 (0.1800) --
<CAPTION>
Distributions to shareholders
-----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. -- -- -- $(0.3287) $(0.0700) $9.76 2.67%/(f)/
1997-Administration
Shares .............. -- -- -- (0.3175) (0.0700) 9.78 2.55/(f)/
1997-Service Shares ...... -- -- -- (0.3043) (0.0700) 9.75 2.42/(f)/
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. -- -- -- (0.6326) 0.0100 9.83 6.75
1996-Administration
Shares/(h)/.......... -- -- -- (0.3940) (0.0100) 9.85 4.00/(f)/
1996-Service
Shares/(i)/.......... -- -- -- (0.3152) 0.1000 9.82 4.35/(f)/
1995-Institutional Shares. -- -- -- (0.6518) 0.1800 9.82 8.97
1995-Administration
Shares .............. -- -- -- (0.2051) (0.0100) 9.63/(h)/ 2.10
1994-Institutional Shares. -- -- -- (0.6036) (0.5000) 9.64 0.99
1994-Administration
Shares .............. -- -- -- (0.5790) (0.5000) 9.64 0.73
1993-Institutional Shares. (0.0065) -- -- (0.5692) (0.0200) 10.14 5.55
1993-Administration
Shares/(e)/.......... -- -- -- (0.2725) (0.0900) 10.14 1.74
1992-Institutional Shares. -- -- -- (0.6703) (0.0600) 10.16 6.24
1991-Institutional Shares. -- -- -- (0.8020) 0.2200 10.22 10.93
1990-Institutional Shares. -- -- -- (0.8300) (0.0700) 10.00 8.23
1989-Institutional Shares. -- -- (0.0300) (0.9100) (0.0300) 10.07 9.08
For the Period August 15, 1988/(g)/through October 31
- ---------------------------------------------------------------
1988-Institutional Shares. -- -- -- (0.1800) 0.1000 10.10 3.30/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
-----------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. 0.45%/(b)/ 6.44%/(b)/ 43.72% $99,824 0.73%/(b)/ 6.16%/(b)/
1997-Administration
Shares .............. 0.70/(b)/ 6.22/(b)/ 43.72 1,504 0.98/(b)/ 5.94/(b)/
1997-Service Shares ...... 0.95/(b)/ 5.94/(b)/ 43.72 2,522 1.23/(b)/ 5.66/(b)/
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. 0.45 6.44 115.45 99,944 0.71 6.18
1996-Administration
Shares/(h)/.......... 0.70/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/.......... 0.95/(b)/ 6.05/(b)/ 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional Shares. 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares .............. 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional Shares. 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares .............. 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional Shares. 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/.......... 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional Shares. 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional Shares. 0.45 8.25 155.44 158,848 0.79 7.91
1990-Institutional Shares. 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional Shares. 0.46 8.71 137.37 31,015 1.39 7.78+
For the Period August 15, 1988/(g)/through October 31
- ---------------------------------------------------------------
1988-Institutional Shares. 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. $9.96 $0.2097/(a)/ $(0.0200)/(a)/ -- $0.1897 $(0.2097) --
1997-Administration
Shares ................ 9.96 0.1976/(a)/ (0.0200)/(a)/ -- 0.1776 (0.1976) --
1997-Service Shares....... 9.97 0.1852/(a)/ (0.0300)/(a)/ -- 0.1552 (0.1852) --
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. 9.94 0.4192/(a)/ 0.0200/(a)/ -- 0.4392 (0.4192) --
1996-Administration
Shares ................ 9.94 0.3944/(a)/ 0.0200/(a)/ -- 0.4144 (0.3944) --
1996-Service Shares....... 9.95 0.3697/(a)/ 0.0200/(a)/ -- 0.3897 (0.3697) --
1995-Institutional Shares. 9.79 0.4235/(a)/ 0.1500/(a)/ -- 0.5735 (0.4235) --
1995-Administration
Shares ................ 9.79 0.3989/(a)/ 0.1500/(a)/ -- 0.5489 (0.3989) --
1995-Service Shares ...... 9.79 0.3744/(a)/ 0.1600/(a)/ -- 0.5344 (0.3744) --
1994-Institutional Shares. 10.23 0.3787/(a)/ (0.3575)/(a)/ -- 0.0212 (0.3787) (0.0825)
1994-Administration
Shares ................ 10.23 0.3537/(a)/ (0.3575)/(a)/ -- (0.0038) (0.3537) (0.0825)
1994-Service Shares/(j)/.. 9.86 0.0475/(a)/ (0.0700)/(a)/ -- (0.0225) (0.0475) --
1993-Institutional Shares. 9.93 0.3834 0.3000/(d)/ -- 0.6834 (0.3834) --
1993-Administration
Shares/(j)/............ 10.16 0.1555 0.0720/(d)/ -- 0.2275 (0.1555) --
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. 10.00 0.0341 (0.0700)/(d)/ -- (0.0359) (0.0341) --
<CAPTION>
Distributions to shareholders
---------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------------------
1997-Institutional Shares. -- -- -- $(0.2097) $(0.0200) $9.94 1.91%/(f)/
1997-Administration
Shares ................ -- -- -- (0.1976) (0.0200) 9.94 1.79/(f)/
1997-Service Shares....... -- -- -- (0.1852) (0.0300) 9.94 1.56/(f)/
For the Year Ended October 31,
- -------------------------------------------------------------------
1996-Institutional Shares. -- -- -- (0.4192) 0.0300 9.96 4.50
1996-Administration
Shares ................ -- -- -- (0.3944) 0.0300 9.96 4.24
1996-Service Shares....... -- -- -- (0.3697) 0.0200 9.97 3.98
1995-Institutional Shares. -- -- -- (0.4235) 0.1500 9.94 5.98
1995-Administration
Shares ................ -- -- -- (0.3989) 0.1500 9.94 5.76
1995-Service Shares ...... -- -- -- (0.3744) 0.1600 9.95 5.59
1994-Institutional Shares. -- -- -- (0.4612) (0.4400) 9.79 0.17
1994-Administration
Shares ................ -- -- -- (0.4362) (0.4400) 9.79 (0.11)
1994-Service Shares/(j)/.. -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/
1993-Institutional Shares. -- -- -- (0.3834) 0.3000 10.23 7.03
1993-Administration
Shares/(j)/............ -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
-----------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------------------
1997-Institutional Shares. 0.45%/(b)/ 4.24%/(b)/ 99.59% $37,159 1.05%/(b)/ 3.64%/(b)/
1997-Administration
Shares ................ 0.70/(b)/ 4.03/(b)/ 99.59 113 1.30/(b)/ 3.43/(b)/
1997-Service Shares....... 0.95/(b)/ 3.77/(b)/ 99.59 1,045 1.55/(b)/ 3.17/(b)/
For the Year Ended October 31,
- -------------------------------------------------------------------
1996-Institutional Shares. 0.45 4.21 231.65 34,814 1.01 3.65
1996-Administration
Shares ................ 0.70 3.96 231.65 48 1.26 3.40
1996-Service Shares....... 0.95 3.74 231.65 695 1.51 3.18
1995-Institutional Shares. 0.45 4.31 259.52 58,389 0.77 3.99
1995-Administration
Shares ................ 0.70 4.14 259.52 46 1.02 3.82
1995-Service Shares ...... 0.95 3.87 259.52 454 1.27 3.55
1994-Institutional Shares. 0.45 3.74 354.00 83,704 0.61 3.58
1994-Administration
Shares ................ 0.70 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/.. 0.95/(b)/ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares. 0.41 3.70 404.60 115,803 1.06 3.05
1993-Administration
Shares/(j)/............ 0.70/(b)/ 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. 0.05/(b)/ 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. $9.85 $0.3236 $(0.1403) $(0.0003) $0.1830 $(0.3230) --
1997-Administrative
Shares .............. 9.84 0.3108 (0.1398) (0.0003) 0.1707 (0.3107) --
1997-Service Shares ..... 9.86 0.2991 (0.1399) (0.0003) 0.1589 (0.2989) --
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 10.00 0.6448 (0.0704) -- 0.5744 (0.6438) (0.0806)
1996-Administrative
Shares/(l)/ ......... 9.91 0.4083 (0.0703) -- 0.3380 (0.4080) --
1996-Service
Shares/(l)/ ......... 9.77 0.3756 0.0898 -- 0.4654 (0.3754) --
1995-Institutional
Shares .............. 9.24 0.6423 0.7610 -- 1.4033 (0.6433) --
For the Period January 5, 1994/(g)/through October 31,
- ------------------------------------------------------
1994-Institutional Shares. 10.00 0.4648 (0.7617) -- (0.2969) (0.4648) --
<CAPTION>
Distributions to shareholders
-----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(k)/
------------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------
1997-Institutional
Shares .............. -- -- -- $(0.3230) $(0.1400) $9.71 1.87%/(f)/
1997-Administrative
Shares .............. -- -- -- (0.3107) (0.1400) 9.70 1.75/(f)/
1997-Service Shares ..... -- -- -- (0.2989) (0.1400) 9.72 1.63/(f)/
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares .............. -- -- -- (0.7244) (0.1500) 9.85 5.98
1996-Administrative
Shares/(l)/ ......... -- -- -- (0.4080) (0.0700) 9.84 3.56/(f)/
1996-Service
Shares/(l)/ ......... -- -- -- (0.3754) 0.0900 9.86 4.90/(f)/
1995-Institutional
Shares .............. -- -- -- (0.6433) 0.7600 10.00 15.72
For the Period January 5, 1994/(g)/through October 31,
- -------------------------------------------------------
1994-Institutional Shares. -- -- -- (0.4648) (0.7617) 9.24 (3.00)
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. 0.45%/(b)/ 6.66%/(b)/ 174.52% $73,483 0.76%/(b)/ 6.35%/(b)/
1997-Administrative
Shares .............. 0.70/(b)/ 6.49/(b)/ 174.52 6,194 1.01/(b)/ 6.18/(b)/
1997-Service Shares ..... 0.95/(b)/ 6.22/(b)/ 174.52 1,108 1.26/(b)/ 5.91/(b)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 0.45 6.51 414.20 72,061 0.83 6.13
1996-Administrative
Shares/(l)/ ......... 0.70/(b)/ 6.41/(b)/ 414.20 702 1.08/(b)/ 6.03/(b)/
1996-Service
Shares/(l)/ ......... 0.95/(b)/ 6.37/(b)/ 414.20 381 1.33/(b)/ 5.99/(b)/
1995-Institutional
Shares .............. 0.45 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994/(g)/through October 31,
- ------------------------------------------------------
1994-Institutional
Shares .............. 0.45/(b)/ 6.48/(b)/ 288.25 24,508 1.46/(b)/ 5.47/(b)/
</TABLE>
/(a)/ Calculated based on the average shares outstanding methodology.
/(b)/ Annualized.
/(c)/ Class A share activity commenced on May 15, 1995.
/(d)/ Includes the effect of mortgage dollar roll transactions.
/(e)/ Administration share activity commenced on April 15, 1993.
/(f)/ Not annualized.
/(g)/ Commencement of operations.
/(h)/ Short Duration Government Fund Administration shares were redeemed in full
on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
/(i)/ Service share activity commenced on April 10, 1996.
/(j)/ Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
/(k)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. For Class A shares only, total return would be reduced if a
sales charge were taken into account.
/(l)/ Administration and Service share activity commenced on February 28, 1996
and March 13, 1996 respectively.
/(m)/ Service share activity commenced on March 27, 1997.
/(n)/ Includes the balancing effect of calculating per share amounts.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
- -------------------------------------------------------------------------------
This Semiannual Report is authorized for distribution to prospective investors
only when preceded or accompanied by a Goldman Sachs Trust Prospectus which
contains facts concerning each Fund's objectives and policies, management,
expenses and other information.
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
John P. McNulty
Mary P. McPherson
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser,
Distributor and Transfer Agent
FISARINST
- ------------------------------------------------------------------------------
The Goldman Sachs
Fixed Income Funds
- ------------------------------------------------------------------------------
Semiannual Report
April 30, 1997
Goldman Sachs Adjustable Rate Government Fund
Goldman Sachs Short Duration Government Fund
Goldman Sachs Short Duration Tax-Free Fund
Goldman Sachs Core Fixed Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
- ------------------------------------------------------------------------------
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/1/
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
- ------------------------
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of a Fund's fiscal
year end.
1-A
<PAGE>
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-1
have a superior capacity for repayment. Notes bearing the designation P-2 have
a strong capacity for repayment.
2-A
<PAGE>
Description of Ratings of State and Municipal
Commercial Paper
---------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an original
maturity in excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
3-A
<PAGE>
AA: Bonds and debt rated AA have a very strong capacity to pay interest
and repay principal and differ from the higher rated issues only in small
degree.
A: Bonds and debt rated A have a very strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB: Bonds and debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB-rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
4-A
<PAGE>
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC-debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A plus sign (+) is added for those issues determined to possess
overwhelming safety characteristics. An SP-2 designation indicates a
satisfactory capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by Standard & Poor's is described as having a strong
degree of safety regarding timely payment.
5-A
<PAGE>
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issued carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable t the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity for
timely payment.
C: This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
FITCH INVESTORS SERVICE, L.P.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories
6-A
<PAGE>
are not significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated F-1+.
A: Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
PLUS (+) AND MINUS (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA, DDD, DD, or D Categories.
7-A
<PAGE>
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
8-A
<PAGE>
DUFF & PHELPS
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
BBB+, BBB, BBB-: Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
9-A
<PAGE>
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
DUFF 3: Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
DUFF 4: Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DUFF 5: Issuer failed to meet scheduled principal and/or interest
payments.
Notes: Bonds which are unrated may expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to
the risks of lower-rated bonds. The Fund is dependent on the
Investment Adviser's judgment, analysis and experience in the
evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
10-A
<PAGE>
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- - Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- - Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
11-A
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of
the interests of the firm and its clients.
INTEGRITY AND HONESTY ARE THE HEART OF OUR BUSINESS. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms, with
partners' capital of approximately $5.3 billion as of November 29, 1996.
. Thirty-four offices worldwide where professionals focus on identifying
financial opportunities.
. The number one underwriter of all international equity issues from (1993-
1996).*
. Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
. The number one lead manager of U.S. common stock offerings from (1989-
1996).*
. The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1996).
* Source: Securities Data Corporation. Ranking excludes REITS, Trusts and
-----------------------------------
Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Goldman Sachs takes Sears public (longest-standing client
relationship)
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 Goldman Sachs opens London office
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Goldman Sachs provides advisory services for the largest privatization
in the region of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
Goldman Sachs increases assets under management by 100% over 1996
3-B
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
GOLDMAN SACHS MUNICIPAL INCOME FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS HIGH YIELD FUND
(EACH A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is not a
prospectus. This Additional Statement describes each of the above-referenced
series of Goldman Sachs Trust. This Additional Statement should be read in
conjunction with the prospectus for the Institutional Shares of Goldman Sachs
Adjustable Rate Government Fund, Goldman Sachs Short Duration Government Fund,
Goldman Sachs Short Duration Tax-Free Fund, Goldman Sachs Government Income
Fund, Goldman Sachs Municipal Income Fund, Goldman Sachs Core Fixed Income Fund,
Goldman Sachs Global Income Fund and Goldman Sachs High Yield Fund, dated August
15, 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
Introduction B-3
Other Investments and Practices B-11
Investment Restrictions B-58
Management B-61
Portfolio Transactions B-77
Shares of the Trust B-80
Net Asset Value B-86
Taxation B-88
Performance Information B-100
Other Information B-112
Financial Statements B-113
Appendix A 1-A
Appendix B 1-B
The date of this Additional Statement is August 15, 1997.
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN SACHS ASSET
ADVISER TO GOLDMAN SACHS MANAGEMENT INTERNATIONAL
SHORT DURATION TAX-FREE FUND, ADVISER TO GOLDMAN SACHS
GOLDMAN SACHS GOVERNMENT GLOBAL INCOME FUND
INCOME FUND, GOLDMAN SACHS 133 PETERBOROUGH COURT
MUNICIPAL INCOME FUND, LONDON EC4A 2BB, ENGLAND
GOLDMAN SACHS CORE FIXED
INCOME FUND AND GOLDMAN
SACHS HIGH YIELD FUND GOLDMAN, SACHS & CO.
ONE NEW YORK PLAZA DISTRIBUTOR
NEW YORK, NEW YORK 10004 85 BROAD STREET
NEW YORK, NY 10004
GOLDMAN SACHS FUNDS
MANAGEMENT, L.P.
ADVISER TO GOLDMAN SACHS GOLDMAN, SACHS & CO.
ADJUSTABLE RATE GOVERNMENT FUND TRANSFER AGENT
AND GOLDMAN SACHS SHORT DURATION 4900 SEARS TOWER
GOVERNMENT FUND CHICAGO, ILLINOIS 60606
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
TOLL FREE (IN U.S.) .......800-621-2550
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") was formed under the laws of the
state of Delaware on January 28, 1997. The Trust is a successor to a
Massachusetts business trust that was merged with the Trust on April 30, 1997.
The Trust assumed its current name on March 22, 1991. The Trustees of the Trust
have authority under the Declaration of Trust to create and classify shares into
separate series and to classify and reclassify any series of shares into one or
more classes without further action by shareholders. Pursuant thereto, the
Trustees have created the following series, among others: Goldman Sachs
Adjustable Rate Government Fund ("Adjustable Rate Fund"), Goldman Sachs Core
Fixed Income Fund ("Core Fund"), Goldman Sachs Global Income Fund ("Global
Income Fund"), Goldman Sachs Government Income Fund ("Government Income Fund"),
Goldman Sachs Municipal Income Fund ("Municipal Income Fund"), Goldman Sachs
Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund"), Goldman Sachs
Short Duration Government Fund ("Short Duration Government Fund") and Goldman
Sachs High Yield Fund ("High Yield Fund") and 27 other series of shares.
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund, Short Duration Government
Fund and High Yield Fund are each sometimes referred to herein as a "Fund" and
collectively as the "Funds." Short Duration Government Fund, Short Duration
Tax-Free Fund and Core Fund are each authorized to issue six classes of shares:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares. Adjustable Rate Fund is authorized to issue
four classes of shares: Institutional Shares, Administration Shares, Service
Shares and Class A Shares. Government Income Fund, Municipal Income Fund,
Global Income Fund and High Yield Fund are authorized to issue five classes of
shares: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. Additional series may be added in the future from time to time.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Government Income Fund, Municipal Income Fund, Short Duration Tax-
Free Fund and High Yield Fund. Goldman Sachs Asset Management International
("GSAMI"), an affiliate of Goldman Sachs, serves as investment adviser to the
Global Income Fund. Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate
of Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI and GSFM are each sometimes
referred to herein as the "Adviser" and collectively herein as the "Advisers."
In addition, Goldman Sachs serves as each Fund's distributor and transfer agent.
Each Fund's custodian is State Street Bank and Trust Company.
Because each Fund's shares may be redeemed upon request of a
shareholder on any business day at net asset value, the Funds offer greater
liquidity than many competing investments, such as certificates of deposit and
direct investments in certain securities in which the respective Fund may
invest. However,
B-3
<PAGE>
unlike certificates of deposits, shares of the Funds are not insured by the
Federal Deposit Insurance Corporation.
The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of each Fund's investment objective and policies.
Investing in the Funds entails certain risks and there is no assurance that a
Fund will achieve its objective.
EXPERIENCED MANAGEMENT. Successfully creating and managing a
----------------------
diversified portfolio of securities requires professionals with extensive
experience. Goldman Sachs' highly skilled portfolio management team brings
together many years of experience in the analysis, valuation and trading of U.S.
and foreign fixed-income securities.
ADJUSTABLE RATE FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Fund and Short Duration Government Fund are both
designed for investors who seek a high level of high current income, relative
stability of principal and the high credit quality of securities issued or
guaranteed by the U.S. government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and accounting
burdens involved in direct investment.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short Duration Government Fund differently than the investments
normally purchased by such investors. Relative to U.S. Treasury and non-
fluctuating money market instruments, the market value of adjustable rate
mortgage securities in which Adjustable Rate and Short Duration Government Funds
may invest may be adversely affected by increases in market interest rates.
Conversely, decreases in market interest rates may result in less capital
appreciation for adjustable rate mortgage securities in relation to U.S.
Treasury and money market investments.
HIGH CURRENT INCOME. Adjustable Rate and Short Duration Government
-------------------
Funds seek a higher current yield than a money market fund or than that offered
by bank certificates of deposit and money market accounts. However, the
Adjustable Rate and Short Duration Government Funds do not maintain a constant
net asset value per share and are subject to greater fluctuations in the value
of their shares than a money market fund. Unlike bank certificates of deposit
and money market accounts, investments in shares of the Funds are not insured or
guaranteed by any government agency. Each of the Adjustable Rate and Short
Duration Government Funds seeks to provide such high current income without
sacrificing credit quality.
RELATIVE LOW VOLATILITY OF PRINCIPAL. Adjustable Rate Fund seeks to
-------------------------------------
minimize net asset value fluctuations by investing primarily in adjustable rate
mortgage pass-through securities and
B-4
<PAGE>
other mortgage securities with periodic interest rate resets, maintaining a
maximum duration of two years and a target duration equal to that of a six-month
to one-year U.S. Treasury security, and utilizing certain active management
techniques to seek to hedge interest rate risk. Short Duration Government Fund
seeks to minimize net asset value fluctuations by utilizing certain interest
rate hedging techniques and by maintaining a maximum duration of not more than
three years. The duration target of the Short Duration Government Fund is that
of the 2-year U.S. Treasury Security plus or minus .5 years. There is no
assurance that these strategies for the Adjustable Rate Fund and Short Duration
Government Fund will always be successful.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
-------------------------------------------
securities of the Government National Mortgage Association ("Ginnie Mae") and
other mortgage-backed securities may prefer professional management and
administration of their mortgage-backed securities portfolios. A well-
diversified portfolio of such securities emphasizing minimal fluctuation of net
asset value requires significant active management as well as significant
accounting and administrative resources. Members of Goldman Sachs' highly
skilled portfolio management team bring together many years of experience in the
analysis, valuation and trading of U.S. fixed-income securities.
GOVERNMENT INCOME FUND
Government Income Fund is designed for investors who seek the
relatively high current income, relative safety of principal and the high credit
quality of securities issued by the U.S. government or its agencies,
instrumentalities or sponsored enterprises, without incurring the administrative
and account burdens involved in direct investment.
Government Income Fund's overall returns are generally likely to move
in the same direction as interest rates. Therefore, when interest rates
decline, Government Income Fund's return is also likely to decline. In exchange
for accepting a higher degree of share price fluctuation, investors have the
potential to achieve a higher return from the Government Income Fund than from
shorter-term investments.
High Current Income. Government Income Fund is designed to have a
-------------------
higher current yield than a money market fund, since it can invest in longer-
term, higher yielding securities, and may utilize certain investment techniques
not available to a money market fund. Similarly, Government Income Fund's yield
is expected to exceed that offered by bank certificates of deposit and money
market accounts. However, Government Income Fund does not maintain a constant
net asset value per share and is subject to greater fluctuation in the value of
its shares than a money market fund. Unlike bank certificates of deposit and
money market accounts, investments in shares of Government Income Fund are not
insured or guaranteed by any government agency. Government Income Fund seeks
B-5
<PAGE>
to provide high current income without, however, sacrificing credit quality.
Liquidity. Because Government Income Fund's shares may be redeemed upon
---------
request of a shareholder on any business day at net asset value, Government
Income Fund offers greater liquidity than many competing investments such as
certificates of deposit and direct investments in certain securities in which
Government Income Fund may invest.
A Sophisticated Investment Process. Government Income Fund's
----------------------------------
investment process starts with a review of trends for the overall economy as
well as for different sectors of the U.S. government and mortgage-backed
securities markets. Goldman Sachs' portfolio managers then analyze yield
spreads, implied volatility and the shape of the yield curve. In planning the
Government Income Fund's portfolio investment strategies, the Adviser is able to
draw upon the economic and fixed-income research resources of Goldman Sachs.
The Adviser will use a sophisticated analytical process involving Goldman Sachs'
proprietary mortgage prepayment model and option-adjusted spread model to
structure and maintain the Government Income Fund's investment portfolio. In
determining the Government Income Fund's investment strategy and making market
timing decisions, the Adviser will have access to information from Goldman
Sachs' economists, fixed-income analysts and mortgage specialists.
Convenience of a Fund Structure. Government Income Fund eliminates
-------------------------------
many of the complications that direct ownership of U.S. government and mortgage-
backed securities entails. Government Income Fund automatically reinvests all
principal payments within the Fund and distributes only current income each
month, thereby conserving principal and eliminating the investor's need to
segregate and reinvest the principal portion of each payment on his own.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS
Short Duration Tax-Free Fund and Municipal Income Fund (the "Tax Exempt
Funds") are not money market funds. Each is designed for investors who seek the
tax benefits associated with investing in municipal securities and who are able
to accept greater risk with the possibility of higher returns than investors in
municipal money market funds. While municipal money market funds almost always
maintain a constant net asset value, they must meet stringent high quality
credit standards, their portfolios must be broadly diversified and their
portfolio securities must have remaining maturities of 397 days or less. An
example of an "eligible" investment for the Tax Exempt Funds is auction rate
municipal securities, which generally have higher yields than money market
municipal securities, but which typically are not eligible investments for
municipal money market funds.
In addition, unlike a municipal money market fund, the Tax Exempt
Funds' increased investment flexibility permits their portfolios to be more
easily adjusted to reflect the shape of the
B-6
<PAGE>
current yield curve as well as to respond to anticipated developments that might
affect the shape of the yield curve.
Investors who wish to invest in municipal securities may find that a
mutual fund structure offers some important advantages when compared to
investing in individual municipal securities, including:
. The ratings given to municipal securities by the rating
organizations are difficult to evaluate. For example, some
municipal securities with relatively low credit ratings have yields
comparable to municipal securities with much higher ratings. The
credit research professionals at Goldman Sachs closely follow
market events and are well positioned to judge current and expected
credit conditions of municipal issuers;
. Because of the relative inefficiency of the secondary market in
municipal securities, the value of an individual municipal security
is often difficult to determine. As such, investors may obtain a
wide range of different prices when asking for quotes from
different dealers. In addition, a dealer may have a large
inventory of a particular issue that it wants to reduce.
Obtaining the best overall prices can require extensive
negotiation, which is a function performed by the portfolio
manager;
. Market expertise is also an important consideration for municipal
investors, and because the Tax Exempt Funds take relatively large
positions in different securities, the Tax Exempt Funds may be able
to obtain more favorable prices in the municipal securities market
than investors with relatively small positions; and
. Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
designed to provide this diversification.
CORE FUND
Core Fund is designed for investors seeking a total return consisting
of both income and capital appreciation that exceeds the total return of the
Lehman Brothers Aggregate Bond Index, without incurring the administrative and
accounting burdens involved in direct investment. Such investors also prefer
liquidity, experienced professional management and administration, a
sophisticated investment process, and the convenience of a mutual fund
structure. Core Fund may be appropriate as part of a balanced investment
strategy consisting of stocks, bonds and cash or as a complement to positions in
other types of fixed-income investments.
B-7
<PAGE>
Core Fund's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fund's return is likely to increase. Conversely, when interest rates
increase, Core Fund's return is likely to decline. However, the Adviser
believes that, given the flexibility of managers to invest in a diversified
portfolio of securities, Core Fund's return is not likely to decline as quickly
as that of other fixed-income funds with a comparable average portfolio
duration. In exchange for accepting a higher degree of potential share price
fluctuation, investors have the opportunity to achieve a higher return from Core
Fund than from shorter-term investments.
A number of investment strategies will be used to achieve the Core
Fund's investment objective, including market sector selection, determination of
yield curve exposure, and issuer selection. In addition, the Adviser will
attempt to take advantage of pricing inefficiencies in the fixed-income markets.
Market sector selection is the underweighting or overweighting of one or more of
the five market sectors (i.e., U.S. Treasuries, U.S. government agencies,
corporate securities, mortgage-backed securities and asset-backed securities) in
which the Fund primarily invests. The decision to overweight or underweight a
given market sector is based on expectations of future yield spreads between
different sectors. Yield curve exposure strategy consists of overweighting or
underweighting different maturity sectors to take advantage of the shape of the
yield curve. Issuer selection is the purchase and sale of corporate securities
based on a corporation's current and expected credit standing. To take
advantage of price discrepancies between securities resulting from supply and
demand imbalances or other technical factors, the Fund may simultaneously
purchase and sell comparable, but not identical, securities. The Adviser will
have access to the research of, and proprietary technical models developed by,
Goldman Sachs and will apply quantitative and qualitative analysis in
determining the appropriate allocations among the categories of issuers and
types of securities.
A SOPHISTICATED INVESTMENT PROCESS. Core Fund will attempt to control
----------------------------------
its exposure to interest rate risk, including overall market exposure and the
spread risk of particular sectors and securities, through active portfolio
management techniques. Core Fund's investment process starts with a review of
trends for the overall economy as well as for different sectors of the fixed-
income securities markets. Goldman Sachs' portfolio managers then analyze
yield spreads, implied volatility and the shape of the yield curve. In planning
Core Fund's portfolio investment strategies, the Adviser is able to draw upon
the economic and fixed-income research resources of Goldman Sachs. The Adviser
will use a sophisticated analytical process including Goldman Sachs' proprietary
mortgage prepayment model and option-adjusted spread model to assist in
structuring and maintaining Core Fund's investment portfolio. In determining
Core Fund's investment strategy and making market timing decisions, the Adviser
will have
B-8
<PAGE>
access to input from Goldman Sachs' economists, fixed-income analysts and
mortgage specialists.
GLOBAL INCOME FUND
Global Income Fund is designed for investors seeking a combination of
high income, capital appreciation, stability of principal, experienced
professional management, flexibility and liquidity. However, investing in the
Fund involves certain risks and there is no assurance that the Fund will achieve
its investment objective.
In selecting securities for the Fund, portfolio managers consider such
factors as the security's duration, sector and credit quality rating as well as
the security's yield and prospects for capital appreciation. In determining the
countries and currencies in which the Fund will invest, the Fund's portfolio
mangers form opinions based primarily on the views of Goldman Sachs' economists
as well as information provided by securities dealers, including information
relating to factors such as interest rates, inflation, monetary and fiscal
policies, taxation, and political climate. The portfolio managers apply the
Black-Litterman Model (the "Model") to their views to develop a portfolio that
produces, in the view of the Adviser, the optimal expected return for a given
level of risk. The Model factors in the opinions of the portfolio managers,
adjusting for their level of confidence in such opinions, with the views implied
by an international capital asset pricing formula. The Model is also used to
maintain the level of portfolio risk within the guidelines established by the
Adviser.
High Income. Global Income Fund's portfolio managers will seek out
-----------
the highest yielding bonds in the global fixed-income market that meet the
Global Income Fund's credit quality standards and certain other criteria.
Capital Appreciation. Investing in the foreign bond markets offers
--------------------
the potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic strength.
However, there is a risk of capital depreciation as a result of unanticipated
interest rate and currency fluctuations.
Portfolio Management Flexibility. Global Income Fund is actively
--------------------------------
managed. The Fund's portfolio managers invest in countries that, in their
judgment, meet the Fund's investment guidelines and often have strong currencies
and stable economies and in securities that they believe offer favorable
performance prospects.
Relative Stability of Principal. Global Income Fund may be able to
-------------------------------
reduce principal fluctuation by investing in foreign countries with economic
policies or business cycles different from
B-9
<PAGE>
those of the United States and in foreign securities markets that do not
necessarily move in the same direction or magnitude as the U.S. market.
Investing in a broad range of U.S. and foreign fixed-income securities and
currencies reduces the dependence of the Fund's performance on developments in
any particular market to the extent that adverse events in one market are offset
by favorable events in other markets. The Fund's policy of investing primarily
in high quality securities may also reduce principal fluctuation. However,
there is no assurance that these strategies will always be successful.
Professional Management. Individual U.S. investors may prefer
-----------------------
professional management of their global bond and currency portfolios because a
well-diversified portfolio requires a large amount of capital and because the
size of the global market requires access to extensive resources and a
substantial commitment of time.
HIGH YIELD FUND
High Yield Fund's Investment Process. GSAM starts the investment
-------------------------------------
process with economic analysis based on research generated by the Goldman Sachs
Global Economic Research Group and others to determine broad growth trends,
industry-specific events and market forecasts. The market value of non-
investment grade fixed income securities tends to reflect individual
developments within a company to a greater extent than higher rated corporate
debt or Treasury bonds that react primarily to fluctuations in interest rates.
Therefore, determining the creditworthiness of issuers is critical. To that
end, the High Yield Fund's portfolio managers have access to Goldman, Sachs &
Co.'s highly regarded Credit Research and Global Investment Research
Departments, as well as analysis from the firm's High Yield Research Group, a
dedicated group of 14 professionals in the high yield and emerging market
corporate bond research area, consisting of industry and regional market
specialists. In addition, the Fund's portfolio managers may review the opinions
of the two largest independent credit rating agencies, Standard & Poor's Ratings
Group and Moody's Investors Services, Inc. High Yield Fund's portfolio managers
and credit analysts also conduct their own in-depth analysis of each issue
considered for inclusion in the Fund's portfolio. The portfolio managers and
credit analysts evaluate such factors as a company's competitive position, the
strength of its balance sheet, its ability to withstand economic downturns and
its potential to generate ample cash flow to service its debt. The ability to
accurately analyze a company's future cash flow by correctly anticipating the
impact of economic, industry-wide and specific events are critical to successful
high yield investing. GSAM's goal is to identify companies with the potential
to strengthen their balance sheets by increasing their earnings, reducing their
debt or effecting a turnaround. GSAM analyzes trends in a company's debt
picture (i.e., the level of its interest coverage) as well as new developments
in its capital structure on an ongoing basis. GSAM believes that this constant
reassessment is more
B-10
<PAGE>
valuable than relying on a "snapshot" view of a company's ability to service
debt at one or two points in time.
High Yield Fund's portfolio is diversified among different sectors and
industries on a global basis in an effort to reduce overall risk. While GSAM
will avoid excessive concentration in any one industry, the Fund's specific
industry weightings are the result of individual security selection. Emerging
market debt considered for the High Yield Fund's portfolio will be selected by
specialists knowledgeable about the political and economic structure of those
economies.
Return on and Risks of High Yield Securities. Over the past decade,
---------------------------------------------
high yield bonds have delivered consistently higher yields and total return (and
higher volatility) than either investment grade corporate bonds or U.S. Treasury
bonds. However, because these non-investment grade securities involve higher
risks in return for higher income, they are best suited to long-term investors
who are financially secure enough to withstand volatility and the risks
associated with such investments. See "Other Investments and Practices."
Different types of fixed income securities may react differently to changes in
the economy. High yield bonds, like stocks, tend to perform best when the
economy is strong, inflation is low and companies experience healthy profits,
which can lead to higher stock prices and higher credit ratings. Government
bonds are likely to appreciate more in a weaker economy when interest rates are
declining. In certain types of markets, adding some diversification in the high
yield asset class may help to increase returns and decrease overall portfolio
risk.
For high yield, non-investment grade securities, as for most
investments, there is a direct relationship between risk and return. Along with
their potential to deliver higher yields and greater capital appreciation than
most other types of fixed income securities, high yield securities are subject
to higher risk of loss, greater volatility and are considered speculative by
traditional investment standards. The most significant risk associated with
high yield securities is credit risk: the risk that the company issuing a high
yield security may have difficulty in meeting its principal and/or interest
payments on a timely basis. As a result, extensive credit research and
diversification are essential factors in managing risk in the high yield arena.
To a lesser extent, high yield bonds are also subject to interest rate risk:
when interest rates increase, the value of fixed income securities tends to
decline.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. government securities ("U.S. Government
Securities"), which are obligations issued or guaranteed by the U.S. government
and its agencies, instrumentalities or sponsored enterprises. Some U.S.
Government Securities (such as
B-11
<PAGE>
Treasury bills, notes and bonds, which differ only in their interest rates,
maturities and times of issuance) are supported by the full faith and credit of
the United States of America. Others, such as obligations issued or guaranteed
by U.S. government agencies, instrumentalities or sponsored enterprises, are
supported either by (a) the full faith and credit of the U.S. government (such
as securities of the Small Business Administration), (b) the right of the issuer
to borrow from the Treasury (such as securities of Federal Home Loan Banks), (c)
the discretionary authority of the U.S. government to purchase the agency's
obligations (such as securities of Federal National Mortgage Association
("Fannie Mae")) or (d) only the credit of the issuer (such as securities of the
Financing Corporation). The U.S. government is under no legal obligation, in
general, to purchase the obligations of its agencies, instrumentalities or
sponsored enterprises. No assurance can be given that the U.S. government will
provide financial support to the U.S. government agencies, instrumentalities or
sponsored enterprises in the future.
U.S. Government Securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, or its agencies, instrumentalities or sponsored
enterprises. U.S. Government Securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a substantial secondary market, such participations are regarded as illiquid.
Each Fund may also purchase U.S. Government Securities in private placements,
subject to the Fund's limitation on investment in illiquid securities.
The Funds may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the separate trading of registered
interest and principal of securities program ("STRIPS").
CUSTODIAL RECEIPTS
Each Fund may acquire custodial receipts in respect of U.S. Government
Securities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). For certain securities law purposes, custodial receipts
are not considered U.S. Government Securities.
B-12
<PAGE>
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
Adjustable Rate, Short Duration Government, Core, Global Income, High
Yield and Government Income Funds (collectively, the "Taxable Funds") may each
invest in mortgage loans and mortgage pass-through securities and other
securities representing an interest in or collateralized by adjustable and
fixed-rate mortgage loans ("Mortgage-Backed Securities").
GENERAL CHARACTERISTICS. Each mortgage pool underlying Mortgage-
-----------------------
Backed Securities consists of mortgage loans evidenced by promissory notes
secured by first mortgages or first deeds of trust or other similar security
instruments creating a first lien on owner occupied and non-owner occupied one-
unit to four-unit residential properties, multi-family (i.e., five or more)
properties, agriculture properties, commercial properties and mixed use
properties (the "Mortgaged Properties"). The Mortgaged Properties may consist
of detached individual dwelling units, multi-family dwelling units, individual
condominiums, townhouses, duplexes, triplexes, fourplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
The Mortgaged Properties may also include residential investment properties and
second homes.
The investment characteristics of adjustable and fixed rate Mortgage-
Backed Securities differ from those of traditional fixed-income securities. The
major differences include the payment of interest and principal on Mortgage-
Backed Securities on a more frequent (usually monthly) schedule, and the
possibility that principal may be prepaid at any time due to prepayments on the
underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed-income securities. As a result, a faster than expected
prepayment rate will reduce both the market value and the yield to maturity from
those which were anticipated. A prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity and market value.
To the extent that the Funds invest in Mortgage-Backed Securities, the Advisers
will seek to manage these potential risks by investing in a variety of Mortgage-
Backed Securities and by using certain hedging techniques.
ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). ARMs generally provide for a
---------------------------------------
fixed initial mortgage interest rate for a specified period of time.
Thereafter, the interest rates (the "Mortgage Interest Rates") may be subject to
periodic adjustment based on changes in the applicable index rate (the "Index
Rate"). The adjusted rate would be equal to the Index Rate plus a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some
mortgagors may find difficult to make. However, certain ARMs may provide that
the Mortgage Interest Rate may not be adjusted to a rate above an applicable
lifetime maximum rate or below an
B-13
<PAGE>
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-month or one-year
London Interbank Offered Rate, the prime rate of a specific bank or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury
rate, closely mirror changes in market interest rate levels. Others, such as
the 11th District Federal Home Loan Bank Cost of Funds index, tend to lag behind
changes in market rate levels and tend to be somewhat less volatile. The degree
of volatility in the market value of each Taxable Fund's portfolio and therefore
in the net asset value of each Taxable Fund's shares will be a function of the
length of the interest rate reset periods and the degree of volatility in the
applicable indices.
FIXED-RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans
-------------------------
included in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple
interest at fixed annual rates and have original terms to maturity ranging from
5 to 40 years. Fixed-Rate
B-14
<PAGE>
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
Taxable Funds may invest. These regulations may impair the ability of a
mortgage lender to enforce its rights under the mortgage documents. These
regulations may adversely affect the Funds' investments in Mortgage-Backed
Securities (including those issued or guaranteed by the U.S. government, its
agencies or instrumentalities) by delaying the Funds' receipt of payments
derived from principal or interest on mortgage loans affected by such
regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
-----------
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate proceeds of the sale of foreclosed property may not equal the
amounts owed on the Mortgage-Backed Securities.
Furthermore, courts in some cases have imposed general equitable principles
upon foreclosure generally designed to relieve the borrower from the legal
effect of default and have required lenders to undertake affirmative and
expensive actions to determine the causes for the default and the
likelihood of loan reinstatement.
2. Rights of Redemption. In some states, after foreclosure of a mortgage
--------------------
loan, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property, which right may diminish the
mortgagee's ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may
also reduce the monthly payments due under such mortgage loan, change the
rate of interest, reduce the principal balance of the loan to the then-
current appraised value of the related mortgaged property, alter the
mortgage loan repayment schedule and grant priority of certain liens over
the lien of the mortgage loan. If a court relieves a borrower's obligation
to repay amounts otherwise due on a mortgage loan, the mortgage loan
servicer will not be required to advance such amounts, and any loss may be
borne by the
B-15
<PAGE>
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 Taxable Funds are permitted to invest in other
types of Mortgage-Backed Securities that may be available in the future to the
extent consistent with their respective investment policies and objectives.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States authorized to guarantee the timely payment
of the principal of and interest on certificates that are based on and backed
by a pool of mortgage loans insured by the Federal Housing Administration ("FHA
Loans"), or guaranteed by the Veterans Administration ("VA Loans"), or by pools
of other eligible mortgage loans. In order to meet its obligations, Ginnie Mae
is authorized to borrow from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the U.S. Congress. Each Fannie Mae Certificate is
issued and guaranteed by Fannie Mae and represents an undivided interest in a
pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool consists of
residential mortgage loans ("Mortgage Loans") either previously owned by Fannie
Mae or purchased by it in connection with the formation of the Pool. The
Mortgage Loans may be either conventional Mortgage Loans (i.e., not insured or
guaranteed by any U.S. government agency) or
B-16
<PAGE>
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.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one- to four-family residential properties
or multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac
Certificate group may include whole loans, participation interests in whole
loans, undivided interests in whole loans and participations comprising another
Freddie Mac Certificate group.
CONVENTIONAL MORTGAGE LOANS. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-
rate mortgage loans with original terms to maturity of between five and thirty
years. Substantially all of these mortgage loans are secured by first liens on
one- to four-family residential properties or multi-family projects. Each
B-17
<PAGE>
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 Taxable Funds may invest in
--------------------------------
government guaranteed mortgage pass-through securities ("Mortgage Pass-
Throughs"), that are fixed or adjustable rate Mortgage-Backed Securities which
provide for monthly payments that are a "pass-through" of the monthly interest
and principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans, net of any fees or other amounts paid to
any guarantor, administrator and/or servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in one
---------------------------
or more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate.
Generally, each certificate will evidence the specified interest of the holder
thereof in the payments of principal or interest or both in respect of the
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of
B-18
<PAGE>
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. Each Taxable Fund may invest in multiple class securities
- -----------
including collateralized mortgage obligations ("CMOs") and REMIC Certificates
issued by U.S. government agencies, instrumentalities (such as Fannie Mae) and
sponsored enterprises (such as Freddie Mac) or, in the case of Core, Global and
Government Income Funds, by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class Mortgage-Backed
Securities represent direct ownership interests in, a pool of mortgage loans or
Mortgage-Backed Securities the payments on which are used to make payments on
the CMOs or multiple class Mortgage-Backed Securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class Mortgage-Backed Securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed Mortgage-Backed Securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a
B-19
<PAGE>
"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
highest priority on each payment date after interest due has been paid to all
classes entitled to receive interest currently. Shortfalls, if any, are added to
the amount payable on the next payment date. The PAC Certificate payment
schedule is taken into account in calculating the final distribution date of
each class of PAC. In order to create PAC tranches, one or more tranches
generally must be created that absorb most of the volatility in the underlying
Mortgage Assets. These tranches tend to have market prices and yields that are
much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The Taxable Funds may invest in
-----------------------------------
Stripped Mortgage-Backed Securities ("SMBS"), which are derivative multi-class
mortgage securities, issued or guaranteed by
B-20
<PAGE>
the U.S. government, its agencies or instrumentalities. Core Fund, Government
Income Fund and Global 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 each
Fund's limitation on investments in illiquid securities. The Adviser may
determine that SMBS which are U.S. Government Securities are liquid for purposes
of each Fund's limitation on investments in illiquid securities in accordance
with procedures adopted by the Board of Trustees. The market value of the class
consisting entirely of principal payments generally is unusually volatile in
response to changes in interest rates. The yields on a class of SMBS that
receives all or most of the interest from Mortgage Assets are generally higher
than prevailing market yields on other Mortgage-Backed Securities because their
cash flow patterns are more volatile and there is a greater risk that the
initial investment will not be fully recouped.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
RATINGS. The ratings assigned by a rating organization to Mortgage Pass-
-------
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things,
payment guarantees, letters of credit, pool insurance, subordination, or any
combination thereof.
B-21
<PAGE>
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due 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
B-22
<PAGE>
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
Core, Government Income, High Yield and Global Income Funds may invest in
asset-backed securities. Such securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During
periods of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, a Fund's ability to
maintain positions in such securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to
B-23
<PAGE>
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.
LOAN PARTICIPATIONS
The High Yield Fund may invest in loan participations. Usually, neither
the co-lender nor any other participant guarantees the participations in any
way. As a result, the principal credit risk associated with acquiring
participation interests is the credit risk associated with the underlying
corporate borrower. The High Yield Fund may incur additional credit risk,
however, when a Fund is in the position of participant rather than a co-lender
because the High Yield Fund must assume the risk of insolvency of the co-lender
from which the participation interest was acquired and that of any person
interpositioned between the Fund and the co-lender.
Typically, the High Yield Fund will look to the agent bank to collect
principal of and interest on a participation interest, to monitor compliance
with loan covenants, to enforce all credit remedies, such as foreclosures on
collateral, and to notify co-lenders of any adverse change in the borrower's
financial condition or declaration of insolvency. The agent bank is compensated
for these services by the borrower pursuant to the terms of the loan agreement.
The High Yield Fund does not believe that price quotations currently
obtainable from banks, dealers or pricing services consistently represent the
market values of participation interests. Therefore, the Adviser will,
following guidelines established by the board of trustees of the Trust (the
"Board of Trustees") value the participation interests held by the High Yield
Fund at fair value, which approximates market value. In valuing a participation
interest, the Adviser may consider the factors it deems appropriate, including:
(i) the characteristics of the participation interest, including the cost, size,
interest rate, period until next interest rate reset, maturity and base lending
rate of the participation interest, the terms and conditions of the loan and any
related agreements and the position of the loan in the borrower's debt
structure; (ii) the nature, adequacy and value of the collateral,including the
High Yield Fund's rights, remedies and interest with respect to the collateral;
(iii) the creditworthiness of the borrower, based on an evaluation of its
financial condition, financial statements and information about the borrower's
business, cash flows, capital structure and future prospects; (iv) the market
for the participation interest, including price quotations for and trading in
the participation interest and similar participation interests or instruments
and the market environment and investor
B-24
<PAGE>
attitudes towards the participation interest or participation interests
generally; (v) the quality and creditworthiness of any intermediate
participants; and (vi) general economic or market conditions.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, deferred interest and capital
appreciation bonds and pay-in-kind ("PIK") securities. Zero coupon, deferred
interest and capital appreciation bonds are debt securities issued or sold at a
discount from their face value and which do not entitle the holder to any
periodic payment of interest prior to maturity or a specified date. The
original issue discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, the liquidity of the security and
the perceived credit quality of the issuer. These securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interests in such stripped debt obligations or coupons. The market prices of
zero coupon, deferred interest, capital appreciation bonds and PIK securities
generally are more volatile than the market prices of interest bearing
securities and are likely to respond to a greater degree to changes in interest
rates than interest bearing securities having similar maturities and credit
quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds and deferred interest bonds, PIK securities are designed to give an
issuer flexibility in managing cash flow. PIK securities that are debt
securities can either be senior or subordinated debt and generally trade flat
(i.e., without accrued interest). The trading price of PIK debt securities
generally reflects the market value of the underlying debt plus an amount
representing accrued interest since the last interest payment.
Zero coupon, deferred interest, capital appreciation and PIK securities
involve the additional risk that, unlike securities that periodically pay
interest to maturity, a Fund will realize no cash until a specified future
payment date unless a portion of such securities is sold and, if the issuer of
such securities defaults, a Fund may obtain no return at all on its investment.
In addition, even though such securities do not provide for the payment of
current interest in cash, the Funds are nonetheless required to accrue income on
such investments for each taxable year and generally are required to distribute
such accrued amounts (net of deductible expenses, if any) to avoid being subject
to tax. Because no cash is generally received at the time of the accrual, a
Fund may be required to liquidate other portfolio securities to obtain
sufficient cash to satisfy federal tax distribution requirements applicable to
the Fund. See "Taxation."
B-25
<PAGE>
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which each Fund may
invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at predesignated
periods in response to changes in the market rate of interest on which the
interest rate is based. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation. The absence of an unconditional
demand feature on variable and floating rate municipal securities exercisable
within seven days would, and the failure of the issuer or a third party to honor
its obligations under a demand or put feature might, require a variable or
floating rate obligation to be treated as illiquid for purposes of the Tax
Exempt Funds' limitation on illiquid investments.
Each Fund may invest in "leveraged" inverse floating rate debt instruments
("inverse floaters"), including "leveraged inverse floaters." The interest rate
on inverse floaters resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse floater, the greater
the volatility of its market value. Accordingly, the duration of an inverse
floater may exceed its stated final maturity. Certain inverse floaters may be
deemed to be illiquid securities for purposes of each Fund's limitation on
illiquid investments.
CORPORATE DEBT OBLIGATIONS
Core, Global Income, Government Income and High Yield Funds may invest in
corporate debt obligations, including obligations of industrial, utility and
financial issuers. Corporate debt obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
HIGH YIELD SECURITIES. Bonds rated BB or below by Standard & Poor's
---------------------
Ratings Group (Standard & Poor's) or Ba or below by Moody's Investor Service,
Inc. ("Moody's") (or comparable rated and unrated securities) are commonly
referred to as "junk bonds" and are considered speculative; the ability of their
issuers to make principal and interest payments may be questionable. In some
cases, such bonds may be highly speculative, have poor prospects 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
B-26
<PAGE>
AAA, AA, A or BBB by Standard and Poor's or Aaa, Aa, A or Baa by Moody's).
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of a
Fund to achieve its investment objective may, to the extent of its investments
in high yield securities, be more dependent upon such creditworthiness analysis
than would be the case if the Fund were investing in higher quality securities.
See Appendix B for a description of the corporate bond and preferred stock
ratings by Standard & Poor's, Moody's, Fitch Investors Service Corp. and Duff &
Phelps.
The amount of high yield, fixed income securities proliferated in the 1980s
and early 1990s as a result of increased merger and acquisition and leveraged
buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tends to reflect
those individual corporate developments to a greater extent than do those of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Issuers of such high yield securities may not be able
to make use of more traditional methods of financing and their ability to
service debt obligations may be more adversely affected than issuers of higher
rated securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These non-
investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the junk bond
market and investor perceptions regarding lower-rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which High Yield Fund
invests, the yields and prices of such securities may tend to fluctuate more
than those for higher-rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income 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
B-27
<PAGE>
such securities but will be reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace such
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if the High Yield Fund experiences unexpected net
redemptions of the High Yield Fund's
B-28
<PAGE>
shares, it may be forced to sell its higher-rated securities, resulting in a
decline in the overall credit quality of the High Yield Fund's portfolio and
increasing the exposure of the High Yield Fund to the risks of high yield
securities. The High Yield Fund may also incur additional expenses to the
extent that it is required to seek recovery upon a default in the payment of
principal or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Funds may each invest
in obligations issued or guaranteed by United States and foreign banks
(Government Income Fund may only invest in U.S. dollar denominated securities).
Bank obligations, including without limitation time deposits, bankers'
acceptances and certificates of deposit, may be general obligations of the
parent bank or may be obligations only of the issuing branch pursuant to the
terms of the specific obligations or government regulation.
Banks are subject to extensive governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. Foreign banks are subject to different regulations and are
generally permitted to engage in a wider variety of activities than U.S. banks.
In addition, the profitability of the banking industry is largely dependent upon
the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
B-29
<PAGE>
MUNICIPAL SECURITIES
Core, Municipal Income, High Yield and Short Duration Tax-Free Funds may
invest in bonds, notes and other instruments issued by or on behalf of states,
territories and possessions of the United States (including the District of
Columbia) and their political subdivisions, agencies or instrumentalities
("Municipal Securities"), the interest on which is exempt from regular federal
income tax (i.e., excluded from gross income for federal income tax purposes but
not necessarily exempt from the federal alternative minimum tax or from the
income taxes of any state or local government). In addition, Municipal
Securities include participation interests in such securities the interest on
which is, in the opinion of bond counsel or counsel selected by the Adviser,
excluded from gross income for federal income tax purposes. The Core, Municipal
Income, High Yield and Short Duration Tax-Free Funds may revise their definition
of Municipal Securities in the future to include other types of securities that
currently exist, the interest on which is or will be, in the opinion of such
counsel, excluded from gross income for federal income tax purposes, provided
that investing in such securities is consistent with each Fund's investment
objective and policies.
Municipal Securities are often issued to obtain funds for various public
purposes including refunding outstanding obligations, obtaining funds for
general operating expenses, and obtaining funds to lend to other public
institutions and facilities. Municipal Securities also include certain
"private activity bonds" or industrial development bonds, which are issued by or
on behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest, although the characteristics and enforcement of general obligations
may vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer, and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer of a
revenue obligation may be backed by a letter of credit, guarantee or insurance.
General obligations and revenue obligations may be issued in a variety of forms,
including commercial paper, fixed, variable and floating rate securities, tender
option bonds, auction rate bonds and zero coupon bonds, deferred interest bonds
and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a
variety of hybrid and special types of Municipal
B-30
<PAGE>
Securities. There are also numerous differences in the security of Municipal
Securities both within and between these two principal classifications.
For the purpose of applying a Fund's investment restrictions, the
identification of the issuer of a Municipal Security which is not a general
obligation is made by the Adviser based on the characteristics of the Municipal
Security, the most important of which is the source of funds for the payment of
principal and interest on such securities.
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as Short Duration Tax-Free, Municipal
Income, High Yield and Core Funds. Thus, the issue may not be said to be
publicly offered. Unlike some securities that are not publicly offered, a
secondary market exists for many Municipal Securities that were not publicly
offered initially and such securities may be readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
MUNICIPAL LEASES, CERTIFICATES OF PARTICIPATION AND OTHER PARTICIPATION
-----------------------------------------------------------------------
INTERESTS. The Core, High Yield, Municipal Income, and Short-Duration Tax-Free
- ---------
Funds may invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Municipal leases
frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject
to the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or
B-31
<PAGE>
utilizing the leased equipment. Although the obligations may be secured by the
leased equipment or facilities, the disposition of the property in the event of
non-appropriation or foreclosure might prove difficult, time consuming and
costly, and result in a delay in recovering or the failure to fully recover a
Fund's original investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation may
be deemed to be illiquid for the purpose of the Funds' limitation on investments
in illiquid securities. Other municipal lease obligations and certificates of
participation acquired by a Fund may be determined by the Adviser, pursuant to
guidelines adopted by the Trustees of the Trust, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades or quotes
for the obligation; and (4) the nature of the marketplace trades. In addition,
the Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance to the issuer of the
property covered by the lease and the likelihood that the marketability of the
obligation will be maintained throughout the time the obligation is held by a
Fund.
The Core, High Yield, Municipal Income and Short Duration Tax-Free Funds
may purchase participations in Municipal Securities held by a commercial bank or
other financial institution. Such participations provide a Fund with the right
to a pro rata undivided interest in the underlying Municipal Securities. In
addition, such participations generally provide a Fund with the right to demand
payment, on not more than seven days' notice, of all or any part of such Fund's
participation interest in the underlying Municipal Security, plus accrued
interest. A Fund will only invest in such participations if, in the opinion of
bond counsel, counsel for the issuers of such participations or counsel selected
by the Adviser, the interest from such participations is exempt from regular
federal income tax.
MUNICIPAL NOTES. Municipal Securities in the form of notes generally are
---------------
used to provide for short-term capital needs, in anticipation of an issuer's
receipt of other revenues or financing, and typically have maturities of up to
three years. Such instruments may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and revenue
B-32
<PAGE>
anticipation notes and construction loan notes. Tax anticipation notes are
issued to finance the working capital needs of governments. Generally, they are
issued in anticipation of various tax revenues, such as income, sales, property,
use and business taxes, and are payable from these specific future taxes.
Revenue anticipation notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under federal revenue sharing
programs. Bond anticipation notes are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the long-term bonds
then provide the funds needed for repayment of the notes. Tax and revenue
anticipation notes combine the funding sources of both tax anticipation notes
and revenue anticipation notes. Construction Loan Notes are sold to provide
construction financing. These notes are secured by mortgage notes insured by
the FHA; however, the proceeds from the insurance may be less than the economic
equivalent of the payment of principal and interest on the mortgage note if
there has been a default. The obligations of an issuer of municipal notes are
generally secured by the anticipated revenues from taxes, grants or bond
financing. An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or that
refinancing will be otherwise unavailable.
TAX-EXEMPT COMMERCIAL PAPER. Issues of commercial paper typically
---------------------------
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by state and local governments and their agencies to finance working
capital needs of municipalities or to provide interim construction financing and
are paid from general revenues of municipalities or are refinanced with long-
term debt. In most cases, tax-exempt commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
PRE-REFUNDED MUNICIPAL SECURITIES. The principal of and interest on pre-
---------------------------------
refunded Municipal Securities are no longer paid from the original revenue
source for the securities. Instead, the source of such payments is typically
an escrow fund consisting of U.S. Government Securities. The assets in the
escrow fund are derived from the proceeds of refunding bonds issued by the same
issuer as the pre-refunded Municipal Securities. Issuers of Municipal
Securities use this advance refunding technique to obtain more favorable terms
with respect to securities that are not yet subject to call or redemption by the
issuer. For example, advance refunding enables an issuer to refinance debt at
lower market interest rates, restructure debt to improve cash flow or eliminate
restrictive covenants in the indenture or other governing instrument for the
pre-refunded Municipal Securities. However, except for a change in the revenue
source from which principal and interest payments are made, the pre-refunded
Municipal Securities remain outstanding on their original terms until they
mature or are redeemed by the issuer. Pre-refunded Municipal Securities are
B-33
<PAGE>
usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free, Municipal Income, High
----------------------
Yield, and Core Funds may each invest in certain types of Municipal Securities,
generally referred to as industrial development bonds (and referred to under
current tax law as private activity bonds), which are issued by or on behalf of
public authorities to obtain funds to provide privately operated housing
facilities, airport, mass transit or port facilities, sewage disposal, solid
waste disposal or hazardous waste treatment or disposal facilities and certain
local facilities for water supply, gas or electricity. Other types of
industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such
issues. A Tax Exempt Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fund's distributions of any tax-exempt interest it receives
from any source will be taxable for regular federal income tax purposes.
TENDER OPTION BONDS. A tender option bond is a Municipal Security
-------------------
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term, tax-exempt rates. The bond is typically issued with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, which grants the security holders the option, at periodic
intervals, to tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the securities,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults or a significant downgrade in the credit
rating assigned to the issuer of the bond. The liquidity of a tender option bond
is a function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Fund's credit quality
requirements, to be inadequate and the bond would not otherwise be readily
marketable. The Tax Exempt Funds intend to invest in tender option bonds the
interest on which will, in the opinion of bond counsel, counsel for the issuer
of interests therein or counsel selected by the Adviser, be exempt from regular
federal income tax. However, because there can be no assurance that the
Internal Revenue Service (the "Service") will agree with such counsel's
B-34
<PAGE>
opinion in any particular case, there is a risk that a Tax Exempt Fund will not
be considered the owner of such tender option bonds and thus will not be
entitled to treat such interest as exempt from such tax. Additionally, the
federal income tax treatment of certain other aspects of these investments,
including the proper tax treatment of tender option bonds and the associated
fees in relation to various regulated investment company tax provisions is
unclear. The Tax Exempt Funds intend to manage their portfolio in a manner
designed to eliminate or minimize any adverse impact from the tax rules
applicable to these investments.
AUCTION RATE SECURITIES. The Core, High Yield, Municipal Income and Short
-----------------------
Duration Tax-Free Funds may invest in auction rate securities. Auction rate
securities consist of auction rate Municipal Securities and auction rate
preferred securities issued by closed-end investment companies that invest
primarily in Municipal Securities (collectively, "auction rate securities").
Provided that the auction mechanism is successful, auction rate securities
usually permit the holder to sell the securities in an auction at par value at
specified intervals. The dividend is reset by "Dutch" auction in which bids are
made by broker-dealers and other institutions for a certain amount of securities
at a specified minimum yield. The dividend rate set by the auction is the
lowest interest or dividend rate that covers all securities offered for sale.
While this process is designed to permit auction rate securities to be traded at
par value, there is some risk that an auction will fail due to insufficient
demand for the securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Code.
A Fund's investments in auction rate securities of closed-end funds are
subject to the limitations prescribed by the Act and certain state securities
regulations. The Funds will indirectly bear their proportionate share of any
management and other fees paid by such closed-end funds in addition to the
advisory fees payable directly by the Funds.
INSURANCE. The Funds may invest in "insured" tax-exempt Municipal
---------
Securities. Insured Municipal Securities are securities for which scheduled
payments of interest and principal are guaranteed by a private (nongovernmental)
insurance company. The insurance only entitles a Fund to receive the face or
par value of the securities held by the Fund. The insurance does not guarantee
the market value of the Municipal Securities or the value of the shares of a
Fund.
The Funds may utilize new issue or secondary market insurance. A new issue
insurance policy is purchased by a bond issuer who wishes to increase the credit
rating of a security. By paying a
B-35
<PAGE>
premium and meeting the insurer's underwriting standards, the bond issuer is
able to obtain a high credit rating (usually, Aaa from Moody's or AAA from
Standard & Poor's) for the issued security. Such insurance is likely to
increase the purchase price and resale value of the security. New issue
insurance policies are non-cancelable and continue in force as long as the bonds
are outstanding.
A secondary market insurance policy is purchased by an investor (such as a
Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. The Funds may purchase bonds
which have already been insured under a secondary market insurance policy by a
prior investor, or the Funds may directly purchase such a policy from insurers
for bonds which are currently uninsured.
An insured Municipal Security acquired by a Fund will typically be covered
by only one of the above types of policies. All of the insurance policies used
by a Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by Standard & Poor's. The Municipal Securities
invested in by the High Yield Fund will not be subject to this requirement.
STANDBY COMMITMENTS. In order to enhance the liquidity of Municipal
-------------------
Securities, the Tax Exempt Funds may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a "standby commitment" or liquidity put, depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
a Tax Exempt Fund. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by a Tax Exempt Fund. In considering whether a security meets a Tax Exempt
Fund's quality standards, the particular Tax Exempt Fund will look to the
creditworthiness of the party providing the Fund with the right to sell as well
as the quality of the security itself.
The Tax Exempt Funds value Municipal Securities which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining a Tax Exempt
Fund's net asset value. The cost of a standby commitment is carried as
unrealized depreciation from the time of purchase until it is exercised or
expires. Since the value of a standby commitment is dependent on the ability of
the standby commitment writer to meet its obligation to repurchase, a Tax Exempt
Fund's policy is to enter into standby
B-36
<PAGE>
commitment transactions only with banks, brokers or dealers which present a
minimal risk of default.
The Adviser understands that the Service has issued a favorable revenue
ruling to the effect that, under specified circumstances, a registered
investment company will be the owner of tax-exempt municipal obligations
acquired subject to a put option. The Service has subsequently announced that it
will not ordinarily issue advance ruling letters as to the identity of the true
owner of property in cases involving the sale of securities or participation
interests therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax Exempt Funds intend to take the position that they are the owner
of any Municipal Securities acquired subject to a standby commitment or acquired
or held with certain other types of put rights and that tax-exempt interest
earned with respect to such Municipal Securities will be tax-exempt in their
hands. There is no assurance that standby commitments will be available to the
Tax Exempt Funds nor have the Tax Exempt Funds assumed that such commitments
would continue to be available under all market conditions.
CALL RISK AND REINVESTMENT RISK. Municipal Securities may include "call"
-------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in a Fund's portfolio are called prior
to the maturity, the Fund will be required to reinvest the proceeds on such
securities at an earlier date and may be able to do so only at lower yields,
thereby reducing the Fund's return on its portfolio securities.
FOREIGN INVESTMENTS
Core, High Yield and Global Income Funds may invest in securities of
foreign issuers and in fixed-income securities quoted or denominated in a
currency other than U.S. dollars. Investing in the securities of foreign
issuers involves certain special considerations, including those set forth
below, which are not typically associated with investing in U.S. issuers. Since
investments in the securities of foreign issuers may involve currencies of
foreign countries, and since Core, High Yield and Global Income Funds may
temporarily hold funds in bank deposits in foreign currencies during completion
of investment programs, Core, High Yield and Global Income Funds may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations and may incur costs in connection with conversions between various
currencies.
Foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. In addition, there may be less publicly available
information about a foreign company than about a comparable U.S. company.
Volume and
B-37
<PAGE>
liquidity in most foreign bond markets are less than in the United States
markets and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Commissions on foreign
securities exchanges are often fixed and generally are higher than negotiated
commissions or dealer mark-ups in the U.S. markets, although each Fund endeavors
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of securities markets
and exchanges, brokers, dealers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlement of portfolio transactions or loss of certificates for portfolio
securities.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of Core Fund, High Yield Fund or Global
Income Fund is uninvested and no return is earned thereon. The inability of
Core Fund, High Yield Fund or Global Income Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to Core Fund, High Yield Fund
or Global Income Fund due to subsequent declines in value of the portfolio
securities, or, if Core Fund, High Yield Fund or Global Income Fund has entered
into a contract to sell the securities, could result in possible liability to
the purchaser. In addition, with respect to certain foreign countries, there is
the possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could adversely affect Core, High
Yield or Global Income Funds' investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources self-sufficiency and balance of payments
position.
INVESTING IN EMERGING COUNTRIES
MARKET CHARACTERISTICS. Debt securities of most emerging markets issuers
----------------------
may be less liquid and are generally subject to greater price volatility than
securities of issuers in the U.S. and other developed countries. The markets
for securities of emerging markets may have substantially less volume than the
market for similar securities in the U.S. and may not be able to absorb, without
price disruptions, a significant increase in trading volume or trade size.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The less liquid the market, the more
difficult it may be for the Fund to accurately price its portfolio securities or
to
B-38
<PAGE>
dispose of such securities at the times determined to be appropriate. The risks
associated with reduced liquidity may be particularly acute to the extent that a
Fund needs cash to meet redemption requests, to pay dividends and other
distributions or to pay its expenses.
Securities markets of emerging markets may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and settlement
could result in temporary periods when a portion of the Fund's assets is
uninvested and no return is earned thereon. Inability to make intended security
purchases could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in
emerging markets may be higher than in the U.S. and other developed securities
markets. As legal systems in emerging markets develop, foreign investors may be
adversely affected by new or amended laws and regulations. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
ECONOMIC, POLITICAL AND SOCIAL FACTORS. Emerging markets may be subject to
--------------------------------------
a greater degree of economic, political and social instability than the U.S.,
Japan and most Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes or attempted changes
in government through extra-constitutional means; (ii) popular unrest associated
with demands for improved economic, political and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection and conflict. Many emerging
markets have experienced in the past, and continue to experience, high rates of
inflation. In certain countries inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate environment and
sharply eroding the value of outstanding financial assets in those countries.
The economies of many emerging markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging markets may differ unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
RESTRICTIONS ON INVESTMENT AND REPATRIATION. Certain emerging markets
-------------------------------------------
require governmental approval prior to investments by foreign persons or limit
investments by foreign persons to only a
B-39
<PAGE>
specified percentage of an issuer's outstanding securities or a specific class
of securities which may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. Repatriation of
investment income and capital from certain emerging markets is subject to
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect the operation
of a Fund.
SOVEREIGN DEBT OBLIGATIONS
Investments in sovereign debt obligations involves special risks not
present in corporate debt obligations. The issuer of the sovereign debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and a Fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and a Fund's net asset value, may be more
volatile than prices of debt obligations of U.S. issuers. In the past, the
governments of certain emerging markets have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core, High Yield and Global
-------------------------------------------
Income Funds may enter into forward foreign currency exchange contracts for
hedging purposes and to seek to increase total return. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
At the maturity of a forward contract, Global Income Fund, High Yield Fund
and Core Fund may either accept or make delivery of
B-40
<PAGE>
the currency specified in the contract or, at or prior to maturity, enter into a
closing purchase transaction involving the purchase or sale of an offsetting
contract. Closing purchase transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract.
Global Income, High Yield or Core Funds may enter into forward foreign
currency exchange contracts in several circumstances. First, when Global
Income, High Yield or Core Funds enter into a contract for the purchase or sale
of a security quoted or denominated in a foreign currency, or when Global
Income, High Yield or Core Funds anticipate the receipt in a foreign currency of
a dividend or interest payment on such a security which it holds, Global Income,
High Yield or Core Funds may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for the purchase or sale,
for a fixed amount of U.S. dollars, of the amount of foreign currency involved
in the underlying transactions, Global Income, High Yield or Core Funds will
attempt to protect themselves against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of foreign currency approximating the value of some or all of a Fund's
portfolio securities quoted or denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of a Fund's foreign
assets.
Global Income, High Yield and Core Funds may engage in cross-hedging by
using forward contracts in one currency to hedge against fluctuations in the
value of securities denominated or quoted in a different currency if the
Advisers determine that there is a pattern of correlation between the two
currencies. The Global Income, High Yield and Core Funds may also purchase and
sell forward contracts to seek to increase total return when the Advisers
anticipate that the foreign currency will appreciate or
B-41
<PAGE>
depreciate in value, but securities quoted or denominated in that currency do
not present attractive investment opportunities and are not held in a Fund's
portfolio.
Global Income, High Yield and Core Funds' custodian will place cash or
liquid assets, into a segregated account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contracts requiring the Fund to purchase foreign
currencies and forward contracts entered into to seek to increase total return.
If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Fund's commitments
with respect to such contracts. The segregated accounts will be marked-to-
market on a daily basis. Although the contracts are not presently regulated by
the Commodity Trading Futures Commission ("CFTC"), the CFTC may in the future
assert authority to regulate these contracts. In such event, a Fund's ability to
utilize forward foreign currency exchange contracts may be restricted. The
Global Income, Core and High Yield Funds will not enter into a forward contract
with a term of greater than one year.
While Global Income, Core and High Yield Funds may enter into forward
contracts to seek to reduce currency exchange rate risks, transactions in such
contracts involve certain other risks. Thus, while Global Income, Core and
High Yield Funds may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for a Fund than if it
had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by
Global Income, Core and High Yield Funds. Such imperfect correlation may cause
the Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
INTEREST RATE SWAPS, MORTGAGE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS,
FLOORS AND COLLARS
Each Fund may enter into interest rate swaps, caps, floors and collars. In
addition, Core, Adjustable Rate, Government Income, Short Duration Government,
Global Income and High Yield Funds may
B-42
<PAGE>
enter into mortgage swaps and Core, High Yield and Global Income Funds may also
enter into currency swaps. Each Fund may enter into swap transactions for
hedging purposes or to seek to increase total return. Interest rate swaps
involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed-rate
payments for floating rate payments. Mortgage swaps are similar to interest
rate swaps in that they represent commitments to pay and receive interest. The
notional principal amount, however, is tied to a reference pool or pools of
mortgages. Currency swaps involve the exchange of the parties' respective
rights to make or receive payments in specified currencies. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payment of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling the interest
rate floor. An interest rate collar is the combination of a cap and a floor
that preserves a certain return within a predetermined range of interest rates.
Since interest rate, mortgage and currency swaps and interest rate caps, floors
and collars are individually negotiated, each Fund expects to achieve an
acceptable degree of correlation between its portfolio investments and its swap,
cap, floor and collar positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each interest rate or currency swap will
be accrued on a daily basis and an amount of cash or liquid assets, having an
aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by a Fund's custodian. Inasmuch as these
transactions are entered into for hedging purposes or are offset by cash or
liquid assets, as permitted by applicable law, maintained in a segregated
account the Funds and the Advisers believe that swaps do not constitute senior
securities under the Act and, accordingly, will not treat them as being subject
to a Fund's borrowing restriction.
B-43
<PAGE>
The Funds will not enter into any swap transactions unless the unsecured
commercial paper, senior debt or claims-paying ability of the other party is
rated either AA or A-1 or better by Standard & Poor's or Aa or P-1 or better by
Moody's or their equivalent ratings. If there is a default by the other party
to such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
The staff of the Securities and Exchange Commission (the "SEC") currently takes
the position that swaps, caps, floors and collars are illiquid for purposes of
a Fund's limitation on illiquid investments.
The use of interest rate, mortgage and currency swaps, as well as interest
rate caps, floors and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a Fund would be less favorable than it would have been if this
investment technique were not used.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
-----------------------
options on any securities in which it may invest or on any securities index
based on securities in which it may invest. A Fund may purchase and write such
options on securities that are listed on national domestic securities exchanges
or foreign securities exchanges or traded in the over-the-counter market. A
call option written by a Fund obligates the Fund to sell specified securities to
the holder of the option at a specified price if the option is exercised at any
time before the expiration date. All call options written by a Fund are
covered, which means that the Fund will own the securities subject to the option
so long as the option is outstanding or use the other methods described below.
The purpose of a Fund in writing covered call options is to realize greater
income than would be realized in portfolio securities transactions alone.
However, in writing covered call options for additional income, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. The purpose of writing such
options is to generate additional income. However, in return for the option
premium, the Fund accepts the 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.
B-44
<PAGE>
All call and put options written by a Fund are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid assets, as
permitted by applicable law, either of which, in the case of Global Income Fund,
Core Fund or High Yield Fund, may be quoted or denominated in any currency, in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position.
A Fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases
are referred to as "closing purchase transactions."
Each Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
The Funds may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by their respective custodian) upon conversion or exchange of
other securities in its portfolio. The Funds may also cover call and put
options on a securities index by maintaining cash or liquid assets, as permitted
by applicable law, with a value equal to the exercise price in a segregated
account with their custodian or by using the other methods described above.
PURCHASING OPTIONS. Each Fund may also purchase put and call options on
------------------
any securities in which it may invest or on any securities index composed of
securities in which it may invest. A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options it had purchased.
A Fund would normally purchase call options in anticipation of an increase,
or put options in anticipation of a decrease ("protective puts") in the market
value of securities of the type in which it may invest. The purchase of a call
option would entitle a Fund, in return for the premium paid, to purchase
specified securities at a specified price during the option period. A Fund would
ordinarily realize a gain on the purchase of a call
B-45
<PAGE>
option if, during the option period, the value of such securities exceeded the
sum of the exercise price, the premium paid and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the call option.
The purchase of a put option would entitle a Fund, in exchange for the premium
paid, to sell specified securities at a specified price during the option
period. The purchase of protective puts is designed to offset or hedge against a
decline in the market value of a Fund's securities. Put options may also be
purchased by a Fund for the purpose of affirmatively benefiting from a decline
in the price of securities which it does not own. A Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
securities decreased below the exercise price sufficiently to cover the premium
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the put option. Gains and losses on the purchase of put
options may be offset by countervailing changes in the value of the underlying
portfolio securities.
A Fund may purchase put and call options on securities indices for the same
purposes as it may purchase options on securities. Options on securities indices
are similar to options on securities, except that the exercise of securities
index options requires cash payments and does not involve the actual purchase or
sale of securities. In addition, securities index options are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security.
Transactions by a Fund in options on securities and securities indices will
be subject to limitations established by each of the exchanges, boards of trade
or other trading facilities on which such options are traded governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which a
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Advisers. An exchange, board of trade
or other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Core, Global Income
----------------------------------------------------
and High Yield Funds may write covered put and call options and purchase put and
call options on foreign currencies in an attempt to protect against declines in
the dollar value of portfolio securities and against increases in the dollar
cost of securities to be acquired. Global Income, Core and High Yield Funds may
use options on currency to cross-hedge, which involves writing or purchasing
options on one currency to seek to hedge against changes in exchange rates for a
different currency with a pattern of correlation. In addition, Global Income,
Core and High
B-46
<PAGE>
Yield Funds may purchase call options on currency to seek to increase total
return when the Advisers anticipate that the currency will appreciate in value,
but the securities denominated or quoted in that currency do not present
attractive investment opportunities and are not included in the Fund's
portfolios.
A call option written by Core, Global Income and High Yield Funds obligates
the Fund to sell specified currency to the holder of the option at a specified
price if the option is exercised at any time before the expiration date. A put
option written by a Fund obligates the Fund to purchase specified currency from
the option holder at a specified price if the option is exercised at any time
before the expiration date. The writing of currency options involves a risk
that a Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase currency subject to a put at a price that exceeds the
currency's market value.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one written. Such purchases are referred
to as "closing purchase transactions." A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
purchased options.
Core, Global Income and High Yield Funds would normally purchase call
options in anticipation of an increase in the U.S. dollar value of currency in
which securities to be acquired by the Fund are denominated or quoted. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified currency at a specified price during the option period. A
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
Core, Global Income and High Yield Funds would normally purchase put
options in anticipation of a decline in the U.S. dollar value of currency in
which securities in its portfolio are denominated or quoted ("protective puts").
The purchase of a put option would entitle Core, Global Income and High Yield
Funds, in exchange for the premium paid, to sell specified currency at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the U.S. dollar value of
a Fund's portfolio securities due to currency exchange rate fluctuations. A
Fund would ordinarily realize a gain if, during the option period, the value of
the underlying currency decreased below the exercise price sufficiently to more
than cover the premium and transaction costs; otherwise the Fund would realize
either no gain or a loss on the purchase of the put option. Gains and losses on
the purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency.
B-47
<PAGE>
In addition to using options for the hedging purposes described above,
Core, Global Income and High Yield Funds may use options on currency to seek to
increase total return. Global Income Fund, High Yield Fund and Core Fund may
write (sell) covered put and call options on any currency in an attempt to
realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Global Income, High Yield and Core Funds may forego the opportunity to
profit from an increase in the market value of the underlying currency. Also,
when writing put options, Global Income, High Yield and Core Funds accept, in
return for the option premium, the risk that it may be required to purchase the
underlying currency at a price in excess of the currency's market value at the
time of purchase.
Global Income, High Yield and Core Funds would normally purchase call
options to seek to increase total return in anticipation of an increase in the
market value of a currency. Global Income, High Yield and Core Funds would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the call option. Put
options may be purchased by the Global Income, High Yield and Core Funds for
the purpose of benefiting from a decline in the value of currencies which it
does not own. Global Income, High Yield and Core Funds would ordinarily realize
a gain if, during the option period, the value of the underlying currency
decreased below the exercise price sufficiently to more than cover the premium
and transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the put option.
YIELD CURVE OPTIONS. Each Fund may enter into options on the yield
-------------------
"spread," or yield differential between two securities. Such options are
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. For example, a Fund may purchase a call option on the yield spread
between two securities if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. A Fund may also purchase or write
yield curve options for other than hedging purposes (i.e., in an attempt to
increase its current income) if, in the judgment of the Adviser, the Fund will
be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks
B-48
<PAGE>
associated with the trading of other types of options. In addition, however,
such options present a risk of loss even if the yield of one of the underlying
securities remains constant, or if the spread moves in a direction or to an
extent which was not anticipated.
Yield curve options written by a Fund must be "covered." A call (or put)
option is covered if the Fund holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or liquid assets, as permitted by applicable law, sufficient to
cover the Fund's net liability under the two options. Therefore, a Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter, and because they
have been only recently introduced, established trading markets for these
options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
B-49
<PAGE>
A Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the SEC changes its position, the Funds will treat
purchased over-the counter options and all assets used to cover written over-the
counter options as illiquid securities, except that with respect to options
written with primary dealers in U.S. Government Securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to a formula
approved by the SEC.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options for
hedging purposes depends in part on the applicable Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
- --------------------------------------------------
To seek to increase total return or to hedge against changes in interest
rates or securities prices or, in the case of Core, High Yield and Global Income
Funds, currency exchange rates, each Fund may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. Each Fund may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), securities indices, foreign currencies in the case of Global
Income, Core and High Yield Funds and any other financial instruments and
indices. A Fund will engage in futures and related options transactions only
for bona fide hedging purposes as defined below or for purposes of seeking to
increase total return to the extent permitted by regulations of the CFTC. All
futures contracts entered into by a Fund are traded on U.S. exchanges or boards
of trade that are licensed and regulated by the CFTC or on foreign exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
When interest rates are rising or securities prices are falling, a Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a Fund, through the purchase of futures contracts,
can attempt to secure better rates or prices than might later be available in
the market when it effects anticipated purchases. Core, Global Income
B-50
<PAGE>
and High Yield Funds may each seek to offset anticipated changes in the value of
a currency in which its portfolio securities, or securities that it intends to
purchase, are quoted or denominated by purchasing and selling futures contracts
on such currencies.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currency are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
------------------
establish with more certainty than would otherwise be possible the effective
price or rate of return on portfolio securities or securities that a Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are quoted or denominated. A Fund may, for example, take a "short"
position in the futures market by selling futures contracts to seek to hedge
against an anticipated rise in interest rates or a decline in market prices or
foreign currency rates that would adversely affect the U.S. dollar value of the
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by a Fund or securities with
characteristics similar to those of a Fund's portfolio securities. Similarly,
Core Fund, High Yield Fund and Global Income Fund may each sell futures
contracts on any currencies in which its portfolio securities are quoted or
denominated or in one currency to seek to hedge against fluctuations in the
value of securities denominated in a different currency if there is an
established historical pattern of correlation between the two currencies. If,
in the opinion of the Advisers, there is a sufficient degree of correlation
between price trends for a Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Funds may also enter into such futures contracts as part of its hedging
strategy. Although under some circumstances prices of securities in a Fund's
portfolio may be more or less volatile than prices of such futures contracts,
the Advisers will attempt to estimate the extent of this volatility difference
based on historical patterns and compensate for any such differential by having
a Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting a
Fund's portfolio securities. When hedging of this character is successful, any
depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position. On the other hand, any
unanticipated appreciation in the value of a Fund's portfolio securities would
be substantially offset by a decline in the value of the futures position.
B-51
<PAGE>
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium,
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that a Fund intends to
purchase. However, a Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Funds will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Each Fund will engage in futures and related options
--------------------
transactions only for bona fide hedging or to seek to increase total return as
permitted by CFTC regulations which permit principals of an investment company
registered under the Act to engage in such transactions without registering as
commodity pool operators. Each Fund will determine that the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
securities or instruments which it expects to purchase. Except as stated below,
each Fund's futures transactions will be entered into for traditional hedging
purposes -- i.e., futures contracts will be sold to protect against a decline in
the price of securities (or the currency in which they are quoted or
denominated) that a Fund
B-52
<PAGE>
owns or futures contracts will be purchased to protect a Fund against an
increase in the price of securities (or the currency in which they are quoted or
denominated) it intends to purchase. As evidence of this hedging intent, each
Fund expects that on 75% or more of the occasions on which it takes a long
futures or option position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities (or assets denominated in the related currency) in
the cash market at the time when the futures or option position is closed out.
However, in particular cases, when it is economically advantageous for a Fund to
do so, a long futures position may be terminated or an option may expire without
the corresponding purchase of securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation permits the Funds to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish positions
to seek to increase total return in futures contracts and options on futures
will not exceed 5% of the net asset value of a Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Funds will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") for maintaining their
qualifications as regulated investment companies for federal income tax
purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
assets, as permitted by applicable law, in an amount equal to the underlying
value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no
B-53
<PAGE>
futures contracts based upon individual securities, except certain U.S.
Government Securities. The only futures contracts available to hedge a Fund's
portfolio are various futures on U.S. Government Securities, securities indices
and foreign currencies.
MORTGAGE DOLLAR ROLLS
- ---------------------
The Taxable Funds (other than High Yield Fund) may enter into mortgage
"dollar rolls" in which a Fund sells securities for delivery in the current
month and simultaneously contracts with the same counterparty to repurchase
similar (same type, coupon and maturity), but not identical securities on a
specified future date. During the roll period, a Fund loses the right to
receive principal and interest paid on the securities sold. However, a Fund
would benefit to the extent of any difference between the price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. Unless such benefits exceed the income, capital appreciation and gain
or loss due to mortgage prepayments that would have been realized on the
securities sold as part of the mortgage dollar roll, the use of this technique
will diminish the investment performance of a Fund compared with what such
performance would have been without the use of mortgage dollar rolls. All cash
proceeds will be invested in instruments that are permissible investments for
the applicable Fund. Each Fund will hold and maintain in a segregated account
until the settlement date cash or liquid assets, as permitted by applicable law,
in an amount equal to its forward purchase price.
For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions; one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if
the broker-dealer to whom a Fund sells the security becomes insolvent, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
CONVERTIBLE SECURITIES
- ----------------------
Convertible securities include corporate notes or preferred stock but are
ordinarily long-term debt obligation of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline.
B-54
<PAGE>
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price
of the common stock underlying a convertible security exceeds the conversion
price, the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities in which the Core Fund and High Yield Fund invest will be
subject to the same rating criteria as its other investments in fixed-income
securities.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions, such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents, letters of credit or U.S. Government Securities maintained on a
current basis in an amount at least equal to the market value of the securities
loaned. Cash collateral may be invested in cash equivalents. A Fund has the
right to call a loan and obtain the securities loaned at any time on five days'
notice. For the duration of a loan, a Fund continues to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned and
also receives compensation from investment of the collateral. A Fund would not
have the right to vote any securities having voting rights during the existence
of the loan, but a Fund would call the loan in anticipation of an important vote
to be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovering, or even loss of
rights in, the collateral should the borrower of the securities fail
financially. However, the loans are made only to firms deemed by the applicable
Adviser to be of good standing, and when, in the judgment of the applicable
Adviser, the consideration which can be earned currently from securities loans
of this type justifies the attendant risk. If an Adviser determines to make
securities loans, the value of the securities loaned will not exceed one-third
of the value of the total assets of each Fund.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
However, a Fund will not invest more than 15% of its net assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate, currency and mortgage swaps, interest rate caps, floors and
collars, certain SMBS, municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted
B-55
<PAGE>
Securities, unless the Board of Trustees determines, based upon a continuing
review of the trading markets for the specific Restricted Securities, that such
Restricted Securities are liquid. Certain commercial paper issued in reliance
on Section 4(2) of the 1933 Act is treated like Rule 144A Securities. The
Trustees have adopted guidelines and delegated to the Advisers the daily
function of determining and monitoring the liquidity of the Funds' portfolio
securities. The Board of Trustees, however, will retain sufficient oversight and
be ultimately responsible for the determinations. Since it is not possible to
predict with assurance exactly how the market for Restricted Securities sold and
offered under Rule 144A or Section 4(2) will develop, the Trustees will
carefully monitor the Funds' investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these Restricted Securities.
The purchase price and subsequent valuation of Restricted Securities
normally reflect a discount from the price at which such securities trade when
they are not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the Restricted Securities and prevailing
supply and demand conditions.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. The Funds will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, the Funds may dispose of or negotiate a
commitment after entering into it. A Fund also may sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Funds may realize a capital gain or loss in connection
with these transactions. For purposes of determining each Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. Each Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to settlement date,
cash or liquid assets, in an amount sufficient to meet the purchase price.
Alternatively, each Fund may enter into offsetting contracts for the forward
sale
B-56
<PAGE>
of other securities that it owns. Securities purchased or sold on a when-issued
or forward commitment basis involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date or if the value of the
security to be sold increases prior to the settlement date.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets,
calculated at the time of purchase, in the securities of other investment
companies, but may not invest more than 5% of its total assets in the securities
of any one investment company or acquire more than 3% of the voting securities
of any other investment company. Pursuant to an exemptive order obtained from
the SEC, the Funds may invest in money market funds for which the Adviser or any
of its affiliates serves as investment adviser. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that a Fund invests in a money
market fund for which the Adviser acts as adviser, the management fees payable
by the Fund to the Adviser will be reduced by an amount equal to the Fund's
proportionate share of the management fees paid by such money market fund to the
Adviser or any of its affiliates.
The Core, High Yield and Global Income Funds may also purchase shares of
investment companies investing primarily in foreign securities, including
"country funds." Country funds have portfolios consisting primarily of
securities of issuers located in one foreign country or region. The Core, High
Yield and Global Income Funds may invest in World Equity Benchmark Shares
("WEBS") and similar securities that invest in securities included in foreign
securities indices.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected broker-
dealers, banks or other financial institutions. A repurchase agreement is an
arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities will be maintained by each Fund's custodian. The
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the security subject to the repurchase agreement.
For purposes of the Act and, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as
B-57
<PAGE>
being collateral for a loan by a Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and a Fund
has not perfected a security interest in the security, the Fund may be required
to return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Fund would be at risk of
losing some or all of the principal and interest involved in the transaction.
As with any unsecured debt instrument purchased for each Fund, the
applicable Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
security. Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the security subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), each Fund will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price. Certain repurchase agreements which provide for
settlement in more than seven days can be liquidated before the nominal fixed
term on seven days or less notice. Such repurchase agreements will be regarded
as liquid instruments.
In addition, the Funds, together with other registered investment companies
having management agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the affected Fund. The
investment objective of each Fund and all other investment policies or practices
of the Funds, except for Short Duration Tax-Free Fund's and Municipal Income
Fund's policy to invest under normal market conditions 80% of its net assets in
Municipal Securities, are considered by the Trust not to be fundamental and
accordingly may be changed without shareholder approval. See "INVESTMENT
OBJECTIVES AND POLICIES" in the Prospectuses. As defined in the Act, "a
majority of the outstanding voting securities" of a Fund means the vote (a) of
67% or more of the shares of the Fund present at a meeting, if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy or (b) more than 50% of the outstanding shares of the Fund, whichever
is less.
B-58
<PAGE>
For the purposes of the limitations (except for the asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, a Fund. With respect to the Tax
Exempt Funds, the identification of the issuer of a Municipal Security that is
not a general obligation is made by the Adviser based on the characteristics of
the Municipal Security, the most important of which is the source of funds for
the payment of principal and interest on such securities.
AS A MATTER OF FUNDAMENTAL POLICY, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in municipal securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other municipal securities. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations.
B-59
<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% or its total assets (including the amount borrowed), (b)
the Fund may, to the extent permitted by applicable law borrow up to
an additional 5% of its total assets for temporary purposes, (c) the
Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities, (d) the
Fund may purchase securities on margin to the extent permitted by
applicable law and (e) the Fund may engage in transactions in
mortgage dollar rolls which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted by
applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be an
underwriting.
(6)(a) for each Fund other than Core Fund, purchase, hold or deal in real
estate, although a Fund may purchase and sell securities that are
secured by real estate or interests therein, securities of real
estate investment trusts and mortgage-related securities and may
hold and sell real estate acquired by a Fund as a result of the
ownership of securities.
(6)(b) in the case of the Core Fund, purchase, hold or deal in real estate
(including real estate limited partnerships) or oil, gas or mineral
leases, although the Fund may purchase and sell securities that are
secured by real estate or interests therein, may purchase mortgage-
related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts that
are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same fundamental investment
objectives, restrictions and policies as the Fund.
B-60
<PAGE>
In addition, as non-fundamental policies, a Fund may not:
(1) Invest in companies for the purpose of exercising control or
management.
(2) Invest more than 15% of the Fund's net assets in illiquid
investments including repurchase agreements maturing in more than
seven days, securities which are not readily marketable and
restricted securities not eligible for resale pursuant to Rule 144A
under the 1933 Act.
(3) Purchase additional securities if the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
MANAGEMENT
TRUSTEES AND OFFICERS
- ---------------------
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees and Officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
Ashok N. Bakhru, Age 53, 1325 Avenue of the Americas, 34th Floor, New York, New
York 10019. Chairman and Trustee. Executive Vice President-Finance and
--------------------
Administration and Chief Financial Officer, Coty Inc. (since April 1996);
President, ABN Associates, Inc. (June 1994 through March 1996); Senior Vice
President, Scott Paper Company (until June 1994); Director, Arkwright Mutual
Insurance Company; Trustee, International House of Philadelphia; Member of
Cornell University Council; Trustee of Walnut Street Theater.
David B. Ford,* Age 51, One New York Plaza, New York, New York 10004. Trustee.
-------
Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs,
(1986-1996); Co-Head of GSAM since December 1994.
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Vice President, Goldman Sachs since May 1996; President,
- ---------------------
MFS Retirement Services Inc., of Massachusetts Financial Services prior thereto.
John P. McNulty,* Age 44, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
B-61
<PAGE>
Mary P. McPherson, Age 60, Taylor Hall, Bryn Mawr College, Bryn Mawr, PA
19010. Trustee. President of Bryn Mawr College since 1978; Director of Josiah
-------
Macy, Jr. Foundation since 1977; Director of the Philadelphia Contributionship
since 1985; Director of Amherst College since 1986; Director of Dayton Hudson
Corporation since 1988; Director of the Spencer Foundation since 1993; and
member of PNC Advisory Board since 1993.
Alan A. Shuch,* Age 48, One New York Plaza, New York, New York 10004. Trustee.
-------
Limited Partner, Goldman Sachs (since 1994); Director and Vice President,
Goldman Sachs Funds Management, Inc. from April 1990 to November 1994; President
and Chief Operating Officer, GSAM from September 1988 to November 1994; Limited
Partner, Goldman Sachs since December 1994.
Jackson W. Smart, Jr., Age 66, One Northfield Plaza, #218, Northfield, Illinois
60093. Trustee. Chairman, Executive Committee, First Commonwealth, Inc. (a
-------
managed dental care company, since January 1996); Chairman and Chief Executive
Officer, MSP Communications Inc. (a company engaged in radio broadcasting) since
November 1988; Director, Federal Express Corporation since 1976; Evanston
Hospital Corporation (since 1980) and First Commonwealth,Inc. (since 1988) and
North American Private Equity Group (a venture capital fund).
William H. Springer, Age 67, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman and Chief Financial and Administrative Officer,
- -------
Ameritech (a telecommunications holding company) from February 1987 to
retirement in June 1992; Director, Walgreen Co. (a retail drugstore business);
and Baker, Fentress & Co. (a closed-end non-diversified management investment
company) April 1992 to present.
Richard P. Strubel, Age 57, 70 West Madison Street, Suite 1400, Chicago,
Illinois 60602. Trustee. Managing Director, Tandem Partners, Inc. (since
-------
1990); President and Chief Executive Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and connectors) from January 1984 to October
1994.
Nancy L. Mucker,* Age 47, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
Scott M. Gilman,* Age 37, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990.
B-62
<PAGE>
John M. Perlowski,* Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 36, 85 Broad Street, New York, New York 10004.
Secretary. Associate General Counsel of GSAM since February 1994; Vice
- ---------
President and Assistant General Counsel of Goldman Sachs; Counsel to the Funds
Group, GSAM since June 1992; Partner, Hale and Dorr from September 1991 to June
1992.
Howard B. Surloff,* Age 31, 85 Broad Street, New York, New York 10004. Assistant
Secretary. Vice President and Assistant General Counsel, Goldman Sachs since
- ---------
November 1993 and May 1994, respectively; Counsel to the Funds Group, GSAM since
November 1993; Associate of Shereff, Friedman, Hoffman & Goodman, LLP prior
thereto.
Valerie A. Zondorak,* Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Vice President, Goldman Sachs (since March 1997); Counsel
- --------------------
to the Funds Group, GSAM (since March 1997); Associate of Shereff, Friedman,
Hoffman & Goodman, LLP (prior thereto).
Steven E. Hartstein*, Age 33, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs since June 1993;
- -------------------
Funds Compliance Officer, Citibank Global Asset Management from August 1991 to
June 1993); Legal Assistant, Brown & Wood prior thereto.
Deborah A. Farrell*, Age 25, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman Sachs since January
- -------------------
1994. Formerly at Cleary, Gottlieb, Stein and Hamilton.
Kaysie Uniacke*, Age 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Senior Portfolio Manager, GSAM since
- -------------------
1988.
Elizabeth D. Anderson*, Age 27, One New York Plaza, New York, New York 10004.
Assistant Secretary. Portfolio Manager, GSAM since April 1996; Junior Portfolio
- -------------------
Manager, Goldman Sachs 1995-1996. Funds Trading Assistant, GSAM 1993-1995.
Compliance Analyst, Prudential Insurance, from 1991 to 1993.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or GSFM is the
investment adviser, administrator and/or distributor. As of July 24, 1997, the
Trustees and officers as a group owned less than 1% of the outstanding shares of
beneficial interest of each Fund.
B-63
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended October
31, 1996:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Funds
from the as of Part of (including
Funds/1 / Trust's Expenses the Funds)/2 /
------------ ---------------- --------------
<S> <C> <C> <C>
Name of Trustees
Ashok N. Bakhru $4,109 $0 $77,375
Marcia L. Beck/3/ $ 0 $0 $ 0
David B. Ford $ 0 $0 $ 0
Douglas C. Grip $ 0 $0 $ 0
Paul C. Nagel, Jr./4/ $2,525 $0 $50,500
Alan A. Shuch $ 0 $0 $ 0
Jackson W. Smart $3,169 $0 $65,750
William H. Springer $3,169 $0 $65,750
Richard P. Strubel $3,169 $0 $65,750
</TABLE>
/1/ Reflects amount paid by Goldman Sachs Trust, a Massachusetts business
trust, during fiscal year ended October 31, 1996.
/2/ The Goldman Sachs Funds consisted of 29 mutual funds, including the seven
series of the Trust, on October 31, 1996.
/3/ Resigned as of May 1, 1996.
/4/ Retired as of June 30, 1996.
B-64
<PAGE>
INVESTMENT ADVISERS
- -------------------
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Municipal Income
Fund, Government Income Fund, Short Duration Tax-Free Fund, High Yield Fund and
Core Fund pursuant to a management agreement. GSFM, One New York Plaza, New
York, New York 10004, serves as the investment adviser to Adjustable Rate Fund
and Short Duration Government Fund pursuant to a management agreement. GSFM, a
Delaware limited partnership, is an affiliate of Goldman Sachs. GSAMI, 133
Peterborough Court, London EC4A 2BB, England, serves as investment adviser to
Global Income Fund pursuant to a management agreement. As a company with
unlimited liability under the laws of England, GSAMI is regulated by the
Investment Management Regulatory Organization Limited, a United Kingdom self-
regulatory organization, in the conduct of its investment advisory business.
See "MANAGEMENT" in the Funds' Prospectuses for a description of the applicable
Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24 hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico,
Milan, Montreal, Osaka, Paris, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs, whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching
$200 million, Goldman Sachs' Investment Research Department covers approximately
2,000 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers. The Advisers manage money for
some of the world's largest institutional investors.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry
B-65
<PAGE>
surveys conducted in the U.S. and abroad. Goldman Sachs is also among the
leading investment firms using quantitative analytics (now used by a growing
number of investors) to structure and evaluate portfolios. For example, Goldman
Sachs' options evaluation model analyzes each security's term, coupon and call
option, providing an overall analysis of the security's value relative to its
interest risk.
In planning the Tax Exempt Funds' strategies, the portfolio managers also
evaluate and monitor individual issues by using analytical techniques that have
traditionally been applied to corporate bonds and Mortgage-Backed Securities.
In particular, the Adviser's embedded option valuation model provides a picture
of an individual security's relative value and the portfolio's overall interest
rate risk. By constantly reviewing the positions of securities within the
portfolio, the Adviser looks for opportunities to enhance the Tax Exempt Funds'
yields by fine-tuning the portfolio, using quantitative tools designed for
municipal portfolio management. The Adviser, which managed approximately $3
billion in tax-free securities in 1996, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
In structuring Adjustable Rate Fund's and Short Duration Government Fund's
respective securities portfolio, the Adviser will review the existing overall
economic and mortgage market trends. The Adviser will then study yield spreads,
the implied volatility and the shape of the yield curve. The Adviser will then
apply this analysis to a list of eligible securities that meet the respective
Fund's investment guidelines. With respect to Adjustable Rate Fund, this
analysis is used to plan a two-part portfolio, which will consist of a "core"
portfolio of ARMs and a "relative value" portfolio of other mortgage assets that
can enhance portfolio returns and lower risk (such as investments in CMO
floating-rate tranches and interest only stripped Mortgage-Backed Securities).
With respect to Adjustable Rate Fund, Government Income Fund, Short
Duration Government Fund, High Yield Fund and Core Fund, the applicable Adviser
expects to utilize Goldman Sachs' sophisticated option-adjusted analytics to
help make strategic asset allocations within the markets for U.S. government,
Mortgage-Backed and other securities and to employ this technology periodically
to re-evaluate the Funds' investments as market conditions change. Goldman
Sachs has also developed a prepayment model designed to estimate mortgage
prepayments and cash flows under different interest rate scenarios. Because a
Mortgage-Backed Security incorporates the borrower's right to prepay the
mortgage, the Advisers use a sophisticated option-adjusted spread (OAS) model to
measure expected returns. A security's OAS is a function of the level and shape
of the yield curve, volatility and the applicable Adviser's expectation of how a
change in interest rates will affect prepayment levels. Since the OAS model
assumes a relationship between prepayments and interest rates, the Advisers
consider it a better way to measure a security's expected return and absolute
and relative values than yield to maturity. In using OAS
B-66
<PAGE>
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and prepayment
sensitivity. The Advisers will then analyze its value relative to alternative
investments and to its own investments. The Advisers will also measure a
security's interest rate risk by computing an option adjusted duration (OAD).
The Advisers believe a security's OAD is a better measurement of its price
sensitivity than cash flow duration, which systematically misstates portfolio
duration. The Advisers also evaluate returns for different mortgage market
sectors and evaluate the credit risk of individual securities. This
sophisticated technical analysis allows the Advisers to develop portfolio and
trading strategies using Mortgage-Backed Securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility
to meet the respective Fund's duration targets and cash flow pattern
requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to calculate projected
security returns under different, discrete interest rate scenarios, and Goldman
Sachs' proprietary prepayment model to generate yield estimates under these
scenarios. The OAS, scenario returns, expected returns, and yields of
securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The Advisers will use OAS analytics to choose what they believe is an
appropriate portfolio of investments for Adjustable Rate Fund, Government Income
Fund, Short Duration Government Fund and Core Fund from a universe of eligible
investments. In connection with initial portfolio selections, in addition to
using OAS analytics as an aid to meeting each Fund's particular composition and
performance targets, the Advisers will also take into account important market
criteria like the available supply and relative liquidity of various mortgage
securities in structuring the portfolio.
The Advisers also expect to use OAS analytics to evaluate the mortgage
market on an ongoing basis. Changes in the relative value of various Mortgage-
Backed Securities could suggest tactical trading opportunities for the Funds.
The Advisers will have access to both current market analysis as well as
historical information on the relative value relationships among different
Mortgage-Backed Securities. Current market analysis and historical information
is available in the Goldman Sachs database for most actively traded Mortgage-
Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive basis,
use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
B-67
<PAGE>
services to third parties or using such services as a basis for trading for its
own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments
in U.S. and foreign fixed-income markets, assesses the outlooks for various
sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed
Income Research Department is at the forefront in developing and using computer-
based tools for analyzing fixed-income securities and markets, developing new
fixed income products and structuring portfolio strategies for investment policy
and tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed-income research and credit research, the Advisers in
managing Global Income Fund are supported by Goldman Sachs' economics research.
The Economics Research Department, based in London, conducts economic, financial
and currency markets research which analyzes economic trends and interest and
exchange rate movements worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In allocating assets in the Global Income Fund's portfolio among
currencies, the Adviser will have access to the Global Asset Allocation Model.
The model is based on the observation that the prices of all financial assets,
including foreign currencies, will adjust until investors globally are
comfortable holding the pool of outstanding assets. Using the model, the
Adviser will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with Goldman Sachs' research
professionals' expectations to produce an optimal currency and asset allocation
for the level of risk suitable for the Fund's investment objective and criteria.
Each Fund's management agreement, (the "Management Agreements"), was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 23, 1997. The applicable Fund's
B-68
<PAGE>
Management Agreement was approved by the shareholders of Adjustable Rate Fund on
October 30, 1991, the shareholders of Short Duration Government Fund on March
27, 1989, the sole initial shareholder of Short Duration Tax-Free Fund on
September 25, 1992, the sole initial shareholder of Core Fund on October 29,
1993, and the shareholders of each other Fund on April 21, 1997. Each
Management Agreement will remain in effect until June 30, 1998 and will continue
in effect with respect to the applicable Fund from year to year thereafter
provided such continuance is specifically approved at least annually by (a) the
vote of a majority of the outstanding voting securities of such Fund or a
majority of the Trustees of the Trust, and (b) the vote of a majority of the
non-interested Trustees of the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
Each Management Agreement will terminate automatically if assigned (as
defined in the Act). Each Management Agreement is also terminable at any time
without penalty by the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund on 60 days' written notice to the
applicable Adviser or by the Adviser on 60 days' written notice of the Trust.
The Management Agreements provide that GSAM, GSFM and GSAMI, in their
capacity as advisers may each render similar services to others so long as the
services under the Management Agreements are not impaired thereby. Pursuant to
the Management Agreements, the Advisers are entitled to receive the fee set
forth below and the Advisers are currently limiting the fee to the rate set
forth below:
<TABLE>
<CAPTION>
Contractual Current
Fund Rate* Rate
- ---- ----------- -------
<S> <C> <C>
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .55% .40%
Core Fixed Income .55% .40%
High Yield .70% .65%
GSFM
Short Duration Government .65% .40%
Adjustable Rate Government .55% .40%
GSAMI
Global Income .90% .59%
- ----------------------------
</TABLE>
* The Contractual Rate is identical to the aggregate advisory and
administration fee rates payable by each Fund under the previous separate
advisory (including subadvisory in the case of Global Income Fund) and
administration agreements. For the fiscal year ended October 31, 1996, the
annual rate expressed is the combined advisory and administration fees paid
(after fee waivers). Such reduction or limits, if any, are calculated
B-69
<PAGE>
monthly on a cumulative basis and may be discontinued or modified by the
applicable Adviser at its discretion at any time, although they have no
current intention to do so.
For the fiscal years ended October 31, 1996, 1995 and 1994, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Adjustable Rate Fund $2,535,709 $2,947,492 $6,798,185
Short Duration Government 411,360 517,091 1,063,867
Fund/(1)/
Short Duration Tax-Free Fund 169,796 260,970 468,868
Core Fund/(2)/ 246,568 137,158 56,255
Global Income Fund/(3)(6)/ 1,117,226 706,460 1,518,814
Government Income Fund/(4)(6)/ 74,060 44,037 0
Municipal Income Fund/(5)(6)/ 211,283 154,707 35,494
</TABLE>
- -------------------------
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $514,200, $646,364 and $1,329,834,
respectively, for such years.
/(2)/ Core Fund commenced operations January 5, 1994.
/(3)/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of
$837,920, $1,412,921 and $3,037,627, respectively. If expense limitations
had not been in effect, Global Income Fund would have paid advisory and
subadvisory fees of $1,474,204 and $491,401, respectively, for the year
ended October 31, 1996 and $789,127 and $1,578,254, respectively, for the
year ended October 31, 1995.
/(4)/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $148,120, $101,737 and $65,604, respectively,
for such years.
/(5)/ Had expense limitations not been in effect for the years ended October 31,
1995 and 1994, Municipal Income Fund would have paid advisory fees of
$200,207 and $174,161, respectively, for such years.
/(6)/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
The fees and services under the Investment Advisory and Administration
Agreements are identical to the fees and services under the Management
Agreement.
Each Adviser performs administrative services for the applicable Funds
under the Management Agreement. Such
B-70
<PAGE>
administrative services include, subject to the general supervision of the
Trustees of the Trust, (a) providing supervision of all aspects of the Funds'
non-investment operations (other than certain operations performed by others
pursuant to agreements with the Funds), (b) providing the Funds, to the extent
not provided pursuant to the agreement with the Trust's custodian, transfer and
dividend disbursing agent or agreements with other institutions, with personnel
to perform such executive, administrative and clerical services as are
reasonably necessary to provide effective administration of the Funds, (c)
arranging, to the extent not provided pursuant to such agreements, for the
preparation, at the Funds' expense, of each Fund's tax returns, reports to
shareholders, periodic updating of the Funds' prospectuses and statements of
additional information, and reports filed with the SEC and other regulatory
authorities, (d) providing the Funds, to the extent not provided pursuant to
such agreements, with adequate office space and certain related office equipment
and services, and (e) maintaining all of the Funds' records other than those
maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
- ----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed-income markets, in each case on a proprietary basis and
for the accounts of customers. As such, Goldman Sachs and its affiliates are
actively engaged in transactions in the same securities, currencies, and
instruments in which the Funds invest. Such activities could affect the prices
and availability of the securities, currencies, and instruments in which the
Funds invest, which could have an adverse impact on each Fund's performance.
Such transactions, particularly in respect of proprietary accounts or customer
accounts other than those included in the Advisers' and their advisory
affiliates' asset management activities, will be executed independently of the
Funds' transactions and thus at prices or rates that may be more or less
favorable. When the Advisers and their advisory affiliates seek to purchase or
sell the same assets for their managed accounts, including the Funds, the assets
actually purchased or sold may be allocated among the accounts on a basis
determined in its good faith discretion of such entitles to be equitable. In
some cases, this system may adversely affect the size or the price of the assets
purchased or sold for the Funds.
B-71
<PAGE>
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which, or in securities of issuers for
which, the Advisers and/or their affiliates are performing services or when
position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs
B-72
<PAGE>
or their affiliated entities. As a result, the performance by these principals
and employees of their obligations to such other entities may be a consideration
of which investors in the Funds should be aware.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income, High Yield and Core Funds, currencies on behalf of
the applicable Funds in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Funds, and such party may
have no incentive to assure that the Funds obtain the best possible prices or
terms in connection with the transactions. Goldman Sachs and its affiliates may
also create, write or issue derivative instruments for customers of Goldman
Sachs or its affiliates, the underlying securities currencies or instruments of
which may be those in which the Funds invest or which may be based on the
performance of a Fund. The Funds may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter into transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the Funds. At times, these activities may cause
departments of the Firm to give advice to clients that may cause these clients
to take actions adverse to the interest of the client. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on a Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
B-73
<PAGE>
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust. Pursuant to the distribution agreement, after the Funds'
Prospectuses and periodic reports have been prepared, set in type and mailed to
shareholders, Goldman Sachs will pay for the printing and distribution of copies
thereof used in connection with the offering to prospective investors. Goldman
Sachs will also pay for other supplementary sales literature and advertising
costs. Goldman Sachs has entered into sales agreements with certain investment
dealers and financial service firms (the "Authorized Dealers") to solicit
subscriptions for Class A, Class B and Class C Shares of each of the Funds that
offer such classes of shares. Goldman Sachs receives a portion of the sales
load imposed on the sale, in the case of Class A Shares, or redemption in the
case of Class B and Class C Shares, of such Fund shares. No Class B Shares were
outstanding during the fiscal years ended October 31, 1994 and 1995. No Class C
Shares were outstanding during the fiscal years ended October 31, 1994, 1995 and
1996. Goldman Sachs retained approximately the following combined commissions
on sales of Class A and B shares during the following periods:
<TABLE>
<CAPTION>
1996** 1995* 1994
------- -------- --------
<S> <C> <C> <C>
Adjustable Rate Fund* $79,000 $40,000 N/A
Municipal Income Fund $24,900 $48,000 $ 76,000
Government Income Fund $17,300 $22,000 $ 5,000
Global Income Fund $52,600 $15,000 $350,000
- ---------------------
</TABLE>
* Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
** Prior to May 1, 1997, the Municipal, Government Income and Global Income
Funds did not offer Class B shares.
Goldman Sachs serves as the Trust's transfer and dividend disbursing agent.
Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken
with the Trust with respect to each Fund to (i) record the issuance, transfer
and redemption of shares, (ii) provide confirmations of purchases and
redemptions, and quarterly statements, as well as certain other statements,
(iii) provide certain information to the Trust's custodian and the relevant
subcustodian in connection with redemptions, (iv) provide dividend crediting and
certain disbursing agent services, (v) maintain shareholder accounts, (vi)
provide certain state Blue Sky and other information, (vii) provide shareholders
and certain regulatory authorities with tax-related information, (viii) respond
to shareholder inquiries, and (ix) render certain other miscellaneous services.
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer and dividend disbursing agent and the
B-74
<PAGE>
assumption by Goldman Sachs of the expenses related thereto, Goldman Sachs
received fees for the fiscal years ended October 31, 1996, 1995 and 1994 by each
Fund then in existence as follows:
<TABLE>
<CAPTION>
Fund 1996 1995 1994
- ---- ------- ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund 278,337 306,662 679,819
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 16,980 26,098 46,887
Core Fund/(1)/ 24,657 13,716 5,637
Global Income Fund 121,212 106,764 132,123
Municipal Income Fund 90,284 63,695 70,811
Government Income Fund 72,237 94,095 57,960
- ------------------------
</TABLE>
/(1)/ Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide that
Goldman Sachs may render similar services to others so long as the services each
provides thereunder to the Funds are not impaired thereby. Each such agreement
also provides that the Trust will indemnify Goldman Sachs against certain
liabilities.
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser, the fees and expenses of
the Trust's custodian, transfer agent fees, brokerage fees and commissions,
filing fees for the registration or qualification of the Trust's shares under
federal or state securities laws, expenses of the organization of the Trust,
fees and expenses incurred by the Trust in connection with membership in
investment company organizations, taxes, interest, costs of liability insurance,
fidelity bonds or indemnification, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal, tax and auditing fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
B-75
<PAGE>
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees (in the
case of Global Income Fund and High Yield Fund) and other extraordinary
expenses) to the following percentage of each Fund's average daily net assets:
Short Duration Government Fund 0.05%
Adjustable Rate Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fund 0.05%
Global Income Fund 0.06%
High Yield Fund 0.01%
Such reductions or limits are calculated monthly on a cumulative
basis. Although the Advisers have no current intention of modifying or
discontinuing such expense limitations or the limitations on the management
fees, described above under "Management -- Investment Advisers," each may do so
in the future at its discretion. For the fiscal year ended October 31, 1996,
October 31, 1995 and October 31, 1994, Other Expenses of each Fund were reduced
by the Advisers in the following amounts:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund 386,863 551,405 442,880
Short Duration
Government Fund 169,069 219,994 115,389
Short Duration
Tax-Free Fund 238,097 213,139 192,696
Core Fund* 233,065 176,469 141,815
Municipal Income Fund 238,203 196,265 198,806
Government Income Fund 219,091 242,036 224,285
Global Income Fund** 337,079 70,195 0
</TABLE>
- ----------------------
* Core Fund commenced operations on January 5, 1994.
** For the fiscal year ended October 31, 1994, there was no expense
limitation.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by the
Advisers in performing certain accounting services not being provided by the
Trust's custodian.
B-76
<PAGE>
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, 225 Franklin Street,
Boston, Massachusetts 02110, have been selected as auditors of the Trust. In
addition to audit services, Arthur Andersen LLP prepares the Trust's federal and
state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a dealer is dealing with a Fund as
principal and receives compensation equal to the spread between the dealer's
cost for a given security and the resale price of such security). In certain
foreign countries, debt securities in which the Global Income Fund, Core Fund
and High Yield Fund may invest are traded on exchanges at fixed commission
rates. In connection with portfolio transactions, the Management Agreement
provides that the Advisers shall attempt to obtain the best net price and the
most favorable execution. The Management Agreement provides that, on occasions
when an Adviser deems the purchase or sale of a security to be in the best
interests of a Fund as well as its other customers (including any other fund or
other investment company or advisory account for which the Advisers or an
affiliate act as investment adviser), a Fund, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution. In
such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the applicable Adviser in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to the applicable Fund and such other customers. In some instances,
this procedure may adversely affect the size and price of the position
obtainable for a Fund. The Management Agreement permits each Adviser, in its
discretion, to purchase and sell portfolio securities to and from dealers who
provide the Trust with brokerage or research services in which dealers may
execute brokerage transactions at a higher cost to the Fund. Brokerage and
research services furnished by firms through which the Fund's effect their
securities transactions may be used by the Advisers in servicing other accounts
and not all of these services may be used by the
B-77
<PAGE>
Adviser in connection with the specific Fund generating the brokerage credits.
The fees received under the Management Agreement are not reduced by reason of
the Adviser receiving such brokerage and research services. In addition, in
selecting brokers and dealers, the Advisers may take into account sales of
shares of the Funds and other funds in the Goldman Sachs Group of Funds by such
brokers and dealers.
For the fiscal years ended October 31, 1995 and 1994, the Funds then in
existence paid no brokerage commissions.
B-78
<PAGE>
For the fiscal year ended October 31, 1996, the Funds then in existence paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid/3/ Research
=========== ================= ======================= ==========
<S> <C> <C> <C> <C>
Fiscal Year Ended
October 31, 1996:
Adjustable Rate Fund $108,000 $108,000(100%)/1/ $2,121,317,579(100%)/2/ N/A$
Short Duration Government Fund 24,000 24,000(100%)/1/ 447,205,928(100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000(100%)/1/ 8,559,280(100%)/2/ N/A
Core Fixed Income Fund 4,000 4,000(100%)/1/ 43,548,299(100%)/2/ N/A
Government Income Fund 1,200 1,200(100%)/1/ 24,437,288(100%)/2/ N/A
Municipal Income Fund 2,750 2,750(100%)/1/ 51,101,625(100%)/2/ N/A
</TABLE>
_______________________________
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Refers to Market Value of Futures Contracts.
B-79
<PAGE>
During the fiscal year ended October 31, 1996, the Funds acquired and
sold securities of their regular broker-dealers: Chase Securities, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1996, Short Duration Tax-Free Fund, Global Income Fund
and Municipal Income Fund held no securities of their regular broker-dealers.
As of the same date, Short Duration Government Fund, Adjustable Rate Fund,
Government Income Fund and Core Fund held the following amounts of securities of
their regular broker-dealers, as defined in Rule 10b-1 under the 1940 Act, or
their parents ($ in thousands): Short Duration Government Fund: Lehman
Brothers, Inc. ($370), Nomura Securities ($280) and Bear Stearns ($280);
Adjustable Rate Fund: Lehman Brothers, Inc. ($4,531), Bear Stearns ($3,430) and
Nomura Securities ($3,430); Government Income Fund: Lehman Brothers, Inc.
($2,774), Nomura Securities (2,774) and Bear Stearns ($2,100); Nomura Securities
(2,774); Core Fund: Lehman Brothers, Inc. ($4,808), Nomura Securities ($3,640)
and Bear Stearns ($3,640).
SHARES OF THE TRUST
The Funds were reorganized from series of a Massachusetts business
trust as part of Goldman Sachs Trust, a Delaware business trust, by a
Declaration of Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees have authority to classify and reclassify any series of shares into one
or more classes of shares. As of the date of this Additional Statement, the
Trustees have authorized: (i) the issuance of six classes of shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares; (ii) the issuance of four classes of shares
of Adjustable Rate Fund: Institutional Shares, Administration Shares, Service
Shares and Class A Shares; and (iii) the issuance of five classes of shares of
Global Income Fund, Government Income Fund, Municipal Income Fund and High Yield
Fund: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. As of October 31, 1996, no Service Shares of the Adjustable
Rate Fund were outstanding; no Class A, Class B or Class C Shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund were
outstanding; no Class C Shares of Government Income Fund and Municipal Income
Fund were outstanding; and no shares of High Yield Fund were outstanding.
B-80
<PAGE>
Each Institutional Share, Administration Share, Service Share, Class A
Share, Class B Share and Class C Share of a Fund represents a proportionate
interest in the assets belonging to the applicable class of the Fund. All
expenses of a Fund are borne at the same rate by each class of shares, except
that fees under Administration and Service Plans are borne exclusively by
Administration and Service Shares, fees under Distribution and Authorized Dealer
Service Plans are borne exclusively by Class A, Class B or Class C Shares and
transfer agency fees are borne at different rates by Class A, Class B or Class C
Shares than Institutional, Administration and Service Shares. The Trustees may
determine in the future that it is appropriate to allocate other expenses
differently between classes of shares and may do so to the extent consistent
with the rules of the SEC and positions of the Internal Revenue Service. Each
class of shares may have different minimum investment requirements and be
entitled to different shareholder services. Currently, shares of a class may
only be exchanged for shares of the same or an equivalent class of another fund.
See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the institution's customers.
Administration Shares may be purchased for accounts held in the name
of an institution that provides certain account administration services to its
customers, including maintenance of account records and processing orders to
purchase, redeem and exchange Administration Shares. Administration Shares bear
the cost of account administration fees at the annual rate of up to 0.25% of the
average daily net assets of such Administration Shares.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge, through brokers
and dealers who are members of the National Association of Securities Dealers,
Inc. and certain other financial service firms that have sales agreements with
Goldman Sachs. Class A Shares of the Funds bear the cost of distribution (Rule
12b-1) fees at the aggregate rate of up to 0.25% of the average daily net assets
of such Class A Shares. Class A Shares also bear the cost of an Authorized
Dealer Service Plan at an annual rate of up to 0.25% of average daily net assets
attributable to Class A Shares.
B-81
<PAGE>
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge through brokers and dealers who are members of the National
Association of Securities Dealers, Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. Class B shares bear the
cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of
the average daily net assets attributable to Class B shares. Class B shares
also bear the cost of an Authorized Dealer Service Plan at an annual rate of up
to 0.25% of the average daily net assets attributable to Class B shares.
Class C Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 1.0% through brokers and dealers who are members of the
National Association of Securities Dealers Inc. and certain other financial
services firms that have sales arrangements with Goldman Sachs. Class C Shares
bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to
0.75% of the average daily net assets attributable to Class C Shares. Class C
Shares also bear the cost of an Authorized Dealer Service Plan at an annual rate
of up to 0.25% of the average daily net assets attributable to Class C Shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A, Class B and Class C Shares) to its customers and thus receive different
compensation with respect to different classes of shares of each Fund.
Dividends paid by each Fund, if any, with respect to each class of shares will
be calculated in the same manner, at the same time on the same day and will be
in the same amount, except for differences caused by the fact that the
respective account administration, service, authorized dealer service plan and
distribution fees relating to a particular class will be borne exclusively by
that class. Similarly, the net asset value per share may differ depending upon
the class of shares purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, each Fund's shares are fully paid and non-assessable by
the Trust. In the event of liquidation of a Fund, shareholders of that Fund are
entitled to share pro rata in the net assets of that Fund available for
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of July 24, 1997, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following Funds: Adjustable
Rate Fund -- First Trust of New York, N.A., Mr. Michael Loughlin, 100 Wall
Street, Suite 1600, New York, NY (12.15%); State Treasurer/Nebraska Investment
Council, Attn: Gayle Ducker, 941 "O" Street, Lincoln, NE 68508 (7.03%); Short
Duration Government Fund -- Central Carolina Bank & Trust Co., P.O.
B-82
<PAGE>
Box 30010, Durham, NC 27702 (7.60%); Richfield Bank & Trust Co., Kirchbak Co.,
Attn: Judith A. Ferguson, 6625 Lyndale Avenue South, Richfield, MN 55423
(7.36%); State Street Bank & Trust Co., 1 Enterprise Drive, North Quincy, MA
02171-2126 (31.49%); Short Duration Tax-Free Fund -- Donald R. Gant, Partner,
Goldman, Sachs & Co., 85 Broad Street, 22nd Floor, New York, NY 10004 (17.25%);
G-K-G, Inc., Bernard Gassin, 166 Oak Knoll Terrace, Highland Park, IL 60035
(10.18%); Indiana Trust & Investment Management Co., Attn: Tina Taylor, 3930
Edison Lakes Parkway, Suite 250, Mishawaka, IN 46545 (6.33%); Nelda Start,
Attn: Mr. Walte Riedel, P.O. Box 903, Orange, TX 77631-0909 (7.51%); Westport
Trust -- WEBAT & Co., c/o Westport Bank & Trust, P.O. Box 5177, Westport, CT
06881-5177 (7.82%); Government Income Fund -- Frontier Trust Co., Inc. TR, FBO
Dade County Public School, Attn: Agnes R. McMurray, Fringe Benefits Management
Co., 1720 S. Gadsden Street, Tallahassee, FL 32301-5547 (7.48); Charles Machine
Works, Inc., ESOP & Trust Asset Allocation Account, Mike Stodola, Trustee, P.O.
Box 66, 1959 West Fir Street, Perry, OK 73077-5803 (6.22%); Bob Smith MD
Foundation, 3811 Turtle Creek Centre #2150, Dallas, TX 75219-4454 (5.22%); Core
Fund --Local 234 Electric Workers Retirement Fund, Attn: Ronald D. Carpenter,
10300 Merritt Street, Castroville, CA 95012 (6.60%); Vinson and Elkins Pension
Plan, Attn: Mr. Mike Ross, c/o Banc One, 910 Travis Street, F16, Houston, TX
77002-5802 (9.79%); St. Barnabas, 1 New York Plaza, New York, NY 10004-1902
(19.33%); Vinson and Elkins Lawyers, Retirement Plan, Texas Commerce Bank N.A.,
P.O. Box 2558, Houston, TX (31.67%); Global Income Fund --First National Bank
North Dakota, Attn: Josie Wahl, P.O. Box 6001, Grand Forks, ND 58206-6001
(5.51%); State Street Bank and Trust, GS Profit Sharing Master Trust, Attn:
Louis Pereira, P.O. Box 1992, Boston, MA 02105-1992 (15.63%).
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act, applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company (such as
the Trust) shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of Trustees from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the election of Trustees (this method of voting being
referred to at "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the
B-83
<PAGE>
Trustees, series and classes of the Trust will vote separately from each other.
Shareholders of the Trust do not have cumulative voting rights in the election
of Trustees. Meetings of shareholders of the Trust, or any series or class
thereof, may be called by the Trustees, certain officers or upon the written
request of holders of 10% or more of the shares entitled to vote at such
meetings. The shareholders of the Trust will have voting rights only with
respect to the limited number of matters specified in the Declaration of Trust
and such other matters as the Trustees may determine or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for
any act or obligation of the series and satisfy any judgment thereon from the
assets of the series.
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
B-84
<PAGE>
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have
the right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of the Delaware Trust, all the powers and authorities of
Trustees under the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of a Fund. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
series or the Trustees. The Declaration of Trust provides for indemnification by
the relevant Fund for all loss suffered by a shareholder as a result of a
obligation of the series. The Declaration of Trust also provides that a series
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. In view of the above, the risk of personal liability of shareholders is
remote.
In addition to the requirement under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the series or class to which such action relates, shall join in the request for
the Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of other advisers in considering the merits of the request
and shall require an undertaking by the shareholders making such request to
B-85
<PAGE>
reimburse the Fund for the expense of any such advisers in the event that the
Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason or willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
NET ASSET VALUE
Under the Act, the Trustees of the Trust are responsible for
determining in good faith the fair value of securities of the Funds. In
accordance with procedures adopted by the Trustees of the Trust, the net asset
value per share of each class of each Fund is calculated by determining the
value of the net assets attributable to each class of that Fund (assets,
including securities at value, minus liabilities) and dividing by the number of
outstanding shares of that class. All securities are valued as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time) on each Business Day (as defined in each Fund's Prospectus).
For the purpose of calculating the net asset value of the Funds,
investments are valued under valuation procedures established by the Trustees.
Portfolio securities, other than money market instruments and with the exception
of Global Income Fund, for which accurate market quotations are readily
available are valued as follows: (a) via electronic feeds to the custodian bank
containing dealer-supplied bid quotations or bid quotations from a nationally
recognized pricing service; (b) securities for which the custodian bank is
unable to obtain an external price or with respect to which the Adviser believes
an external price does not reflect accurate market values, will be valued by the
Adviser in good faith based on valuation models that take into account daily
spread and yield changes on U.S. Treasury securities (i.e., matrix pricing); (c)
overnight repurchase agreements will be valued by the Adviser at cost; (d) term
repurchase agreements (i.e., those whose maturity exceeds seven days) and
interest rate swaps, caps, collars and floors will be valued at the average of
the bid quotations obtained daily from at least two dealers or, for term
repurchase agreements, recognized counterparties; (e) debt securities with a
remaining maturity of 60 days or less are valued by the Adviser at amortized
cost, which the Trustees have determined to approximate fair value; (f) spot and
forward foreign currency exchange contracts will be valued using a pricing
service such as Reuters then calculating then mean between the last bid and
asked quotations supplied by certain independent dealers in such contracts; (g)
exchange-traded options and futures contracts will be valued by the custodian
bank at the last sale price on the exchange where such contracts and options are
principally traded; and (h) over-the-counter options will be valued by an
independent
B-86
<PAGE>
unaffiliated broker identified by the portfolio manager/trader and contacted by
the custodian bank.
Portfolio securities of the Global Income Fund for which accurate
market quotations are available are valued as follows: (a) securities listed on
any U.S. or foreign stock exchange or on the National Association of Securities
Dealers Automated Quotations System ("NASDAQ") will be valued at the last sale
price on the exchange or system in which they are principally traded, on the
valuation date. If there is no sale on the valuation day, securities traded
principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean between
the closing bid and asked prices, and (ii) on a foreign exchange will be valued
at the official bid price. The last sale price and official bid price for
securities traded principally on a foreign exchange will be determined as of the
close of the London Foreign Exchange; (b) over-the-counter securities not quoted
on NASDAQ will be valued at the last sale price on the valuation day or, if no
sale occurs, at the mean between the last bid and asked prices; (c) options and
futures contracts will be valued at the last sale price in the market where such
contract is principally traded; and (d) forward foreign currency exchange
contracts will be valued at the mean between the last bid and asked quotations
supplied by a dealer in such contracts.
All other securities, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved by the Board of Trustees.
Money market instruments held by a Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which the
Trustees have determined approximates market value.
The value of all assets and liabilities expressed in foreign
currencies will be converted into U.S. dollar values at current exchange rates
of such currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the time the Global Income, Core and High
Yield Funds calculate their net asset value. Occasionally, events affecting the
values of such securities may occur between the times at which they are
determined and the calculation of net asset value which will not be reflected in
the computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value, in which case an adjustment
may be made.
B-87
<PAGE>
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies and financial institutions. Each prospective
shareholder is urged to consult his own tax adviser with respect to the specific
federal, state, local and foreign tax consequences of investing in the Funds.
This summary is based on the laws in effect on the date of this Additional
Statement, which are subject to change.
GENERAL
- -------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect to
be treated and intends to continue to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its gross
income (including tax-exempt interest) for its taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks or securities, or foreign currencies or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"); (b) a Fund derive less than 30% of its
gross income for its taxable year from the sale or other disposition of any of
the following which was held for less than three months: (i) stock or
securities, (ii) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies) and (iii) foreign currencies
and foreign currency options, futures and forward contracts that are not
directly related to the Fund's principal business of investing in stocks or
securities or options and futures with respect to stocks or securities (the
"short-short test"); and (c) a Fund diversify its holdings so that, at the close
of each quarter of its taxable year, (i) at least 50% of the market value of its
total (gross) assets is comprised of cash, cash items, United States Government
Securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (gross) assets is invested in the securities of any
one issuer (other than United States Government Securities and securities of
other regulated investment companies) or two or more issuers controlled by a
Fund and engaged in the same, similar or related trades or businesses. Gains
from the sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that
B-88
<PAGE>
are not directly related to Core Fund's or Global Income Fund's principal
business of investing in stock or securities or options and futures with respect
to stock or securities will be treated as gains from the sale of investments
held for less than three months under the short-short test (even though
characterized as ordinary income for some purposes) if such currencies or
instruments were held for less than three months. In addition, future Treasury
regulations could provide that qualifying income under the 90% gross income test
will not include gains from foreign currency transactions that are not directly
related to Core Fund's or Global Income Fund's principal business of investing
in stock or securities or options and futures with respect to stock or
securities. Using foreign currency positions or entering into foreign currency
options, futures and forward contracts for purposes other than hedging currency
risk with respect to securities in Core Fund's or Global Income Fund's portfolio
or anticipated to be acquired may not qualify as "directly related" under these
tests.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on the portion of its income and capital gains that it
distributes to its shareholders in any taxable year for which it distributes, in
compliance with the Code's timing and other requirements, at least 90% of its
"investment company taxable income" (which includes dividends, taxable interest,
taxable original issue discount income, market discount income, income from
securities lending, net short-term capital gain in excess of net long-term
capital loss, certain net realized foreign exchange gains, and any other taxable
income other than "net capital gain" as defined below and is reduced by
deductible expenses) and at least 90% of the excess of its gross tax-exempt
interest income over certain disallowed deductions ("net tax-exempt interest").
A Fund may retain for investment its "net capital gain" (which consists of the
excess of its net long-term capital gain over its net short-term capital loss).
However, if a Fund retains any investment company taxable income or net capital
gain, it will be subject to tax at regular corporate rates on the amount
retained. If a Fund retains any net capital gain, that Fund may designate the
retained amount as undistributed net capital gain in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by that Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For U.S.
federal income tax purposes, the tax basis of shares owned by a shareholder of
the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute for each taxable year to its
shareholders all or substantially all of its investment company taxable income
(if any), net capital gain and any net tax-exempt interest. Exchange control or
other foreign laws, regulations or practices may restrict repatriation of
investment income, capital or the proceeds
B-89
<PAGE>
of securities sales by foreign investors such as Global Income Fund or Core Fund
and may therefore make it more difficult for Global Income Fund or Core Fund to
satisfy the distribution requirements described above, as well as the excise tax
distribution requirements described below. However, Global Income Fund and Core
Fund generally expect to be able to obtain sufficient cash to satisfy such
requirements from new investors, the sale of securities or other sources. If
for any taxable year a Fund does not qualify as a regulated investment company,
it will be taxed on all of its investment company taxable income and net capital
gain at corporate rates, its net tax-exempt interest (if any) may be subject to
the alternative minimum tax, and its distributions to shareholders will be
taxable as ordinary dividends to the extent of its current and accumulated
earnings and profits.
For federal income tax purposes, each Fund is permitted to carry
forward a net capital loss in any year to offset its own capital gains, if any,
during the eight years following the year of the loss. At October 31, 1996, the
Funds had approximately the following amounts of capital loss carry forwards:
<TABLE>
<CAPTION>
Years of
Amount Expiration
----------- ----------
<S> <C> <C>
Adjustable Rate Fund $47,923,000 2000-2003
Short Duration
Government Fund $13,272,000 2002-2003
Short Duration
Tax-Free Fund $ 4,271,000 2002-2003
Core Fixed Income Fund $ 77,000 2004
Global Income Fund $ 4,472,000 2002
Municipal Income Fund $ 1,535,000 2002
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by the Code and applicable tax regulations.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year) and 100% of any taxable
ordinary income and the excess of capital gains over capital losses for the
prior year that were not distributed during such year and on which the Fund did
not pay federal income tax. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will
B-90
<PAGE>
be treated as if they were received by shareholders on December 31 of the year
declared.
The Tax Exempt Funds may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." The Tax Exempt Funds may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, the Tax
Exempt Funds may purchase beneficial interests in Municipal Securities held by
trusts, custodial arrangements or partnerships and/or combined with third-party
puts and other types of features such as interest rate swaps; those investments
may require the Fund to pay "tender fees" or other fees for the various features
provided.
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that tax-
exempt interest received by a regulated investment company with respect to such
obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax Exempt Funds intends to take
the position that it is the owner of any municipal obligations acquired subject
to a standby commitment or other third party put and that tax-exempt interest
earned with respect to such municipal obligations will be tax-exempt in its
hands. There is no assurance that the Service will agree with such position in
any particular case. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the treatment of tender fees paid
by these Funds, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Tax Exempt
Funds' portfolios in a manner designed to minimize any adverse impact from the
tax rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is,
B-91
<PAGE>
treated as having been sold at their fair market value on the last day of the
Fund's taxable year. These provisions may require a Fund to recognize income or
gains without a concurrent receipt of cash. Any gain or loss recognized on
actual or deemed sales of these futures contracts, forward contracts or options
will (except for certain foreign currency options, forward contracts, and
futures contracts) be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. As a result of certain hedging transactions
entered into by a Fund, that Fund may be required to defer the recognition of
losses on futures or forward contracts and options or underlying securities or
foreign currencies to the extent of any unrecognized gains on related positions
held by the Fund and the characterization of gains or losses as long-term or
short-term may be changed. The short-short test described above may limit each
Fund's ability to use options, futures and forward transactions as well as its
ability to engage in short sales. The tax provisions described above applicable
to options, futures and forward contracts may affect the amount, timing, and
character of a Fund's distributions to shareholders. Certain tax elections may
be available to the Funds to mitigate some of the unfavorable consequences
described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by Core Fund and Global Income
Fund. Under these rules, foreign exchange gain or loss realized by Core Fund or
Global Income Fund with respect to foreign currencies and certain futures and
options thereon, foreign currency-denominated debt instruments, foreign currency
forward contracts, and foreign currency-denominated payables and receivables
will generally be treated as ordinary income or loss, although in some cases
elections may be available that would alter this treatment. If a net foreign
exchange loss treated as ordinary loss under Section 988 of the Code were to
exceed a Fund's investment company taxable income (computed without regard to
such loss) for a taxable year, the resulting loss would not be deductible by
the Fund or its shareholders in future years. Net loss, if any, from certain
foreign currency transactions or instruments could exceed net investment income
otherwise calculated for accounting purposes with the result being either no
dividends being paid or a portion of Core Fund's, High Yield Fund's or Global
Income Fund's dividends being treated as a return of capital for tax purposes,
nontaxable to the extent of a shareholder's tax basis in his shares and, once
such basis is exhausted, generally giving rise to capital gains.
Core and Global Income, and High Yield Funds may be subject to foreign
taxes on income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes in some cases. Because more than 50% of Global Income
Fund's total assets at the close of any taxable year will generally consist of
stock or securities of foreign corporations, Global Income Fund will generally
qualify to file an election with the Internal Revenue Service pursuant to which
shareholders of Global Income Fund would
B-92
<PAGE>
be required to (i) include in ordinary gross income (in addition to taxable
dividends actually received) their pro rata shares of foreign income taxes paid
by Global Income Fund that are treated as income taxes under U.S. tax
regulations (which excludes, for example, stamp taxes, securities transaction
taxes, and similar taxes) even though not actually received by such
shareholders, and (ii) treat such respective pro rata portions as foreign income
taxes paid by them. Global Income Fund may or may not make this election for
any particular taxable year. Core Fund will not satisfy the 50% requirement
described above and, therefore, will not make this election. Core Fund and, if
it does not make the election, Global Income Fund will, however, be entitled to
deduct such taxes in computing the amounts they are required to distribute.
If Global Income Fund makes this election, its shareholders may then deduct
such pro rata portions of qualified foreign taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of qualified foreign taxes paid by
Global Income Fund, although such shareholders will be required to include their
shares of such taxes in gross income if Global Income Fund makes the election
referred to above.
If a shareholder chooses to take a credit for the foreign taxes deemed paid
by such shareholder as a result of any such election by Global Income Fund, the
amount of the credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken which the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. For
this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by Global Income Fund will generally not be treated as
income from foreign sources. This foreign tax credit limitation may also be
applied separately to certain specific categories of foreign-source income and
the related foreign taxes. As a result of these rules, which have different
effects depending upon each shareholder's particular tax situation, certain
shareholders of Global Income Fund may not be able to claim a credit for the
full amount of their proportionate shares of the foreign taxes paid by the Fund.
Shareholders who are not liable for U.S. federal income taxes, including
tax-exempt shareholders, will ordinarily not benefit from this election. Each
year, if any, that Global Income Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of qualified foreign income taxes paid by Global Income Fund and (ii) the
portion of Fund dividends which represents income from each foreign country.
If Core, or Global Income or High Yield Funds acquire stock (including,
under proposed regulations, an option to acquire stock
B-93
<PAGE>
such as is inherent in a convertible bond) in certain foreign corporations that
receive at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies") Core, Global Income or High Yield Funds could be subject
to federal income tax and additional interest charges on "excess distributions"
received from such companies or gain from the sale of such stock in such
companies, even if all income or gain actually received by Core, Global Income
or High Yield Funds is timely distributed to its shareholders. Core, Global
Income or High Yield Funds would not be able to pass through to their
shareholders any credit or deduction for such a tax. Certain elections may, if
available, ameliorate these adverse tax consequences, but any such election
would require Core, Global Income or High Yield Funds to recognize taxable
income or gain without the concurrent receipt of cash. Core, Global Income or
High Yield Funds may limit and/or manage their holdings in passive foreign
investment companies to minimize its tax liability or maximize its return from
these investments.
A Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark-to-market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations
B-94
<PAGE>
concerning the tax-exempt status of such obligations, nor does it guarantee or
represent that bond counsels' opinions are correct. Bond counsels' opinions will
generally be based in part upon covenants by the issuers and related parties
regarding continuing compliance with federal tax requirements. Tax laws not
only limit the purposes for which tax-exempt bonds may be issued and the supply
of such bonds, but also contain numerous and complex requirements that must be
satisfied on a continuing basis in order for bonds to be and remain tax-exempt.
If the issuer of a bond or a user of a bond-financed facility fails to comply
with such requirements at any time, interest on the bond could become taxable,
retroactive to the date the obligation was issued. In that event, a portion of
a Tax Exempt Fund's distributions attributable to interest the Fund received on
such bond for the current year and for prior years could be characterized or
recharacterized as taxable income. The availability of tax-exempt obligations
and the value of a Tax Exempt Fund's portfolio may be affected by restrictive
federal income tax legislation enacted in recent years or by similar, future
legislation. If a Tax Exempt Fund satisfies the applicable requirements,
dividends paid by the Fund which are attributable to tax exempt interest on
Municipal Securities and designated by the Fund as exempt-interest dividends in
a written notice mailed to its shareholders within sixty days after the close
of its taxable year may be treated by shareholders as items of interest
excludable from their gross income under Section 103(a) of the Code. Exempt-
interest dividends a Tax Exempt Fund receives from other regulated investment
companies, including exempt-interest dividends on auction rate preferred
securities of such companies held by a Fund, are treated as interest on
Municipal Securities and may be distributed by a Tax Exempt Fund as exempt-
interest dividends. The recipient of tax-exempt income is required to report
such income on his federal income tax return. However, a shareholder is advised
to consult his tax adviser with respect to whether exempt-interest dividends
retain the exclusion under Section 103(a) if such shareholder would be treated
as a "substantial user" under Section 147(a)(1) with respect to some or all of
the tax-exempt obligations held by a Tax Exempt Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of a
Tax Exempt Fund is not deductible to the extent attributable to exempt-interest
dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
B-95
<PAGE>
ALL FUNDS. Distributions from investment company taxable income, as
defined above, are taxable to shareholders who are subject to tax as ordinary
income whether paid in cash or reinvested in additional shares. Taxable
distributions include distributions from any Fund, including Short Duration Tax-
Free Fund and Municipal Income Fund, that are attributable to (i) taxable
income, including but not limited to dividends, taxable bond interest,
recognized market discount income, original issue discount income accrued with
respect to taxable bonds, income from repurchase agreements, income from
securities lending, income from dollar rolls, income from interest rate or
currency swaps, caps, floors and collars, and a portion of the discount from
certain stripped tax-exempt obligations or their coupons or (ii) capital gains
from the sale of securities or other investments (including from the disposition
of rights to when-issued securities prior to issuance) or from options, futures
or certain forward contracts. Any portion of such taxable distributions that is
attributable to a Fund's net capital gain, as defined above, may be designated
by the Fund as a "capital gain dividend," taxable to shareholders as long-term
capital gain whether received in cash or additional shares and regardless of the
length of time their shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less than a
minimum period, generally 46 days. Receipt of certain distributions qualifying
for the deduction may result in reduction of the tax basis of the corporate
shareholder's shares and may give rise to or increase its liability for federal
corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes,
will first reduce a shareholder's basis in his shares and, after the
shareholder's basis is reduced to zero, will generally constitute capital gains
to a shareholder who holds his shares as capital assets. Amounts that are not
allowable as a deduction in computing taxable income, including expenses
associated with earning tax-exempt interest income, do not reduce a Fund's
current earnings and profits for these purposes. Consequently, the portion, if
any, of Short Duration Tax-Free Fund's or Municipal Income Fund's distributions
from gross tax-exempt interest income that exceeds its net tax-exempt interest
would be taxable as ordinary income to the extent of such disallowed deductions
even
B-96
<PAGE>
though such excess portion may represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash and will have a cost basis in the shares received equal
to such amount.
TAXABLE U.S. SHAREHOLDERS -- SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of in
a transaction that is treated as a sale for tax purposes, the shareholder will
generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale, such gain or loss should be capital in
character, and long-term if the shareholder has a tax holding period for the
shares of more than one year, otherwise short-term, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund Shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. All or a portion
of a sales charge paid in purchasing Class A shares of Adjustable Rate Fund or
Global Income Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of that Fund or another fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment or
exchange privilege. Any disregarded portion of such charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired. If
a shareholder received a capital gain dividend with respect to shares and such
shares have a tax holding period of six months or less at the time of the sale
or redemption, then any loss the shareholder realizes on the sale or redemption
will be treated as a long-term capital loss to the extent of such capital gain
dividend. Also, any losses realized by shareholders who dispose of shares of
Short Duration Tax-Free or Municipal Income Funds with a tax holding period of
six months or less are disallowed to the extent of any exempt-interest dividends
received with respect to such shares. Additionally, any loss realized on a sale
or redemption of shares of a Fund may be disallowed under "wash sale" rules to
the extent the shares disposed of are replaced with other shares of the same
Fund within a period of 61 days beginning 30 days before and ending 30 days
after the shares are disposed of, such as pursuant to a dividend reinvestment in
shares of the Fund. If disallowed, the loss will be reflected in an adjustment
to the basis of the shares acquired.
After the close of each calendar year, each of Short Duration Tax-Free Fund
and Municipal Income Fund will inform shareholders of
B-97
<PAGE>
the federal income tax status of its dividends and distributions for such year,
including the portion of such dividends that qualifies as tax-exempt and the
portion, if any, that should be treated as a tax preference item for purposes of
the federal alternative minimum tax. Shareholders who have not held shares of
Short Duration Tax-Free Fund or Municipal Income Fund for such Fund's full
taxable year may have designated as tax-exempt or as a tax preference item a
percentage of distributions which is not equal to the actual amount of tax-
exempt income or tax preference item income earned by Short Duration Tax-Free
Fund or Municipal Income Fund during the period of their investment in Short
Duration Tax-Free Fund or Municipal Income Fund, as the case may be.
All distributions, whether received in shares or in cash, as well as
redemptions and exchanges, must be reported by each shareholder who is required
to file a U.S. Federal income tax return.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish the Funds with their correct taxpayer identification number and with
certain required certifications or if the Service or a broker notifies the Funds
that the number furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from Short
Duration Tax-Free Fund or Municipal Income Fund will not be subject to backup
withholding if the applicable Fund reasonably estimates that at least 95% of its
distributions will be exempt-interest dividends. A Fund may refuse to accept an
application that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
B-98
<PAGE>
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment company taxable income distributed by a
Fund to a shareholder who is not a U.S. person will be subject to U.S.
withholding tax at the rate of 30% (or a lower rate provided by an applicable
tax treaty) unless the dividends are effectively connected with a U.S. trade or
business of the shareholder, in which case the dividends will be subject to tax
on a net income basis at the graduated rates applicable to U.S. individuals or
domestic corporations. Distributions of net capital gain, including amounts
retained by a Fund which are designated as undistributed capital gains, to a
shareholder who is not a U.S. person will not be subject to U.S. federal income
or withholding tax unless the distributions are effectively connected with the
shareholder's trade or business in the United States or, in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met. Non-U.S. shareholders may also be subject to U.S.
withholding tax on deemed income resulting from any election by Global Income
Fund to treat qualified foreign taxes it pays as passed through to shareholders
(as described above), but they may not be able to claim a U.S. tax credit or
deduction with respect to such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
B-99
<PAGE>
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Thirty-day yield and average annual total return values are computed pursuant to
formulas specified by the SEC. Each Fund may also from time to time quote
distribution rates in reports to shareholders and in sales literature.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price per share on the
last day of such period. Yield is then annualized by assuming that yield is
realized each month for twelve months and is reinvested every six months. Net
investment income per share is equal to the dividends and interest earned during
the period, reduced by accrued expenses for the period. The calculation of net
investment income for these purposes may differ from the net investment income
determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, a Tax Exempt Fund's tax-free yield. Tax equivalent yield is
calculated by dividing a Tax Exempt Fund's tax-exempt yield by one minus a
stated federal and/or state tax rate.
Distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share on the last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price applicable to the relevant
class (i.e., net asset value in the case of each class other than Class A) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption (and in the case
of Class B and Class C Shares payment of any contingent deferred sales charge)
at the end of the period. This calculation assumes a complete redemption of the
investment. It also assumes that all dividends and distributions are reinvested
at net asset value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price per share with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period.
B-100
<PAGE>
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
Thirty-day yield, tax equivalent yield (Short Duration Tax-Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A, Class B or Class C Shares which is based upon a Fund's net asset value per
share would be reduced if a sales charge were taken into account.
B-101
<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- -------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 6.00% 5.94%
Administration Shares 5.75% 5.69%
Service Shares/2/
Class A Shares
- Assumes 1.5% sales charge 5.66% 5.35%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.43% 6.16%
Administration Shares 6.19% 5.93%
Service Shares 5.96% 5.71%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.34% 3.71%
Administration Shares 4.09% 3.42%
Service Shares 3.84% 3.22%
CORE FUND
Institutional Shares 6.60% 6.25%
Administration Shares 6.37% 6.03%
Service Shares 6.12% 5.78%
GLOBAL INCOME FUND
Institutional Shares 5.20% 4.76%
Service Shares/2/
Class A Shares
(Assumes 4.5% sales charge) 4.54% 4.08%
Class B Shares 4.23% 3.80%
MUNICIPAL INCOME FUND
Class A Shares 4.21% 3.56%
(assumes 4.5% sales charge)
Class B Shares 3.68% 3.25%
GOVERNMENT INCOME FUND
Class A Shares 6.04% 4.76%
(assumes 4.5% sales charge)
Class B Shares 5.57% 4.48%
</TABLE>
B-102
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- ---- ------------------ ----------- -------------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 5.87% 5.81%
Administration Shares 5.62% 5.56%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.62% 5.31%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.24% 5.97%
Administration Shares 6.00% 5.72%
Service Shares 5.78% 5.49%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.19% 3.56%
Administration Shares 3.94% 3.28%
Service Shares 3.69% 3.06%
MUNICIPAL INCOME FUND
Class A Shares 4.27% 3.59%
-assumes no sales charge
Class B Shares 3.53% 3.09%
GOVERNMENT INCOME FUND
Class A Shares 6.33% 5.00%
-assumes no sales charge
Class B Shares 5.58% 4.50%
CORE FUND
Institutional Shares 6.46% 6.12%
Administration Shares 6.23% 5.89%
Service Shares 5.98% 5.63%
GLOBAL INCOME FUND
Institutional Fund 5.95% 6.18%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.44% 4.96%
Class B Shares 5.02% 4.59%
</TABLE>
B-103
<PAGE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---- ------------------ -------------- --------------
<S> <C> <C> <C>
30-Days
ended
10/31/96
SHORT DURATION
TAX-FREE FUND/3/
Institutional Shares 6.94% 5.89%
Administration Shares 6.52% 5.43%
Service Shares 6.11% 5.07%
MUNICIPAL INCOME FUND/3/
Class A Shares 7.07% 5.94%
-assumes no sales charge
Class B Shares 5.84% 5.12%
</TABLE>
- ----------------------------------
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to limit its advisory fees and to maintain
expenses at a specified level.
2 There were no Service Shares outstanding during the periods indicated.
3 The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 39.6% federal income tax rate.
The above tables should not be considered a representation of future
performance.
B-104
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- ---------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/96 5.32% 5.19%
11/1/95 one year ended
10/31/96 6.86% 6.80%
11/1/91 five years ended
10/31/96 5.13% 5.05%
Administration Shares 4/15/93/1b/ ended 10/31/96 4.69% 4.64%
11/1/95 one year ended
10/31/96 6.60% 6.53%
Service Shares/1c/ N/A N/A
Class A Shares 5/12/95/1d/ ended 10/31/96
Assumes 1.5% Sales Charge 5.29% 4.96%
Assumes No Sales Charge 6.40% 6.07%
11/1/95 one year ended
Assumes 1.5% Sales Charge 10/31/96 4.99% 4.66%
Assumes No Sales Charge 6.60% 6.27%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/96 7.24% 6.84%
11/1/95 one year ended
10/31/96 6.75% 6.47%
11/1/91 five years
ended 10/31/96 5.67% 5.44%
Administration Shares 2/28/96/2b/ ended 10/31/96 4.00% 3.82%
Service Shares 4/10/96/2b/ ended 10/31/96 4.35% 4.20%
</TABLE>
B-105
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-----------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
Institutional Shares 10/1/92/3a/ ended 10/31/96 4.21% 3.71%
11/1/95 one year ended
10/31/96 4.50% 3.92%
Administration Shares 5/20/93/3b/ ended 10/31/96 3.51% 3.15%
11/1/95 one year ended
10/31/96 4.24% 3.66%
Service Shares 9/20/94/3c/ ended 10/31/96 4.36% 3.92%
11/1/95 one year ended
10/31/96 3.98% 3.40%
CORE FUND
Institutional Shares 1/15/94/4a/ 10/31/96 6.34% 5.70%
11/1/95 one year ended
10/31/96 5.98% 5.58%
Administration Shares 2/28/96/4b/ ended
10/31/96 3.56% 3.29%
Service Shares 3/13/96/4b/ ended
10/31/96 4.90% 4.69%
</TABLE>
B-106
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
------------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- -------------- ------------------- --------------- ------------
<S> <C> <C> <C> <C>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/96
Assumes 4.5% Sales Charge 7.08% 6.76%
Assumes No Sales Charge 8.02% 7.71%
Assumes 4.5% Sales Charge 11/1/95 one year 6.08% 5.57%
Assumes No Sales Charge ended 10/31/96 11.05% 10.53%
Assumes 4.5% Sales Charge 11/1/91 five years 7.02% 6.73%
Assumes No Sales Charge ended 10/31/96 8.01% 7.69%
Class B Shares/5b/ 5/1/96 ended 10/31/96/5d/ 6.24% 6.01%
Institutional Shares 8/1/95/5e/ ended 10/31/96 12.95% 12.45%
11/1/95 one year
ended 10/31/96 11.55% 11.05%
Service Shares/5f/
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/96
Assumes 4.5% Sales Charge 3.80% 2.78%
Assumes No Sales Charge 5.27% 4.23%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.35% 0.65%
Assumes No Sales Charge 6.13% 5.40%
Class B Shares/6b/ 5/1/96 ended 10/31/96 4.40% 4.07%
</TABLE>
B-107
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
--------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/96
Assumes 4.5% Sales Charge 5.41% 2.92%
Assumes No Sales Charge 6.72% 4.21%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.06% -0.33%
Assumes No Sales Charge 5.80% 4.35%
Class B Shares/7b/ 5/1/96 ended 10/31/96 4.85% 4.17%
- ----------------
</TABLE>
1a Institutional Shares of Adjustable Rate Fund commenced operations on
July 17, 1991.
1b Administration Shares of Adjustable Rate Fund commended operations on
April 15, 1993.
1c No Service Shares of Adjustable Rate Fund were outstanding during the
periods indicated.
1d Class A shares of Adjustable Rate Fund commenced operations on May 12,
1995.
2a Institutional Shares of Short Duration Government Fund commenced
operations on August 15, 1988.
2b Administration Shares of Short Duration Government Fund commenced
operations on February 28, 1996. Service Shares of Short Duration
Government Fund commenced operations on April 10, 1996. An aggregate total
return (not annualized) is shown instead of an average annual total return
since Administration and Service Shares have not completed a full 12 months
of operation as of October 31, 1996.
3a Institutional Shares of Short Duration Tax-Free Fund commenced operations
on October 1, 1992.
3b Administration Shares of Short Duration Tax-Free Fund commenced operations
on May 20, 1993.
3c Service Shares of Short Duration Tax-Free Fund commenced operations on
September 20, 1994.
4a Institutional Shares of Core Fund commenced operations on January 5, 1994.
4b Administration Shares of Core Fund commenced operations on February
28, 1996. Service Shares of Core Fund commenced operations on March 13,
1996. An aggregate total return (not annualized) is shown instead of an
average annual total return since Administration and Service Shares have
not completed a full 12 months of operation as of October 31, 1996.
5a Class A Shares of Global Income Fund commenced operations on August 2,
1991.
5b Class B Shares of Global Income Fund commenced operations on May 1, 1996.
5c On November 27, 1992, the maximum sales charge was changed from 3% to
4.5% of the offering price. All performance figures in this table
incorporate the sales charge currently in effect.
5d An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a full
12 months of operation as of October 31, 1996.
5e Institutional Shares of Global Income Fund commenced operations on
August 1, 1995.
5f No Service Shares of Global Income Fund were outstanding during the
periods indicated.
6a Class A shares of Municipal Income Fund commenced operations on July
20, 1993.
6b Class B Shares of Municipal Income Fund commenced operations on May 1,
1996. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a full
12 months of operation as of October 31, 1996.
B-108
<PAGE>
7a Class A Shares of Government Income Fund commenced operations on
February 10, 1993.
7b Class B Shares of Government Income Fund commenced operations on May
1, 1996. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a full
12 months of operation as of October 31, 1996.
The above table should not be considered a representation of future
performance.
B-109
<PAGE>
Occasionally statistics may be used to specify a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare a Fund's net
asset value or performance relative to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market. A beta of more than 1.00 indicates volatility greater than the market,
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average,
over a specified period of time. The premise is that greater volatility
connotes greater risk undertaken in achieving performance.
Each Fund may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to, Lipper
------
Analytical Services, Inc., Donaghues Money Fund Report, Barron's, The Wall
- ------------------------- --------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- ----------------- -------------------------------- -----
In addition, Adjustable Rate, Government Income and Short Duration
Government Funds may from time to time advertise their performance relative to
certain indices and benchmark investments, including: (a) the Shearson Lehman
Government/Corporate (Total) Index, (b) Shearson Lehman Government Index, (c)
Merrill Lynch 1-3 Year Treasury Index, (d) Merrill Lynch 2-Year Treasury Curve
Index, (e) the Salomon Brothers Treasury Yield Curve Rate of Return Index, (f)
the Payden & Rygel 2-Year Treasury Note Index, (g) 1 through 3 year U.S.
Treasury Notes, (h) constant maturity U.S. Treasury yield indices, (i) the
Consumer Price Index, (j) the London Interbank Offered Rate, (k) other taxable
investments such as certificates of deposit, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds, repurchase
agreements, commercial paper and (l) historical data concerning the performance
of adjustable and fixed-rate mortgage loans.
Short Duration Tax-Free and Municipal Income Funds may from time to
time advertise their performance relative to certain indices, any components of
such indices and benchmark investments, including but not limited to: (a) the
Lipper Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed Income
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
Lehman Brothers Municipal Bond Indices; (c) the Merrill Lynch Municipal Bond
Institutional Total Rate of Return Indices; (d) Bond Buyer Indices; (e)
IBC/Donoghue's Money Fund Averages/Institutional Only Tax Free; and constant
maturity U.S. Treasury yield indices.
Core, Global Income and High Yield Funds may each from time to time
advertise its performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income
B-110
<PAGE>
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
CDA Mutual Fund Report published by CDA Investment Technologies, Inc. (which
analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Salomon Brothers' World Bond Index (which measures the total
return in U.S. dollar terms of government bonds, Eurobonds and foreign bonds of
ten countries, with all such bonds having a minimum maturity of five years); (f)
the Lehman Brothers Aggregate Bond Index or its component indices; (g) the
Standard & Poor's Bond Indices (which measure yield and price of corporate,
municipal and U.S. government bonds); (h) the J.P. Morgan Global Government Bond
Index; (i) other taxable investments including certificates of deposit (CDs),
money market deposit accounts (MMDAs), checking accounts, savings accounts,
money market mutual funds and repurchase agreements; (j) historical investment
data supplied by the research departments of Goldman Sachs, Lehman Brothers
Inc., First Boston Corporation, Morgan Stanley & Co. Incorporated, Salomon
Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson
Lufkin and Jenrette Securities Corporation; and (k) Donoghue's Money Fund Report
(which provides industry averages for 7-day annualized and compounded yields of
taxable, tax-free and U.S. government money funds).
The composition of the investments in the above-referenced indices and
the characteristics of a Fund's benchmark investments are not identical to, and
in some cases may be very different from, those of a Fund's portfolio. These
indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by the a Fund to calculate its performance figures.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Goldman Sachs as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
regulated matters believed to be of relevance to a Fund.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. The performance of various types of securities (taxable money market funds,
U.S. Treasury securities, adjustable rate mortgage securities, government
securities, municipal bonds) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
B-111
<PAGE>
. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/ All
Taxable Index) over varying periods of time.
. Credit Ratings of domestic government bonds in various countries
. Price volatility comparisons of types of securities over different periods
of time.
. Price and yield comparisons of a particular security over different periods
of time.
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other material
which highlight or summarize the services provided in support of an asset
allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein.
Performance data is based on historical results and is not intended to
indicate future performance. Total return, thirty-day yield, tax equivalent
yield and distribution rate will vary based on changes in market conditions,
portfolio expenses, portfolio investments and other factors. The value of a
Fund's shares will fluctuate and an investor's shares may be worth more or less
than their original cost upon redemption. The Trust may also, at its
discretion, from time to time make a list of a Fund's holdings available to
investors upon request.
OTHER INFORMATION
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value of each Fund during any 90-day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net
B-112
<PAGE>
asset value of each respective Fund at the time of redemption by a distribution
in kind of securities (instead of cash) from such Fund. The securities
distributed in kind would be readily marketable and would be valued for this
purpose using the same method employed in calculating each Fund's net asset
value per share. See "Net Asset Value." If a shareholder receives redemption
proceeds in kind, the shareholder should expect to incur transaction costs upon
the disposition of the securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such other period as the
SEC may by order permit for the protection of shareholders of a Fund.
The Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen LLP,
independent public accounts, for each Fund contained in each Fund's 1996 Annual
Report are hereby incorporated by reference and attached hereto. A copy of the
annual reports may be obtained without charge by writing Goldman, Sachs & Co.,
4900 Sears Tower, Chicago, Illinois 60606 or by calling Goldman, Sachs & Co., at
the telephone number on the back cover of each Fund's Prospectus. Unaudited
financial statements for each Fund for the six months ended April 30, 1997 are
also attached hereto.
B-113
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with
a robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and
Treasury prices remained in a narrow trading range throughout the summer and
fall. During September and October, however, interest rates retreated and the
bond market strengthened. The rebound was primarily due to evidence of a
slowing U.S. economy and strong demand for Treasury bonds from the central banks
of China, Japan and Germany, which accelerated their purchases dramatically
toward the end of the period. By the end of October, prices of 30-year
Treasuries broke out of the trading range that had persisted for over six
months.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 GS Core Fixed Income Fund 22
GS Adjustable Rate Government Fund 3 Financial Statements 30
GS Short Duration Government Fund 9 Notes to Financial Statements 34
GS Short Duration Tax-Free Fund 15 Financial Highlights 42
- ---------------------------------------------------------------------------------------------------------
</TABLE>
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter,
with annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Tresuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[GRAPH APPEARS HERE]
The yield curve steepened on the short end and shifted upward on the longer end.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significiantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a
Republican-controlled Congress, which points toward continued budgetary
restraint.
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and
we look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Adjustable Rate Government Fund seeks a high level of current income
consistent with low volatility of principal. The portfolio ordinarily invests
substantially all of its assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, with primary emphasis on
adjustable rate mortgage securities (ARMs). Under normal interest rate
conditions, the fund's duration is expected to be in a range approximately equal
to that of a six-month to one-year U.S. Treasury security.
The ARM Market Began Weak but Improved as Prepayments Slowed and Demand
Increased
The key factors affecting ARM performance during the 12 months under review
were the changing direction of interest rates and, consequently, the pace of
mortgage prepayments. From November 1995 through early February 1996, declining
interest rates spurred homeowners to switch from ARMs to fixed rate mortgages to
lock in attractive rates. The high level of refinancing activity depressed the
ARM market and caused yield spreads between ARMs and Treasuries to widen until
the end of January 1996, when long-term interest rates began to rise. Throughout
the spring, the ARM market strengthened as interest rates climbed sharply.
Spreads between ARMs and Treasuries continued to tighten even after rates
stabilized from the end of May through August, partly due to strong demand from
"crossover" investors from other short-duration fixed income sectors. Although
interest rates declined in September and October, mortgage prepayment fears
remained subdued as rates were still relatively high compared with their levels
a year earlier. Investor demand for seasoned one-year Constant Maturity Treasury
(CMT) ARMs, which our fund stresses, remained especially strong due to their
relative prepayment stability in a falling rate environment.
Performance Review
During the period under review, the fund's Institutional, Administration
and Class A shares all significantly outperformed both the six-month U.S.
Treasury bill and the one-year U.S. Treasury bill. (As of October 31, the fund's
duration was 0.7 years, in between that of the six-month and the one-year U.S.
Treasury bill.) The fund's positive performance can be attributed to the
incremental yield its ARM holdings delivered over similar-duration Treasuries
and tightening spreads between ARMs and Treasuries.
- ------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six-
Month One-Year
Institu- Adminis- Class Treasury Treasury
tional tration A Bill Bill
------ ------- - ---- ----
<S> <C> <C> <C> <C> <C>
Total Return (based 6.86% 6.60% 6.60% 5.48% 5.82%
on net asset value)
- ------------------------------------------------------------------------
Return From 6.25% 5.99% 5.99% NA NA
Monthly
Distributions
- ------------------------------------------------------------------------
Return From Price 0.61% 0.61% 0.61% NA NA
Appreciation
- ------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.83 $9.83 NA NA
- ------------------------------------------------------------------------
NAV Change +$0.06 +$0.06 +$0.06 NA NA
- ------------------------------------------------------------------------
</TABLE>
We are also pleased to note that the fund outperformed most of its peers.
For the 12 months ended October 31, 1996, the fund's Institutional shares ranked
fourth out of 53 adjustable rate mortgage funds based on total return, as
tracked by Lipper Analytical Services, Inc. (Lipper does not rank the fund's
Administration and Class A shares. Please note that Lipper rankings do not take
sales charges into account and that past performance is not a guarantee of
future results.) As of October 31, 1996, the
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
fund's Institutional shares were ranked "four stars" by Morningstar, Inc., an
independent rating agency.\1\
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Repos/Cash Equivalents 3.4%
CMOs 3.5%
SBA Floaters 7.8%
ARMs 85.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ---------------------------------------------
/1/ Source (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received five
and four stars for the three- and five-year periods, respectively. The
Institutional shares were rated among 1,054 and 572 fixed income funds for the
three- and five-year periods, respectively. For the one-year period, the
Institutional shares were rated among 1,654 fixed income funds. 22.5% of the
funds receive the four-star rating. The Morningstar rating applies only to the
fund's Institutional shares; the fund's Class A and Administration shares have
not been rated. Class A and Administration shares are subject to additional fees
that may have the effect of lowering performance and may affect and future
Morningstar rating. Morningstar rates funds against their peers in the same
category. In all, there are five Morningstar categories (domestic equity,
international equity, fixed income, municipal and hybrid). Morningstar ratings
range from five stars (highest) to one star (lowest). Funds with five-star
ratings are in the top 10% of their category, four-star ratings in the next
22.5%, three stars the next 35%, two stars the next 22.5% and one star the
lowest 10% of their categories.
Portfolio Composition and Investment Strategies
During the period under review, the portfolio's sector allocation shifted
slightly, with reductions in collateralized mortgage obligations (CMOs) and
Small Business Administration (SBA) loans in favor of ARMs.
. ARMs. As of October 31, 1996, ARMs accounted for 85.3% of the portfolio, up
from 80.2% a year ago. We emphasized seasoned, one-year CMT issues that offered
relative prepayment and duration stability as well as incremental yield over
Treasuries. The position significantly contributed to the fund's performance
during the period.
. SBA Floaters. The portfolio held a 7.8% allocation in securities backed by
Small Business Administration loans, which traded at attractive spreads relative
to Treasuries. We trimmed the portfolio's holdings in the sector slightly from
8.9% a year ago to take profits after the position performed well.
. CMOs. CMOs accounted for 3.5% of the portfolio as of October 31,
approximately half their weighting a year ago (7.7%). This position provided
relatively stable cash flows and a greater number of opportunities to take
advantage of potential mispricing than comparable fixed income sectors. During
December 1995 and January 1996, the sector became expensive versus
similar-duration Treasuries, and we subsequently sold part of the fund's
holdings at a profit. The fund's CMO position included 1.4% in floaters, which
added incremental yield, and 0.4% in sequential-pay CMOs. In addition, the fund
held CMO super floaters, discussed below.
. Prudent Use of Derivatives. We used higher risk derivatives very sparingly to
enhance the fund's performance without taking on additional undue risk. As of
October 31, 1996, the fund held a 1.5% position in super floaters, which
contributed to its performance during the year. (Super floaters are floating
rate securities whose coupons reset higher and more quickly than regular
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
ARMs in a rising interest rate environment.) The portfolio also included minor
positions in interest-only (IO) and inverse IO securities.
. Duration. As of October 31, the duration of the fund was 0.7 years, unchanged
from a year earlier. Rather than attempting to make interest rate predictions,
we seek to provide excess returns over a similar-duration U.S. Treasury security
through sector weightings and security selection. During the period, we used
financial futures as a tool to help manage the portfolio's duration.
. Credit Quality. The fund invests exclusively in securities issued by the U.S.
government and its agencies or instrumentalities, which are considered to be of
the highest credit quality.
ARM Outlook: Seasoned ARMs Are Expected to Perform Well Relative to Other
Sectors
Our outlook for the ARM sector is moderately constructive. Although spreads
have tightened over the course of the year, we expect them to remain stable for
the near term due to strong investor demand and limited supply. In addition, we
believe that our core holding of seasoned ARMs should fare well relative to less
seasoned issues if rates continue to decline and prepayments increase.
Distribution Policy
During the 12-month period ended October 31, 1996, the fund's Institutional,
Administration and Class A shares distributed $0.59, $0.57 and $0.57 per
share, respectively.
The fund distributes substantially all of its investment company taxable
income. The dividend is set at the start of each month, based on the income the
fund is expected to generate. However, because the fund invests primarily in
mortgage securities that are subject to prepayments, we cannot precisely predict
the amount of principal and interest that a portfolio will receive. Therefore,
at times a portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy has not affected the management of
the fund nor significantly affected its net asset value (NAV) per share.
In conclusion, we appreciate your investment in the GS Adjustable Rate
Government Fund and will continue to seek attractive fixed income investments in
the months ahead.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
GS Adjustable Rate Government Fund
November 29, 1996
- --------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Adjustable Rate Government Fund based on a normal minimum
initial investment, for each class, is compared to its benchmarks--the Lehman
Brothers Mutual Fund Short (1-2) U.S. Government Index ("Lehman 1-2 Index") and
the six month and one year U.S. Treasury Bills ("6-Month T-Bill / 1-Year T-
Bill"). All performance data shown represents past performance and should not be
considered indicative of future performance which will fluctuate as market
conditions change. The investment return and principal value of an investment
will fluctuate with changes in market conditions so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
HYPOTHETICAL INVESTMENTS/(a)/
Institutional Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/1/91 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/91 51,047 51,581 51,179 50,870
- --------------------------------------------------------------------------------
10/31/92 54,176 55,506 54,161 53,376
- --------------------------------------------------------------------------------
10/31/93 56,414 58,368 56,198 55,197
- --------------------------------------------------------------------------------
10/31/94 57,475 59,511 57,744 57,257
- --------------------------------------------------------------------------------
10/31/95 61,355 64,343 61,766 60,819
- --------------------------------------------------------------------------------
10/31/96 65,576 68,197 65,373 64,158
- --------------------------------------------------------------------------------
</TABLE>
Administration Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Administration Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/93 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/93 50,917 50,931 50,785 50,780
- --------------------------------------------------------------------------------
10/31/94 51,747 51,931 52,182 52,675
- --------------------------------------------------------------------------------
10/31/95 55,100 56,148 55,835 55,951
- --------------------------------------------------------------------------------
10/31/96 58,742 59,511 59,096 59,023
- --------------------------------------------------------------------------------
</TABLE>
Class A Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Short (1-2) One Year Six Month
(no sales charge) (w/ sales charge) Gov't Index T-Bill T-Bill
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/1/95 10,000 9,850 10,000 10,000 10,000
- ---------------------------------------------------------------------------------------------------
10/31/95 10,222 10,069 10,277 10,260 10,246
- ---------------------------------------------------------------------------------------------------
10/31/96 10,898 10,735 10,893 10,859 10,809
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
Average Annual Total Return
--------------------------------------------------
One Year Five Year Since Inception/(b)/
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Institutional Shares 6.86% 5.13% 5.32%
- --------------------------------------------------------------------------------
Administration Shares 6.60% N/A 4.69%
- --------------------------------------------------------------------------------
Class A Shares
excluding sales charge 6.60% N/A 6.40%
- --------------------------------------------------------------------------------
Class A Shares
including sales charge 4.99% N/A 5.29%
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ For comparative purposes, initial investments are assumed to be made on
the first day of the month following the commencement of operations.
/(b)/ The Institutional, Administration and Class A shares commenced operations
July 17, 1991, April 15, 1993 and May 15, 1995, respectively.
- --------------------------------------------------------------------------------
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations--96.3%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(d)--25.6%
<S> <C> <C> <C>
$ 409,475 7.33% 11/01/17 $ 422,849
1,443,341 7.54 12/01/18 1,482,297
2,695,805 7.40 07/01/18 2,793,527
1,799,007 7.69 01/01/19 1,857,314
10,670,041 7.38 05/01/19 11,021,833
20,341,589 7.58 11/01/19 21,218,921
5,280,731 7.70 05/01/20 5,464,395
19,004,192 7.42 06/01/20 19,698,985
37,238,927 7.73 02/01/22/(a)/ 38,845,042
4,072,603 7.39 08/01/22 4,215,145
2,234,941 7.56 08/01/22 2,331,334
6,804,200 7.53 09/01/22 7,067,182
17,808,242 7.61 11/01/22 18,565,092
10,195,026 7.63 06/01/24 10,506,892
3,045,972 7.31 12/01/24 3,122,121
3,495,056 7.20 02/01/28 3,604,835
4,584,605 7.09 07/01/29 4,671,987
1,815,464 7.62 07/01/30 1,892,059
2,055,859 7.39 05/01/31 2,110,462
- --------------------------------------------------------------------------------
$160,892,272
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)--55.4%
$ 1,138,394 7.80% 11/01/14 $ 1,187,493
6,190,161 6.54 03/01/17 6,277,194
3,662,002 7.56 03/01/17 3,799,511
4,221,326 6.21 03/01/18 4,247,709
6,778,125 7.66 04/01/18 7,046,064
874,932 7.63 05/01/18 901,180
7,405,181 7.34 07/01/18 7,724,566
5,249,737 7.41 07/01/18 5,456,472
6,398,858 7.08 08/01/18 6,609,828
3,972,504 7.64 08/01/18 4,143,838
3,746,795 7.42 10/01/18 3,896,068
6,780,326 7.41 11/01/18 7,009,162
2,068,449 7.29 12/01/18 2,138,591
13,495,001 7.67 12/01/18/(a)/ 14,077,040
3,484,080 7.27 06/01/19 3,597,870
4,440,531 7.31 07/01/19 4,579,297
1,698,502 7.34 07/01/19 1,755,826
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)(continued)
<S> <C> <C> <C>
$ 2,849,462 7.46% 01/01/20 $ 2,942,526
3,037,915 7.70 03/01/20 3,168,940
8,771,533 7.40 07/01/20 9,055,204
4,563,057 7.48 09/01/20 4,746,994
4,953,382 7.53 02/01/21 5,167,022
5,289,644 7.28 04/01/21 5,464,044
74,489,219 7.51 09/01/21/(a)/ 77,678,102
4,088,820 7.95 11/01/21 4,210,095
22,090,964 7.56 02/01/22 23,043,747
14,611,569 7.68 06/01/22 15,112,892
6,682,461 7.47 08/01/22 6,893,894
759,290 7.48 08/01/22 776,511
38,116,807 7.56 09/01/22/(a)/ 39,760,785
1,934,079 7.53 02/01/23 1,968,235
277,701 6.22 12/01/23 276,574
18,079,861 7.48 09/01/25 18,856,752
2,565,500 7.33 10/01/27 2,653,702
1,177,401 7.04 07/01/29 1,205,729
3,288,252 7.59 04/01/30 3,376,640
8,565,310 7.58 01/01/31 8,934,732
28,276,177 6.09 02/01/31 28,161,376
- --------------------------------------------------------------------------------
$ 347,902,205
- --------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association
(GNMA)(d) -- 2.2%
$ 1,527,707 6.50% 03/20/16 $ 1,551,096
1,806,135 7.12 08/20/17 1,839,711
1,026,294 7.12 08/20/18 1,046,984
8,886,125 6.00 11/20/25 9,040,211
- --------------------------------------------------------------------------------
$ 13,478,002
- --------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(d)--7.8%
$ 1,416,469 6.75% 10/25/14 $ 1,449,883
2,562,866 6.75 02/25/15 2,624,144
3,684,715 6.75 03/25/15 3,773,370
2,839,268 6.75 04/25/15 2,907,581
2,057,142 6.75 05/25/15 2,106,637
1,036,764 6.75 08/25/15 1,062,040
1,684,161 6.75 09/25/15 1,725,220
2,069,161 6.75 10/25/15 2,119,917
1,110,382 6.37 09/25/16 1,125,305
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations (continued)
Adjustable Rate Small Business Administration
(SBA)(d)(continued)
$ 4,125,881 6.37% 07/25/17 $ 4,181,333
9,019,837 6.37 08/25/17 9,141,062
4,040,857 6.37 09/25/17 4,095,166
3,577,478 6.37 10/25/17 3,625,559
8,937,943 6.37 02/25/18 9,058,069
- --------------------------------------------------------------------------------
$ 48,995,286
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations-5.3%
Adjustable Rate CMOs(d)-1.8%
FNMA Remic Trust 1990-145, Class A
$ 11,024,778 6.51% 12/25/20 $ 11,025,439
- --------------------------------------------------------------------------------
Inverse Floater(d)-0.0%
FNMA Remic Trust 1991-91, Class S
$ 164,490 17.66% 07/25/98 $ 174,261
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(d)-0.0%
FNMA Remic Trust 1992-157, Class SA
$2,002,645/(b)/ 14.10% 03/25/04 $ 168,743
- --------------------------------------------------------------------------------
Inverse IOette-0.1%
FHLMC Series 1164, Class O
$ 36,128/(b)/ 29.44% 11/15/06 $ 489,372
- --------------------------------------------------------------------------------
IOette-0.1%
FNMA Remic Trust 1990-145, Class B
$ 27,091/(b)/ 10.00% 12/25/20 $ 657,906
- --------------------------------------------------------------------------------
Regular Floater CMOs(d)-1.4%
FHLMC Series 1011, Class F
$ 8,872,813 6.34% 11/15/20 $ 9,069,612
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs-0.4%
FNMA Remic Trust 1990-65, Class U
$ 616,589 9.50% 11/25/06 $ 619,475
FNMA Remic Trust 1991-37, Class E
1,664,339 8.50% 04/25/05 1,679,418
- --------------------------------------------------------------------------------
$ 2,298,893
- --------------------------------------------------------------------------------
Super Floater CMOs(d)-1.5%
FNMA Remic Trust 1992-157, Class FA
$ 9,859,177(b) 1.22% 03/25/04 $ 9,631,134
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 33,515,360
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $605,544,961) $604,783,125
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Repurchase Agreement-2.1%
Joint Repurchase Agreement Account
$ 13,000,000 5.58% 11/01/96/(a)/$ 13,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $13,000,000) $ 13,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $618,544,961/(c)/) $617,783,125
================================================================================
Futures contracts open at October 31, 1996:
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- --------------------------------- ------------- ------------------- ----------------
<S> <C> <C> <C>
1-Month Libor 45 November 1996 $4,500
Euro Dollars 365 December 1996 309,500
Euro Dollars 280 March 1997 95,000
Euro Dollars 55 June 1997 28,000
5-Year U.S. Treasury Notes 67 December 1996 9,766
10-Year U.S. Treasury Notes (270) December 1996 (302,812)
----------------
$143,954
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 2,404,589
Gross unrealized loss for investments in which cost
exceeds value (3,318,600)
- --------------------------------------------------------------------------------------
Net unrealized gain $ (914,011)
======================================================================================
</TABLE>
(a) Portions of these securities are being segregated for futures margin
requirements.
(b) Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
(c) The aggregate costs for federal income tax purposes is $618,697,136.
(d) Variable rate security. Coupon rate disclosed is that which is in effect
at October 31, 1996.
(e) Each Euro Dollar contract represents $1,000,000 in notional par value.
Each Libor contract represents $3,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and U.S. Treasury Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $879,000,000 and $200,909,125, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Government Fund's primary objective is to provide a
high level of current income by investing in a portfolio that consists of
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including mortgage-backed securities as well as repurchase
agreements collateralized by such instruments. Under normal interest rate
conditions, the fund's duration is expected to be within one-half year of its
benchmark, the two-year U.S. Treasury security.
Performance Review
During the period under review, the fund's Institutional, Administration
and Service shares all outperformed the two-year U.S. Treasury security,
primarily due to our emphasis on and the favorable performance of
mortgage-backed security investments, as well as our ability to identify
relative value within the sector. In addition, the portfolio's term structure,
which overweighted one- and three-year maturity securities, also contributed to
performance when the yield curve steepened.
During the period, the net asset values (NAVs) of the fund's Institutional
and Administration shares (which opened February 28, 1996) were nearly unchanged
while the NAV of the fund's Service shares (which opened April 10, 1996) rose
$0.10 as interest rates stabilized and subsequently declined.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (4/10/96-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net 6.75% 4.00% 4.35%
asset value
- --------------------------------------------------------------------------------
Return From Monthly 6.65% 4.10% 3.32%
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.10% -0.10% 1.03%
Depreciation/
Appreciation
- --------------------------------------------------------------------------------
Total Return of Two-Year 5.64% 3.61% 3.71%
U.S. Treasury
- --------------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.85 $9.82
- --------------------------------------------------------------------------------
NAV Change +$0.01 -$0.01 +$0.10
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund performed well compared with its peers. The Institutional shares
ranked in the top 10% of short-intermediate U.S. government funds (fifth out of
88) based on total return for the 12-month period ended October 31, 1996,
according to Lipper Analytical Services, Inc. (The Administration and Service
shares were not ranked for this period because they were in existence less than
12 months. Please note that Lipper rankings do not take sales charges into
account and that past performance is not a guarantee of future results.)
Portfolio Composition and Investment Strategies
The fund significantly reduced its allocation in U.S. Treasuries in favor
of collateralized mortgage obligations (CMOs), which offered more attractive
return potential according to our analysis. This strategy proved successful as
mortgage-backed securities outperformed comparable-duration Treasuries.
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Repos/Cash Equivalents 1.1%
Fixed Rate Mortgage
Pass-Throughs 7.2%
U.S. Treasuries 15.8%
ARMs 19.0%
CMOs 56.9%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- --------------------------------------------------------------------------------
. CMOs. During the period, we more than doubled the portfolio's allocation in
collateralized mortgage obligations, with most of the increase occurring from
February through April. As of October 31, 56.9% of the portfolio was invested in
CMOs, of which 24.7% were sequential-pay CMOs (up from 10.4% last year) and
17.0% were planned amortization class (PAC) CMOs (up from 1.9% last year).
These sectors were favored for their relatively stable cash flows and
incremental yields over Treasuries, and they performed well during the period.
Though the CMO sector was fairly valued relative to equal-duration Treasuries
from January through the end of the period, our extensive research enabled us to
identify specific securities that presented attractive investment opportunities.
. ARMs. Adjustable rate mortgage securities (ARMs) accounted for 19.0% of the
portfolio as of October 31, down from 23.7% last year. We focused on seasoned
securities indexed to the one-year Constant Maturity Treasury (CMT), which
offered attractive income stability and low relative prepayment risk. A high
level of mortgage refinancing adversely impacted the sector in November and
December of 1995 when rates had eased, but ARMs strengthened when rates started
to rise during the first quarter of 1996 and prepayment fears faded.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio's
position in U.S. Treasuries was cut to 15.8%, down from 37.1% a year ago, as we
identified securities in other sectors that offered higher incremental yield. In
addition, repurchase agreements/cash equivalents were reduced to 1.1% from 4.7%
a year ago.
. Fixed Rate Mortgage Pass-Throughs. Fixed rate pass-throughs, a 7.2%
allocation, offered more attractive yield spreads than most of the other
high-credit quality fixed income sectors. During the period under review, the
technical balance of the pass-through market strengthened, with investor demand
improving as prepayments and supply slowed from the high levels experienced last
November. We continued to emphasize seasoned premium mortgages because they
typically have lower prepayment risk than recently issued mortgages.
. Issuer Composition. The breakdown of the portfolio's mortgage-backed security
holdings by issuer was 37.8% in Federal National Mortgage Association (FNMA)
issues, 36.0% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 9.2%
in Government National Mortgage Association (GNMA) issues.
. Credit Quality. The fund invests exclusively in issues of the U.S. government
and its agencies or instrumentalities.
. Prudent Use of Derivatives. Sequential-pay CMOs and PAC CMOs, which are
typically considered to be lower risk derivatives, represented 24.7% and 17.0%
of the portfolio, respectively, as noted earlier. Other derivative investments
included CMO floaters (10.0%), which are securities whose coupons reset upward
as interest rates rise, and inverse floaters (3.2%), which have coupons that
reset in the opposite direction from interest rates. When floaters are held
along with inverse floaters, they can produce a position with a similar risk
profile as a fixed rate pass-through but provide a higher yield. The fund also
held a small position (1.3%) in PAC interest-only securities (IOs). We invest in
such higher risk derivatives very sparingly in an effort to enhance returns
without taking undue risk. In addition, we used futures as a tool to help manage
the portfolio's duration.
Market Outlook
In general, we have a cautiously optimistic view of the mortgage-backed
securities market in the near term. In the ARM sector, we expect spreads to
remain stable due to strong investor demand and limited supply. Given the
environment of declining rates for the past few months, we will continue to
emphasize seasoned one-year CMT
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
ARMs due to the relative prepayment stability that these securities offer.
Though we have a neutral outlook for the CMO market, we continue to find areas
that offer attractive investment opportunities. In the mortgage pass-through
market, we believe the recent widening of yield spreads during September and
October has been somewhat overdone, but we will remain vigilant to an increase
in prepayments that may result from a further decline in interest rates. We will
continue to actively allocate the portfolio's assets among the various fixed
income sectors as their relative value changes throughout the coming year.
Distribution Policy
During the period under review, the fund's Institutional shares paid out
distributions of $0.63 per share. From their inceptions through October 31,
1996, the fund's Administration and Service shares distributed $0.39 per share
and $0.32 per share, respectively. (The Administration shares opened on February
28, 1996 and the Service shares opened on April 10, 1996.) The fund distributes
substantially all of its investment company taxable income, as required by tax
law.
We thank you for your support and look forward to continuing to meet your
investment needs in the future.
Sincerely,
/s/Jonathan A. Beinner
Jonathan A. Beinner
/s/James B. Clark
James B. Clark
Portfolio Managers
GS Short Duration Government Fund
November 29, 1996
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short-Term Government Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmarks, the U.S.
2-Year Treasury Bill ("2-Year T-Bill") and the Lehman Brothers Mutual Fund Short
(1-3) U.S. Government Index ("Lehman Short (1-3) Gov't Index"). All performance
data shown represents past performance and should not be considered indicative
of future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Shares(a)
Institutional Shares 2-Year\r T-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
9/1/88 50,000 50,000 50,000
10/31/88 51,283 51,057 51,091
10/21/89 55,940 55,412 55,919
10/31/90 60,543 59,876 60,861
10/31/91 67,161 66,615 67,699
10/31/92 71,365 72,161 73,208
10/31/93 75,326 76,335 77,446
10/31/94 76,072 77,058 78,339
10/31/95 82,895 84,009 85,256
10/31/96 88,507 88,756 90,346
</TABLE>
Administration Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Administration Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
2/28/96 50,000 50,000 50,000
10/31/96 52,000 51,805 51,760
</TABLE>
Service Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Service Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
4/10/96 50,000 50,000 50,000
10/31/96 52,175 51,855 52,110
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------
Average Annual Total Return
-----------------------------------------------------------
One Year Five Year Since Inception(b)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional shares 6.75% 5.6% 7.24%
- --------------------------------------------------------------------------------
Administrative shares N/A N/A 4.00(c)
- --------------------------------------------------------------------------------
Service shares N/A N/A 4.35(c)
- --------------------------------------------------------------------------------
</TABLE>
/a/ For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
/b/ The Institutional, Administration and Service shares commenced operations
August 15, 1988, February 28, 1996 and April 10, 1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--82.4%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(a)--14.2%
$ 1,208,677 6.00% 11/15/16 $ 1,198,196
1,941,838 7.54 12/01/18/(b)/ 1,994,248
8,544,958 7.73 02/01/22/(b)/ 8,913,502
2,234,941 7.56 08/01/22 2,331,334
- --------------------------------------------------------------------------------
$ 14,437,280
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(a)--6.2%
$ 389,769 9.00% 12/01/97 $ 402,558
2,732,146 7.80 11/01/14/(b)/ 2,849,984
3,025,230 7.48 08/01/22/(b)/ 3,093,842
- --------------------------------------------------------------------------------
$ 6,346,384
- --------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (GNMA)--3.5%
$ 1,093,610 6.00% 06/01/09/(b)/ $ 1,065,244
2,058,384 6.00 10/01/09/(b)/ 2,004,994
540,970 6.00 10/01/08/(b)/ 526,938
- --------------------------------------------------------------------------------
$ 3,597,176
- --------------------------------------------------------------------------------
Fixed Rate Government National Mortgage Association--3.3%
$ 3,040,068 10.00% 12/15/17/(b)/ $ 3,338,359
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--55.3%
Inverse Floater(a)--5.7%
FHLMC Series 1296, Class J
$ 890,613 11.93% 07/15/99/(b)/ $ 948,502
FHLMC Series 1325, Class B
2,416,565 6.06 07/15/97/(b)/ 2,421,833
FHLMC Series 1325, Class C
1,028,325 7.56 07/15/97/(b)/ 1,034,598
FNMA Remic Trust 1991-127, Class S
144,496 12.98 09/25/98 153,084
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 10.00 05/25/99 1,241,097
- --------------------------------------------------------------------------------
$ 5,799,114
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.3%
FHLMC Series 1684, Class JD
$ 2,801,277(c) 3.66% 08/15/20/(b)/ $ 199,759
FNMA Remic Trust 1993-110, Class SC
2,597,458(c) 3.46 04/25/19/(b)/ 126,990
- --------------------------------------------------------------------------------
$ 326,749
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
Mortgage Backed Obligations (continued)
Collateralized Mortgage Obligations (continued)
Planned Amortization Class (PAC CMOs)--11.1%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,954,040
FNMA Remic Trust 1992-138, Class C
2,350,000 6.00 12/25/18/(b)/ 2,325,020
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09 6,038,400
- --------------------------------------------------------------------------------
$ 11,317,460
- --------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--0.6%
FHLMC Series 1552, Class JE
$ 10,552,245/(c)/ 7.00% 02/15/14/(b)/ $ 590,926
- --------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.5%
FNMA Remic Trust 1992-198, Class K
$ 42,908/(c)/ 16.00% 12/25/15 $ 547,555
- --------------------------------------------------------------------------------
Regular Floater (a)--9.9%
FHLMC Series 1684, Class F
$ 5,000,000 5.75% 08/15/20/(b)/ $ 4,818,750
FHLMC Series 1684, Class JC
2,801,277 5.34 08/15/20/(b)/ 2,737,352
FNMA Remic Trust 1993-110, Class FC
2,597,459 5.54 04/25/19/(b)/ 2,565,796
- --------------------------------------------------------------------------------
$ 10,121,898
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--27.1%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,095,620
FHLMC Series 1296, Class I
2,493,715 5.24 07/15/99/(b)/ 2,481,546
FHLMC Series 174, Class Z
3,757,885 10.00 08/15/21 4,189,703
FNMA Remic Trust 1988-12, Class A
4,076,171 10.00 02/25/18/(b)/ 4,350,090
FNMA Remic Trust 1988-12, Class B
3,218,030 4.47 02/25/18/(b)/ 3,081,585
FNMA Remic Trust 1989-12, Class X
1,955,861 10.00 12/25/14/(b)/ 2,021,246
FNMA Remic Trust 1989-18, Class B
1,312,493 9.50 01/25/04 1,359,730
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
$ 4,628,657 7.75% 10/25/18 (b) $ 4,699,707
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,394,800
- --------------------------------------------------------------------------------
$ 27,674,027
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 56,377,729
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $83,545,715) $ 84,096,928
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--15.7%
United States Treasury Notes
$ 5,150,000 5.88% 04/30/98 $ 5,166,068
10,900,000 5.13 06/30/98/(b)/ 10,804,620
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $15,894,705) $ 15,970,688
- --------------------------------------------------------------------------------
Repurchase Agreement--1.0%
Joint Repurchase Agreement Account
$ 1,000,000 5.58% 11/01/96/(b)/ $ 1,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,000,000) $ 1,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $100,440,420(d)) $ 101,067,616
================================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- ------------------------- -------------- ------------------ ----------------
Euro Dollars 40 December 1996 $28,000
Euro Dollars 29 March 1997 34,650
Euro Dollars 37 June 1997 38,950
Euro Dollars 47 September 1997 68,625
Euro Dollars 45 December 1997 80,375
Euro Dollars 35 March 1998 25,250
Euro Dollars 20 June 1998 9,000
2 Year U.S. Treasury Notes 71 December 1996 87,859
5 Year U.S. Treasury Notes (89) December 1996 (173,203)
10 Year U.S. Treasury Notes (44) December 1996 (131,781)
20 Year U.S. Treasury Notes (7) December 1996 (34,844)
--------------
$32,881
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 826,961
Gross unrealized loss for investments in which
cost exceeds value (213,881)
- --------------------------------------------------------------------------------
Net unrealized gain $ 613,080
================================================================================
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for futures margin
requirements.
/(c)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/The aggregate cost for federal income tax purposes is $100,454,536.
/(e)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
2-Year U.S. Treasury Note contract represents $200,000 in notional par
value. Each 5-Year U.S. Treasury Note, 10-Year U.S. Treasury Note, and 20-
Year U.S. Treasury Note contract represents $100,000 in notional par value.
The total notional amount and market value are $253,200,000 and
$89,469,788, respectively. The determination of notional amounts and market
value as presented here are indicative only of volume of activity and not a
measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Tax-Free Fund seeks to provide a high level of
current income exempt from regular federal income tax, consistent with
relatively low principal volatility, through investments in municipal securities
rated single-A or better or deemed to be of comparable quality. Under normal
interest rate conditions, the fund's duration will be within one-half year of
its benchmark, the Lehman Brothers Three-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a three-year
bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a three-year municipal bond
(as calculated from data provided by Municipal Market Data, an independent
municipal market information provider) fell slightly (0.14%), while yields rose
from 4.10% on October 31, 1995 to 4.15% on October 31, 1996.
The municipal bond market began the period under review on a weak note.
Tax reform uncertainty impacted investor demand during November and December
1995, while municipal bond supply was high due to seasonably heavy year-end
issuance. The market environment improved during January and February 1996, when
fading tax reform concerns helped to revive investor interest in the sector and
issuance declined. From March through the end of the period, the market's
technical balance was generally healthy, though occasional spikes in supply
periodically overwhelmed demand and briefly impacted performance. The largest of
these surges occurred in June when supply rose to its highest level since late
1995, but subsequently both new issuance and secondary supply fell dramatically
from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (which control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review
The performance of the fund's Institutional shares was in line with the
benchmark, the Lehman Brothers Three-Year Municipal Bond Index (the "Index"),
for the 12-month period ended October 31, 1996. The Administration and Service
shares also performed well, but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- --------------------------------------------------------------------------------
Lehman Brothers
Institu- Adminis- 3-Year
tional tration Service Municipal Bond Index
-------- -------- ------- ---------------------
<S> <C> <C> <C> <C>
Total Return (based on net 4.50% 4.24% 3.98% 4.51%
asset value)
- --------------------------------------------------------------------------------
Return From 4.30% 4.04% 3.78% NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.20% 0.20% 0.20% NA
Appreciation
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.96 $9.96 $9.97 NA
- --------------------------------------------------------------------------------
NAV Change +$0.02 +$0.02 +$0.02 NA
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period was primarily due to our
emphasis on higher yielding revenue bonds, as well as successful selection of
specific securities and relative value trades. As always, we did not make any
bets on the direction of interest rates, but rather kept the fund's duration in
line with the Index, occasionally using Treasury futures to actively manage
sector allocation.
In our search for incremental yield, we focused on three types of bonds.
The first category was relatively generic, highly liquid securities; the second
included slightly less liquid issues such as insured hospital bonds and
letter-of-credit-backed debt; and the last area was "story" bonds, such as
uninsured hospital and electric utility issues and multifamily housing revenue
bonds, whose value is often unrecognized by the market because they are unique
or generally not well understood. We identified attractive investment
opportunities for the third category through our extensive credit analysis.
We are pleased to report that the fund's Institutional shares ranked first
out of 26 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the 12-month period ended October 31, 1996 based on
total return. (Lipper did not rank the fund's Administration and Service shares.
Please note that Lipper rankings do not take sales charges into account and that
past performance is not a guarantee of future results.) In addition, as of
October 31, 1996, the fund's Institutional shares were rated "five stars" by
Morningstar, Inc., its highest rating./1/
Portfolio Composition and Investment Strategies:
Revenue Bonds Dramatically Increased
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
General Obligations 3.0%
Variable Rate Demand Notes 4.7%
Insured General Obligations 12.6%
Insured Revenue Bonds 24.2%
Revenue Bonds 55.5%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ----------------------------
1 Source: (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and ten-year average annual returns (where applicable) in excess of
90-day Treasury bill returns with appropriate fee and sales charge adjustments
and a risk factor that reflects fund performance below 90-day Treasury bill
returns. The one-year rating is calculated using the same methodology, but is
not a component of the overall rating. The fund's Institutional shares received
five stars and were rated among 1,038 municipal bond funds for the three-year
period. For the one-year period, the Institutional shares received five stars
and were rated among 1,728 municipal bond funds. 10% of the funds receive the
five-star rating. The Morningstar rating applies only to the fund's
Institutional shares; the fund's Administration and Service shares have not been
rated. Administration and Service shares are subject to additional fees that may
have the effect of lowering performance and may affect any future Morningstar
rating. Morningstar rates funds against their peers in the same category. In
all, there are five Morningstar categories (domestic equity, international
equity, fixed income, municipal and hybrid). Morningstar ratings range from five
stars (highest) to one star (lowest). Funds with five-star ratings are in the
top 10% of their category, four-star ratings in the next 22.5%, three stars the
next 35%, two stars the next 22.5% and one star the lowest 10% of their
categories.
- --------------------------------------------------------------------------------
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------
. Revenue Bonds. As of October 31, the portfolio's combined position in
insured and uninsured revenue bonds was significantly overweighted compared with
the Index, 79.7% versus 35.8%. We substantially increased the portfolio's total
revenue bond allocation (from 29.2% a year ago) because our emphasis on credit
analysis enabled us to identify attractive revenue bonds that offered higher
incremental yield than was available from general obligation bonds. (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 15.6% of the
portfolio, down from 51.0% a year ago and significantly underweighted versus the
Index's 55.5%. GOs are backed by the general taxing power of a municipality and
are typically higher credit quality but lower yielding than revenue bonds.
. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash
equivalents that we used to manage the portfolio's excess liquidity. VRDNs
were a 4.7% position, down from 10.0% a year ago.
. Pre-refunded Bonds. Over the course of the year, we trimmed the fund's
holdings in pre-refunded bonds (9.8% as of October 31, 1995). In October, we
sold the fund's remaining position in the sector in favor of revenue bonds that
offered more attractive yields.
. Duration. As of October 31, the fund's duration was in line with that of
the Index at 2.7 years.
. Credit Quality. During the year, the fund's credit quality allocations
shifted. We reduced the portfolio's allocation in triple-A-rated GOs in favor of
single-A-rated revenue bonds, which allowed us to maintain the fund's targeted
double-A-rated average credit quality and liquidity while achieving higher
overall yields. We structured the portfolio's credit-quality allocation like a
"barbell," emphasizing higher credit quality securities in the four- to five-
year maturity range and lower relative credit quality securities in the one- to
three-year maturity range. As of October 31, more than half of the portfolio was
invested in triple-A-rated bonds (52.7%), while double-A- and single-A-rated
securities accounted for 20.1% and 27.2%, respectively.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
12-month period ended October 31, 1996, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.42,
$0.39 and $0.37 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
We value your continued confidence in the GS Short Duration Tax-Free Fund
and look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
GS Short Duration Tax-Free Fund
November 29, 1996
- --------------------------------------------------------------------------------
18
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short Duration Tax-Free Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmark, the Lehman
Brothers 3-Year Municipal Bond Index ("3-Year Bond Index"). All performance data
shown represents past performance and should not be considered indicative of
future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT/(a)/
[GRAPH APPEARS HERE]
Institutional Shares
<TABLE>
<CAPTION>
Institutional Shares 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/92 50000 50000
- --------------------------------------------------------------------------------
10/31/92 49830 49805
- --------------------------------------------------------------------------------
10/31/93 53333 53102
- --------------------------------------------------------------------------------
10/31/94 53424 53825
- --------------------------------------------------------------------------------
10/31/95 56618 58023
- --------------------------------------------------------------------------------
10/31/96 59172 60646
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Administration Shares
<TABLE>
<CAPTION>
Admin 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
6/1/93 50000 50000
- --------------------------------------------------------------------------------
10/31/93 51088 51144
- --------------------------------------------------------------------------------
10/31/94 51031 51840
- --------------------------------------------------------------------------------
10/31/95 53971 55884
- --------------------------------------------------------------------------------
10/31/96 56265 58410
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Service Shares
<TABLE>
<CAPTION>
Service 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/94 50000 50000
- --------------------------------------------------------------------------------
10/31/94 49810 49880
- --------------------------------------------------------------------------------
10/31/95 52594 53771
- --------------------------------------------------------------------------------
10/31/96 54693 56201
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
Average Annual Total Return
------------------------------------
One Year Since Inception/(b)/
-----------------------------------------------------------
<S> <C> <C>
Institutional Shares 4.50% 4.21%
-----------------------------------------------------------
Administration Shares 4.24% 3.51%
-----------------------------------------------------------
Service Shares 3.98% 4.36%
-----------------------------------------------------------
</TABLE>
/(a)/For comparative purposes, initial investments are assumed to be made on the
first day of the month following the commencement of operations of the
Administration and Service share classes.
/(b)/The Institutional, Administration and Service shares commenced operations
October 1, 1992, May 20, 1993 and September 20, 1994, respectively.
- --------------------------------------------------------------------------------
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligation--98.2%
Alabama--2.8%
Selma, AL IDA for International Paper Co. PCRB (A-/A3)
$1,000,000 4.15% 07/15/08 $1,000,000
- --------------------------------------------------------------------------------
Arkansas--3.8%
West Memphis, AR Public Utility System RB (MBIA) (NR/Aaa)
$1,310,000 5.25%(e) 12/01/00 $1,344,388
- --------------------------------------------------------------------------------
Colorado--4.2%
Municipal Sub District of Northern Colorado Water Conservation Co.
RB(AMBAC)(AAA/Aaa)
$1,435,000 5.75% 12/01/01 $1,508,845
- --------------------------------------------------------------------------------
Connecticut--4.3%
Connecticut State Resource Recovery Authority Series A RB (AA-/NR)
$1,500,000 5.60% 11/15/99 $1,546,185
- --------------------------------------------------------------------------------
Illinois--4.4%
Chicago, IL GO (MBIA) (AA/Aaa)
$1,500,000 5.40% 10/31/00 $1,547,670
- --------------------------------------------------------------------------------
Kentucky--7.5%
Jefferson County, KY Trust Certificates (A+/NR)RB
$1,145,000 5.25% 03/01/99 $1,163,904
Pendleton County, KY LOC (Self Insurance)(NR/VMIG1)
1,500,000 4.25 07/01/01 1,503,045
- --------------------------------------------------------------------------------
$2,666,949
- --------------------------------------------------------------------------------
Louisiana--7.4%
Louisiana Offshore Deepwater Part Authority Term B RB (A/Baa1)
$1,000,000 5.85% 09/01/00 $1,040,080
Louisiana State Refunding RB, Series A GO (FGIC) (AAA/Aaa)
1,500,000 6.00 08/01/01 1,583,970
- --------------------------------------------------------------------------------
$2,624,050
- --------------------------------------------------------------------------------
New Jersey--4.0%
West Windsor/Plainsboro, NJ Regional School District (FGIC)
(AAA/Aaa)
$1,400,000 5.25% 12/01/99 $1,436,750
- --------------------------------------------------------------------------------
New York--6.8%
Municipal Assistance Corp. Refunding RB (AMBAC) (AAA/Aaa)
$1,000,000 6.00% 07/01/00 $1,051,690
Syracuse, NY IDA RB (AA/NR)
$1,365,000 4.60% 10/15/98 $1,369,491
- --------------------------------------------------------------------------------
$2,421,181
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Oklahoma--13.5%
Enid, OK Hospital Authority RB (Societe Generale LOC) (NR/Aa2)
$2,700,000 6.63%(a) 10/01/15 $2,747,115
Southern Oklahoma Memorial Hospital RB(b) (A/A)
2,000,000 5.60 02/01/00 2,043,680
- -------------------------------------------------------------------------------
$4,790,795
- -------------------------------------------------------------------------------
Oregon--4.2%
Klamath Falls, OR Salt Caves Hydroelectic RB (SP1+/NR)
$1,500,000 4.50% 05/01/23 $1,507,980
- -------------------------------------------------------------------------------
Pennsylvania--9.7%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB
(FGIC) (AAA/Aaa)
$1,500,000 5.75% 06/15/00 $1,559,730
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,879,146
- --------------------------------------------------------------------------------
$3,438,876
- --------------------------------------------------------------------------------
Texas--11.4%
Bexar County, TX MFH Finance Corp. RB (CFMG) (NR/A3)
$1,500,000 4.88% 11/01/04 $1,502,220
Houston, TX Water & Sewer RB Series B (A/A)
1,430,000 5.25 12/01/99 1,460,802
Port Neches, TX Independent School District GO (AAA/Aaa)
1,000,000 7.00 02/15/01 1,092,480
- -------------------------------------------------------------------------------
$4,055,502
- -------------------------------------------------------------------------------
Virginia--5.0%
Petersburg, VA Hospital Authority RB (NR/A)
$1,760,000 5.50% 07/01/99 $1,798,157
- -------------------------------------------------------------------------------
Washington--4.6%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$1,500,000 7.20% 07/01/02 $1,623,044
- -------------------------------------------------------------------------------
Wyoming--4.6%
Uinta County, WY School District GO, Series A (FSA) (AAA/Aaa)
$1,500,000 6.88% 06/01/00 $1,620,390
- -------------------------------------------------------------------------------
Total Debt Obligations
(Cost $34,727,338) $34,930,762
===============================================================================
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Short-Term Obligations--4.5%
Illinois--0.6%
Illinois Development Finance Authority RB (AA+/A-1)/(c)/
$200,000 3.55% 01/1/96 $200,000
Louisiana--3.9%
East Baton Rouge Parish PCRB (AAA/Aaa)/(c)/
$1,400,000 3.60% 11/1/96 $1,400,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,600,000) $ 1,600,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $36,328,338)/(d)/ $36,530,762
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 204,715
Gross unrealized loss for investments in which
cost exceeds value (2,291)
- --------------------------------------------------------------------------------
Net unrealized gain $ 202,424
================================================================================
</TABLE>
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for when-issued
securities.
/(c)/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next reset interest dates.
/(d)/The amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/When-issued securities.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal Bond Assurance Corp.
CFMG --Credit Lyonnais Line of Credit
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Core Fixed Income Fund seeks to achieve a total return consisting of
capital appreciation and income that exceeds the total return of its benchmark,
the Lehman Brothers Aggregate Bond Index (the "Index"), through a diversified
portfolio of fixed income securities. The fund may invest in U.S. Treasury,
agency, corporate, mortgage-backed and asset-backed securities, as well as in a
limited amount of non-dollar-denominated fixed income securities. While the
fund's performance will be measured against the Index, the portfolio is not
required to hold the same securities or match the sector weightings of the
Index. Every security in the portfolio must be rated at least investment grade
by an independent rating agency or be considered to be of equivalent quality by
Goldman Sachs Asset Management at the time it is purchased. The fund's
approximate interest rate sensitivity is expected to be comparable to that of a
five-year bond.
Performance Review
During the period under review, the fund's Institutional shares outperformed
the Index. The strong performance was primarily due to its investments in
corporate bonds and emerging market debt. In addition, the fund also benefited
from its mortgage-backed and asset-backed holdings when both sectors
strengthened during the period.
The fund fared well relative to its peers. For the 12-month period ended
October 31, 1996, the fund's Institutional shares ranked in the top quartile
(24th out of 96 funds) in Lipper Analytical Services, Inc.'s "corporate debt -
BBB-rated" category based on total return. (Lipper did not rank the fund's
Administration and Service shares for the period because they were in existence
less than 12 months. Please note that Lipper rankings do not take sales charges
into account and that past performance is not a guarantee of future results.)
The fund's Administration and Service shares, which began operations on
February 28, 1996 and March 13, 1996, respectively, achieved positive returns
since their inceptions.
During the period, the net asset value (NAV) of the fund's Institutional
shares fell $0.15 due to the sharp rise in interest rates during the first half
of 1996. Reflecting the fact that rates had already risen significantly, the NAV
of the fund's Administration shares (which opened in February) also declined but
not as significantly, while the NAV of the fund's Service shares (which opened
in March) rose $0.09.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary
- -------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (3/13/96-
10/31/96) 10/31/96) 10/31/96)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Return (based on 5.98% 3.56% 4.90%
net asset value)
- -------------------------------------------------------------------------------
Return From Monthly 7.48% 4.27% 3.98%
Distributions
- -------------------------------------------------------------------------------
Return From Price -1.50% -0.71% 0.92%
Depreciation/
Appreciation
- -------------------------------------------------------------------------------
Total Return of Lehman 5.83% 3.74% 4.94%
Brothers Aggregate
Bond Index
- -------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.85 $9.84 $9.86
- -------------------------------------------------------------------------------
NAV Change -$0.15 -$0.07 +$0.09
- -------------------------------------------------------------------------------
</TABLE>
*New share class opened during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Corporate Bonds 26.6%
Fixed Rate Mortgage Pass-Throughs 23.9%
U.S. Treasuries 19.5%
ABSs 12.5%
CMOs 9.8%
Emerging Market Debt 4.5%
Repos/Cash Equivalents 1.7%
Agency Debentures 1.5%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
. Corporate Bonds. As of October 31, the fund's largest allocation was in
corporate bonds, overweighted relative to the Index (26.6% versus 17.6%),
which significantly benefited performance. Though corporate bonds began the
period on a weak note due to the economic slowdown during November and December,
the sector improved dramatically when companies reported positive earnings
growth from January 1996 through the end of the period. Within the sector, we
stressed industrial and financial issues. Industrials performed well due to the
strengthening economy, while financials benefited from the relatively steep
yield curve, which enabled issuers to borrow at lower, short-term rates and lend
at higher, long-term rates.
. Fixed Rate Mortgage Pass-Throughs. Fixed rate mortgage pass-throughs, a
23.9% position as of October 31, were underweighted compared with the Index
(29.7%), with the remainder of the fund's mortgage-backed security allocation
invested in collateralized mortgage obligations (CMOs). We emphasized seasoned
premium mortgages, which have lower prepayment risk than recently issued
mortgages. The sector suffered from high prepayments during November and
December 1995, but conditions improved when interest rates rose sharply during
the first half of 1996 and prepayments declined. Over the course of the year,
these securities positively contributed to the fund's performance.
During the period, we occasionally used mortgage dollar rolls to benefit from
short-term supply and demand imbalances in the mortgage settlement process.
(Mortgage dollar rolls refer to transactions that involve selling mortgage
securities owned by the fund and simultaneously contracting to buy back similar
mortgage securities with the same coupon on a specified future date -- usually
one month forward.) At all times, we "cover" the mortgage dollar rolls by
keeping cash or high-grade liquid debt securities equal to the dollar amount of
the forward commitment in a segregated account with the fund's custodian.
. CMOs. During the period, we increased the portfolio's CMO allocation to
9.8%, up from 2.0% a year earlier. Within the sector, we initiated a
position in sequential-pay/support CMOs (5.1% as of October 31) and increased
the portfolio's position in planned amortization class (PAC) CMOs to 3.5% from
0.9%. These securities were favored for their relative stability and attractive
spreads compared with Treasuries, and they benefited performance during the
period. The remaining CMO positions were inverse floaters, discussed below.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The fund's
allocation in U.S. Treasuries was reduced to 19.5% from 24.7% a year ago. We
significantly underweighted Treasuries relative to the benchmark (45.2%) to
focus on other sectors that offered more attractive relative value. In addition,
repurchase agreements/cash equivalents accounted for 1.7% of the portfolio, up
from 0.4% a year ago.
. Asset-Backed Securities (ABSs). We increased the fund's allocation in ABSs to
12.5%, up from 9.9% a year ago. The ABS position consisted of short-term,
high-credit-quality issues primarily backed by credit card loans, as well as
smaller positions in automobile loan debt and other receivables, that offered
incremental yield over similar-duration Treasuries. When the period under review
began, the ABS market was weak due to uncertainty regarding credit card
delinquencies, but those concerns waned and the sector strengthened from January
through October. The supply of ABSs was robust during the period, with a wide
variety of innovative new issues across a range of maturities, collateral types
and structures. Despite the increased issuance, the technical balance of the ABS
market remained favorable due to heavy investor demand from foreign banks,
insurance companies and an increasing number of corporate "crossover" accounts.
- --------------------------------------------------------------------------------
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
. Emerging Market Debt. The portfolio's investments in emerging market debt
(4.5%) performed extremely well during the period. We carefully managed the
fund's exposure in the sector by stressing higher credit-quality, short-duration
bonds. Geographically, we emphasized Latin American countries because we believe
this region has the best risk/reward characteristics. During the period, we
focused on bonds from Chile, Colombia and the Andean region development bank. We
also initiated a new position in investment-grade Mexican bonds.
. Agency Debentures. Agency debentures, a small position (1.5%), added to the
portfolio's diversification and contributed incremental yield. However, we
underweighted the sector relative to the Index (6.5%) because our analysis
indicated that it did not adequately compensate us given its level of risk.
. Duration. As of October 31, the fund's duration matched that of the Index at
4.7 years. Rather than attempting to predict the direction of interest rates, we
manage the fund's duration to approximate that of the Index, partly through the
use of financial futures. We seek to add incremental return over the Index
through sector weighting and individual security selection.
. Credit Quality. More than half of the portfolio was invested in government
and agency securities (51 .1%), with another 12.6% invested in triple-A-rated
securities. The remainder of the portfolio was made up of double-A-rated
securities (2.7%), single-A-rated securities (12.5%), triple-B-rated
securities (19.4%) and cash equivalents
(1.7%).
. Prudent Use of Derivatives. As noted, the portfolio held positions in asset-
backed securities (12.5%), sequential-pay/support CMOs (5.1%) and PAC CMOs
(3.5%), which are all typically considered to be lower risk derivatives. In
addition, we held a 1.2% position in inverse floaters, which are securities
whose coupons reset in the opposite direction from interest rate movements.
These securities performed well during the period, offering incremental yield
over Treasuries.
Market Outlook
We are somewhat cautious on the corporate bond sector as it has become
expensive relative to Treasuries, but expect the sector to continue to benefit
from strong technical and fundamental factors. We intend to continue to
overweight industrial and financial issues and underweight utilities due to
their regulatory and competitive pressures. In the mortgage pass-through market,
certain segments are attractively valued, and we believe that our current
seasoned holdings should fare well relative to other sectors if interest rates
were to continue to fall and increase the level of prepayments. We are
cautiously optimistic on the ABS market, where we expect the sector's
significant spread premiums relative to comparably rated corporate securities to
continue to buoy investor demand. In addition, Fed surveys indicate that banks
have been tightening their underwriting standards over the last three quarters,
which should help to allay lingering investor concerns surrounding consumer
credit card delinquencies. Finally, we remain optimistic on the prospects for
the relative performance of emerging market debt, which continues to offer good
value compared with other asset classes. Overall, the economic trends in
emerging markets appear to be headed in the right direction and the
globalization of financial markets is likely to increase investor interest in
the sector. During the coming year, we will continue to actively allocate the
portfolio's assets among the various fixed income sectors as their relative
value changes.
Distribution Policy
During the 12-month period under review, the fund's Institutional shares
distributed $0.72 per share. From their inceptions through October 31, the
fund's Administration and Service shares paid out $0.41 and $0.38 per share,
respectively. (The Administration shares' inception date was on February 28,
1996, and the Service shares' inception date was on March 13, 1996.) Dividends
are
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
declared daily and paid on a monthly basis. As required by tax law, the fund
distributes substantially all of its investment company taxable income.
In closing, we appreciate your investment and look forward to serving you in
the future.
Sincerely,
/s/ Jonathan A Beinner
Jonathan A Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Stephen R. Warren
Stephen R. Warren
Portfolio Managers
GS Core Fixed Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Core Fixed Income Fund based on the Fund's normal minimum
initial investment of $50,000, is compared to its benchmark, the Lehman Brothers
Aggregate Bond Index ("Lehman Aggregate Index"). All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate as market conditions change. The investment
return and principal value of an investment will fluctuate with changes in
market conditions so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
Institutional Shares/(a)/ Administration Shares Service Shares
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 48500 10/31/96 51780 10/31/96 52450
10/31/95 56124
10/31/96 59492
Lehman Aggregate Index Lehman Aggregate Index Lehman Aggregate Index
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 46980 10/31/96 51870 10/31/96 52470
10/31/95 54332
10/31/96 57505
<TABLE>
<CAPTION>
------------------------ -----------------------------------------------------
Average Annual Total Return
------------------------ -----------------------------------------------------
One Year Since Inception/(a)/
<S> <C> <C>
------------------------ ---------------------------- ------------------------
Institutional Shares 5.98% 6.34%
------------------------ ---------------------------- ------------------------
Administration Shares N/A 3.56/(b)/
------------------------ ---------------------------- ------------------------
Service Shares N/A 4.90/(b)/
------------------------ ---------------------------- ------------------------
</TABLE>
(a) The Institutional, Administration and Service shares commenced operations
January 5, 1994, February 28, 1996 and March 13, 1996, respectively
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
26
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
GS Core Fixed Income Fund
October 31, 1996
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds--26.8%
Finance Bonds--12.6%
BankAmerica Corp.
$ 20,000 6.03% 05/17/99 $ 201,724
Bear Stearns Mortgage Securities, Inc.
2,045,784 6.50 03/28/09 1,903,048
Capital One Bank
600,000 8.63 01/15/97 603,000
500,000 8.13 02/27/98 511,610
Comdisco Inc.
950,000 9.75 01/15/97 956,717
200,000 7.33 03/06/97 201,112
Conseco Inc.
340,000 10.50 12/15/04 402,688
Continental Bank N.A.
525,000 11.25 07/01/01 565,971
Countrywide Funding Corp.
125,000 6.08 07/14/99 124,166
250,000 8.43 11/16/99 263,653
250,000 7.75 08/10/01 259,800
Ford Capital Corp.
200,000 9.38 01/01/98 207,584
300,000 9.50 07/01/01 333,960
General Motors Acceptance Corp.
275,000 7.63 03/09/98 281,064
200,000 7.13 05/10/00 204,238
375,000 9.63 12/15/01 422,483
Meditrust, Inc.
240,000 7.82 09/10/26 258,144
Security Pacific Corp.
995,000 11.50 11/15/00 1,268,429
Signet Banking Corp.
240,000 9.63 06/01/99 257,527
Washington Real Estate Corp.
120,000 7.13 08/13/03 120,307
- ---------------------------------------------------------------------
$ 9,247,225
- ---------------------------------------------------------------------
Industrial Bonds--13.7%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 520,312
Auburn Hills Trust
210,000 12.00 05/01/20 316,730
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds (continued)
Industrial Bonds (continued)
Cablevision Industries Corp.
$ 150,000 10.75% 01/30/02 $ 162,534
Continental Airlines, Inc.
349,679 7.75 07/02/14 364,513
569,776 8.56 07/02/14 620,880
Ford Holdings, Inc.
300,000 9.25 03/01/00 325,581
Mitchell Energy & Development Corp.
400,000 8.00 07/15/99 410,020
News America Holdings, Inc.
350,000 9.13 10/15/99 375,340
150,000 7.50 03/01/00 154,083
Northwest Airlines Corp.
167,795 8.26 03/10/06 179,500
575,000 8.97 01/02/15 605,573
RJR Nabisco Inc.
175,000 8.00 07/15/01 175,334
450,000 8.63 12/01/02 456,467
Tele-Communications, Inc.
50,000 6.46 03/06/00 49,465
300,000 8.25 01/15/03 296,652
1,135,000 6.27 09/15/03 1,132,764
Tenneco Inc.
1,175,000 10.00 08/01/98 1,249,178
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,708,410
400,000 7.98 08/15/04 409,452
U.S. Air Inc.
560,072 6.76 04/15/08 547,711
- ---------------------------------------------------------------------
$10,060,499
- ---------------------------------------------------------------------
Utility Bonds--0.5%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 329,248
- ---------------------------------------------------------------------
$ 329,248
- ---------------------------------------------------------------------
Total Corporate Bonds
(Cost $19,435,482) $19,636,972
- ---------------------------------------------------------------------
Asset-Backed Securities--12.2%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 $ 159,816
- ---------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
27
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C> <C>
Asset-Backed Securities (continued)
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
$ 232,121 5.80% 06/15/02 $ 231,466
Discover Card Master Trust, Series 1996-4, Class A
1,910,000 5.76 10/16/13 1,926,101
Discover Card Master Trust, Series 1996-4, Class B
1,100,000 5.93 10/16/13 1,100,000
General Motors Acceptance Corp. Series 1995, Class A
99,367 7.15 03/15/00 100,546
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
291,994 6.55 11/20/01 293,725
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
314,669 6.85 06/15/01 318,757
Premier Auto Trust Series 1995-1, Class A4
360,000 7.85 09/04/98 362,023
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 81,150
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20 02/16/06 675,750
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 577,500
Sears Credit Card Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 306,561
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,140,294
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 924,183
Standard Credit Card Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 726,111
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $8,987,847) $8,923,983
- --------------------------------------------------------------------------------
Emerging Market Debt--3.9%
Bancoldex
$ 160,000 8.63% 06/02/00 $ 164,731
Corp. Andina de Fomento
200,000 7.25 04/30/98 202,294
40,000 8.38 07/29/01 40,698
Empresa Col Petroleos
900,000 7.25 07/08/98 904,563
Financiera Energy Nacional
530,000 6.63 12/13/96 534,400
160,000 9.38 06/15/06 165,234
- --------------------------------------------------------------------------------
Emerging Market Debt (continued)
Instituto de Fomento Industrial
$ 80,000 8.38% 07/29/01 $ 81,397
Korea Electric Power
266,952 7.40 04/01/16 269,197
YPF Sociedad Anonima
456,886 7.50 10/26/02 463,036
- --------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,799,425) $2,825,550
- --------------------------------------------------------------------------------
Government Bonds--0.9%
Province of Quebec
$ 520,000 13.25% 09/15/14 $ 630,058
- --------------------------------------------------------------------------------
Total Government Bonds
(Cost $653,628) $ 630,058
- --------------------------------------------------------------------------------
Mortgage Backed Obligations--31.1%
Federal Home Loan Mortgage Corp. (FHLMC((b)
$4,500,000 7.50% TBA-30 Yr(b) $4,515,435
1,208,677 6.00 TBA-30 Yr(b) 1,198,196
Federal National Mortgage Association (FNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,930
1,000,000 8.00 11/15/16 1,020,000
126,229 8.50 06/01/06 131,790
125,861 8.50 09/01/06 131,406
720,814 8.50 03/01/10 752,213
500,000 6.25 07/25/18 492,810
989,360 7.00 02/01/26 970,493
1,000,001 8.50 07/01/26 1,034,681
FNMA Remic Trust, Series 1993-201G
1,000,000 3.50 05/25/19 871,560
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24 1,842,500
Government National Mortgage Association (GNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,620
1,000,000 7.50 TBA-30 Yr(b) 1,003,120
3,000,000 8.00 TBA-30 Yr(b) 3,067,500
1,000,000 8.50 TBA-30 Yr(b) 1,038,120
342,966 8.00 02/15/17 356,042
850,876 7.50 03/15/23 857,785
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
- ----------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
======================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Government National Mortgage Association (GNMA)--(continued)
$ 512,583 7.00% 08/15/23 $ 505,699
124,369 7.50 08/15/23 125,379
Prudential Home Mortgage Securities Corp., Series 1992-39 A8
1,000,000 7.74 12/25/07 892,270
- ----------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $22,482,170) $22,768,549
- ----------------------------------------------------------------------
Sovereign Credit--1.3%
United Mexican States
$ 650,000 7.69% 08/06/01 $ 658,769
State of Israel
300,000 6.38 12/15/05 286,611
- ----------------------------------------------------------------------
Total Sovereign Credit
(Cost $926,260) $ 945,380
- ----------------------------------------------------------------------
U.S. Government Agency Obligations--1.5%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 300,000 8.20% 01/16/98 $ 301,734
250,000 6.83 09/18/02 249,023
Resolution Funding Corp. Principal-Only Stripped Securities/(c)/
1,790,000 7.08 10/15/20 335,392
1,140,000 7.08 01/15/21 210,136
- ----------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $1,058,170) $ 1,096,285
- ----------------------------------------------------------------------
U.S. Treasury Obligations--19.3%
United States Treasury Bonds
$ 3,900,000 8.75% 05/15/17 $ 4,772,625
30,000 8.88 08/15/17 37,153
150,000 8.75 08/15/20 185,180
120,000 7.88 02/15/21 135,900
United States Treasury Interest-Only Stripped Securities/(d)/
2,250,000 6.69 08/15/09 968,063
350,000 6.75 11/15/10 137,736
United States Treasury Notes
1,200,000 5.88 04/30/98 1,203,744
3,250,000 6.88 08/31/99 3,331,250
100,000 6.13 07/31/00 100,375
2,090,000 7.88 11/15/04 2,293,775
United States Treasury Principal-Only Stripped Securities/(c)/
40,000 5.54 11/15/97 37,792
590,000 6.41 11/15/04 354,885
2,920,000 6.95 05/15/20 581,460
- ----------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,792,338) $14,139,938
- ----------------------------------------------------------------------
Repurchase Agreements--19.0%
Joint Repurchase Agreement Account/(a)/
$ 13,900,000 5.58% 11/01/96 $13,900,000
- ----------------------------------------------------------------------
Total Repurchase Agreements
(Cost $13,900,000) $13,900,000
- ----------------------------------------------------------------------
Total Investments
(Cost $84,035,320/(e)/) $84,866,715
======================================================================
</TABLE>
Futures contracts open at October 31, 1996 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type Long (f) Month Gain
- ------------------------- ------------ --------------- ------------
<S> <C> <C> <C>
Euro Dollars 5 December 1996 $5,125
Euro Dollars 5 March 1997 6,875
Euro Dollars 3 September 1997 825
Euro Dollars 5 June 1997 7,500
Euro Dollars 5 June 1998 3,625
5-Year U.S. Treasury
Notes 7 December 1996 8,641
10-Year U.S. Treasury
Notes 18 December 1996 65,625
=====================================================================
$98,216
-----------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 993,383
Gross unrealized loss for investments in
which cost exceeds value (243,229)
=====================================================================
Net unrealized gain $ 750,154
- ---------------------------------------------------------------------
</TABLE>
/(a)/Portions of these securities are being segregated for open TBA purchases,
mortgage dollar rolls and futures.
/(b)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally + / -2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(c)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(d)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(e)/The aggregate cost for federal income tax purposes is $84,116,561.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year U.S. Treasury Note and, 10-Year U.S. Treasury Note contract
represents $100,000 in notional par value. The total notional amount and
market value are $25,500,000 and $8,144,325, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==============================================================
<S> <C> <C> <C> <C>
Assets:
Investments in securities, at value (cost $618,544,961, $100,440,420,
$36,328,338 and $84,035,320, respectively) $617,783,125 $1O1,067,616 $36,530,762 $84,866,715
Receivables:
Investment securities sold 9,023,710 -- 2,639,947 4,512,122
Interest 6,238,391 962,570 560,207 981,011
Fund shares sold 93,534 9,761 48,407
Variation margin -- -- -- 5,475
Cash 23,482 85,863 133,870 70,206
Deferred organization expenses, net -- -- 20,748 53,352
Other assets 186,057 127,499 66,001 66,089
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 633,348,299 102,253,309 39,999,942 90,554,970
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,479,757 109,402 20,960 23,483
Investment securities purchased 3,134,490 -- 4,336,434 17,313,687
Fund shares repurchased 732,405 55,958 20,916 6,846
Variation margin 20,125 256 -- --
Investment adviser fees 210,539 34,534 11,033 22,677
Transfer agent fees 46,181 -- 5,254 3,058
Authorized dealer service fees 1,675 -- -- --
Accrued expenses and other liabilities 54,249 35,598 48,693 40,800
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,679,421 235,748 4,443,290 17,410,551
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 680,810,713 115,128,671 39,403,964 72,421,889
Accumulated undistributed (distributions in excess of) net
investment income (3,441,783) 770,624 90,133 33,551
Accumulated net realized loss on investment and futures
transactions (49,082,170) (14,541,811) (4,139,869) (240,632)
Net unrealized gain (loss) on investments and futures (617,882) 660,077 202,424 929,611
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $627,668,878 $102,017,561 $35,556,652 $73,144,419
===================================================================================================================================
Net asset value, offering and redemption price per share
Institutional shares $9.83 $9.83 $9.96 $9.85
Administration shares $9.83 $9.85 $9.96 $9.84
Service shares -- $9.82 $9.97 $9.86
Class A shares(a) $9.83 -- -- --
===================================================================================================================================
Shares Outstanding:
Institutional shares 62,407,407 10,168,881 3,494,408 7,312,322
Administration shares 385,738 25,537 4,845 71,240
Service shares -- 185,492 69,696 38,782
Class A shares 1,091,335 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value
(unlimited number of shares authorized) 63,884,480 10,379,910 3,568,949 7,422,344
===================================================================================================================================
</TABLE>
(a) Maximum public offering price per share (NAV per share x 1.0152) for Class A
shares of GS Adjustable Rate Government Fund is $9.97
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Operations
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==========================================================
<S> <C> <C> <C> <C>
Investment income:
Interest, net (a) $39,925,070 $7,068,555 $1,979,825 $4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 39,925,070 7,068,555 1,979,825 4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 2,535,709 514,200 169,796 246,568
Distribution fees 30,905 -- -- --
Authorized dealer service fees 30,905 -- -- --
Administration share fees 9,833 107 129 751
Service share fees -- 1,222 2,322 422
Transfer agent fees 278,337 -- 16,980 24,657
Custodian fees 136,975 66,180 53,929 81,841
Professional fees 86,751 56,020 54,712 53,340
Registration fees 72,001 37,210 44,701 48,435
Amortization of deferred organization expenses 20,848 -- 22,735 24,562
Trustees' fees 1,899 1,287 760 915
Other 106,857 59,952 65,554 30,136
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,311,020 736,178 431,618 511,627
Less--Expenses reimbursable and fees waived by Goldman Sachs (417,768) (272,069) (238,097) (233,065)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 2,893,252 464,109 193,521 278,562
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 37,031,818 6,604,446 1,786,304 4,013,477
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (310,326) (222,458) 367,144 (108,070)
Futures transactions (2,192,298) (345,361) (35,506) (145,350)
Net change in unrealized gain (loss) on:
Investments 6,892,986 661,003 (396,071) (192,910)
Futures 818,120 (41,385) -- 117,560
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 5,208,482 51,799 (64,433) (328,770)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $42,240,300 $ 6,656,245 $ 1,721,871 $3,684,707
====================================================================================================================================
(a) Net of $1,314 in foreign withholding tax for the Core Fixed Income Fund.
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
----------------------------------------------------------
<S> <C> <C> <C> <C>
From Operations:
Net investment income $ 37,031,818 $6,604,446 $1,786,304 $4,013,477
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819) 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618 (396,071) (75,350)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245 1,721,871 3,684,707
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519) (1,766,892) (4,019,797)
Administration shares (220,450) (2,548) (2,032) (19,144)
Service shares -- (14,792) (17,380) (5,349)
Class A shares (577,779) -- -- --
In excess of net investment income
Institutional shares (1,304,006) -- -- --
Administration shares (7,930) -- -- --
Class A shares (20,794) -- -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- -- -- (450,016)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859) (1,786,304) (4,494,306)
- ------------------------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441 22,248,684 21,976,567
Reinvestment of dividends and distributions 18,181,648 4,153,816 1,401,492 4,315,748
Cost of shares repurchased (477,107,914) (47,993,112) (46,918,400) (7,840,575)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from shares transactions (52,339,892) (1,819,855) (23,268,224) 18,451,740
- ------------------------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469) (23,332,657) 17,642,141
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of year $676,133,018 $103,760,030 $58,889,309 $55,502,278
- ------------------------------------------------------------------------------------------------------------------------------
End of year $627,668,878 $102,017,561 $35,556,652 $73,144,419
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed
net investment income $ (3,441,783) $ 770,624 $ 90,133 $ 33,551
- ------------------------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467 2,233,482 2,244,430
Reinvestment of dividends and distributions 1,856,783 424,274 140,950 439,299
Shares repurchased (48,741,470) (4,905,357) (4,727,959) (811,075)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616) (2,353,527) 1,872,654
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
32
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short-Term
Rate Government
Government Agency
Agency Fund Fund
==================================
<S> <C> <C>
From Operations:
Net investment income $ 42,586,453 $ 8,885,667
Net realized gain (loss) from investment and futures transactions (12,000,479) (4,030,174)
Net change in unrealized gain on investments and futures 16,138,367 5,735,691
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 46,724,341 10,591,184
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (42,629,917) (8,684,213)
Administration shares (278,448) (11,164)
Service shares -- --
Class A shares (425,863) --
In excess of net investment income
Institutional shares (2,124,188) --
Administration shares (13,875) --
Class A shares (21,220) --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (45,493,511) (8,695,377)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 456,762,969 49,034,023
Proceeds from reorganizations 37,593,780 --
Reinvestment of dividends and distributions 21,273,685 4,993,443
Cost of shares repurchased (790,211,526) (145,988,674)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (274,581,092) (91,961,208)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (273,350,262) (90,065,401)
Net Assets:
Beginning of year 949,483,280 193,825,431
- ----------------------------------------------------------------------------------------------------------------
End of year $676,133,018 $103,760,030
================================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ (2,129,902) $ 708,450
================================================================================================================
Summary of Share Transactions:
Shares sold 46,809,171 5,072,030
Shares exchanged in reorganizations 3,843,169 --
Reinvestment of dividends and distributions 2,181,117 516,178
Shares repurchased (81,125,615) (15,135,663)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (28,292,158) (9,547,455)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GS Short GS Core
Duration Fixed
Tax-Free Income
Fund Fund
============================
<S> <C> <C>
From Operations:
Net investment income $ 2,814,454 $2,248,195
Net realized gain (loss) from investment and futures transactions (472,312) 921,130
Net change in unrealized gain on investments and futures 1,270,197 1,663,176
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,612,339 4,832,501
- ---------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (2,771,793) (2,253,625)
Administration shares (20,584) --
Service shares (22,077) --
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
- ---------------------------------------------------------------------------------------------------------
Total distributions to shareholders (2,814,454) (2,253,625)
- ---------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 36,468,900 30,256,879
Proceeds from reorganizations -- --
Reinvestment of dividends and distributions 1,873,154 2,232,160
Cost of shares repurchased (67,865,169) (4,073,379)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (29,523,115) 28,415,660
- ---------------------------------------------------------------------------------------------------------
Total (decrease) increase (28,725,230) 30,994,536
Net Assets:
Beginning of year 87,614,539 24,507,742
- ---------------------------------------------------------------------------------------------------------
End of year $58,889,309 $55,502,278
=========================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ 67,398 $ 40,202
=========================================================================================================
Summary of Share Transactions:
Shares sold 3,733,382 3,077,397
Shares exchanged in reorganizations -- --
Reinvestment of dividends and distributions 190,942 230,595
Shares repurchased (6,950,294) (411,156)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,025,970) 2,896,836
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust
registered under the Investment Company Act of 1940 (as amended) as an open-end,
management investment company. Included in this report are the financial
statements for the GS Adjustable Rate Government Fund, GS Short Duration
Government Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund,
collectively, ("the Funds"). The Funds are diversified portfolios of the Trust
offering three classes of shares - Institutional shares, Administration shares
and Service shares. In addition, the GS Adjustable Rate Government Fund offers
Class A shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
-------------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations
for which accurate market quotations are readily available are valued on the
basis of quotations furnished by a pricing service or provided by dealers in
such securities. Other securities are valued based on yield equivalents, a
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Portfolio securities for which accurate market
quotations are not readily available are valued based on yield equivalents,
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Short-term debt obligations maturing in sixty days or
less are valued at amortized cost.
B. Security Transactions and Investment Income
------------------------------------------------
Security transactions are recorded on trade date. Realized gains and
losses on sales of portfolio securities are calculated on the identified cost
basis. Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account actual principal
prepayment experience and estimates of future principal prepayments. Certain
mortgage security paydown gains and losses are taxable as ordinary income. Such
paydown gains and losses increase or decrease taxable ordinary income available
for distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
Market premiums resulting from the purchase of long-term debt securities are
amortized to interest income over the life of the security with a corresponding
decrease in the cost basis of that security for GS Short Duration Tax-Free Fund.
Market discounts and market premiums on debt securities, other than mortgage
backed securities, are amortized to interest income over the life of the
security with a corresponding adjustment in the cost basis of that security for
GS Core Fixed Income Fund.
C. Mortgage Dollar Rolls
--------------------------
The Funds, with the exception of the GS Short Duration Tax-Free Fund, may
enter into mortgage "dollar rolls" in which the Fund sells securities in the
current month for delivery and simultaneously contracts with the same
counterparty to repurchase similar (same type,
34
<PAGE>
coupon and maturity) but not identical securities on a specified future date.
The Fund loses the right to receive principal and interest paid on the
securities sold. However, the Fund benefits to the extent of any price received
for the securities sold and the lower forward price for the future purchase
(often referred to as the "drop") or fee income plus the interest earned on the
cash proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high-grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
D. Futures Contracts
----------------------
The Funds may enter into futures transactions in order to hedge against
changes in interest rates, securities prices, currency exchange rates in the
case of GS Core Fixed Income Fund or to seek to increase total return. A Fund
will engage in futures transactions only for bona fide hedging purposes as
defined in regulations of the CFTC or to seek to increase total return to the
extent permitted by such regulations. The use of futures contracts involve, to
varying degrees, elements of market risk which may exceed the amounts recognized
in the Statements of Assets and Liabilities.
Upon entering into a futures contract, a Fund is required to deposit with
a broker an amount of cash or securities equal to the minimum "initial margin"
requirement of the futures exchange on which the contract is traded. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the contract, and are
recorded for financial reporting purposes as unrealized gains or losses by the
Fund. When entering into a closing transaction, the Fund will realize, for book
purposes, a gain or loss equal to the difference between the value of the
futures contract to sell and the futures contract to buy. Futures contracts are
valued at the most recent settlement price, unless such price does not reflect
the fair market value of the contract, in which case the position will be valued
using methods as approved by the Board of Trustees.
Certain risks may arise upon entering into futures contracts. The
predominant risk is that the changes in the value of the futures contract may
not directly correlate with changes in the value of the underlying securities.
This risk may decrease the effectiveness of the Funds' hedging strategies and
may also result in a loss to the Funds.
E. Deferred Organization Expenses
-----------------------------------
Organization-related costs are being amortized on a straight-line basis
over a period of five years.
F. Expenses
-------------
Expenses incurred by the Trust that do not specifically relate to an
individual portfolio of the Trust are allocated to the portfolios based on each
portfolio's relative average net assets for the period.
Shareholders of Administration shares and Service shares bear all expenses
and fees paid to service organizations for their services with respect to such
shares as well as other expenses (subject to expense limitations) which are
directly attributable to such shares. For the GS Adjustable Rate Government
Fund, shareholders of Class A shares bear all expenses and fees relating to the
distribution and authorized dealer service plans as well as other expenses which
are directly attributable to such shares.
G. Federal Taxes
------------------
It is each Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute each
year substantially all of its investment company taxable and tax-exempt income
to its shareholders. Accordingly, no federal tax provisions are required.
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The characterization of distributions to shareholders for financial
statement purposes as either from or in excess of net investment income or net
realized gain on investment transactions, or from capital, depends on the type
of book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. federal tax purposes:
<TABLE>
<CAPTION>
Years of
Fund Amount Expiration
- --------------------------------------- --------------------- -----------------
<S> <C> <C>
GS Adjustable Rate
Government Fund $47,923,000 2000-2003
GS Short Duration Government
Fund $13,272,000 2002-2003
GS Short Duration Tax-Free
Fund $4,271,000 2002-2003
GS Core Fixed Income
Fund $77,000 2004
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by applicable laws or regulations.
3. Agreements
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman,
Sachs & Co. ("Goldman Sachs"), serves as the investment adviser for the GS
Adjustable Rate Government and GS Short Duration Government Funds pursuant to
Investment Advisory Agreements. Goldman Sachs Asset Management ("GSAM"), a
separate operating division of Goldman Sachs, serves as the investment adviser
for the GS Short Duration Tax-Free and GS Core Fixed Income Funds pursuant to
Investment Advisory Agreements. Under the Investment Advisory Agreements, the
adviser, subject to the general supervision of the Trust's Board of Trustees,
manages the Funds' portfolios and provides for the administration of the Funds'
other affairs. As compensation for the services rendered under the Investment
Advisory Agreements and the assumption of the expenses related thereto, the
adviser is entitled to a fee, computed daily and payable monthly at an annual
rate equal to .40% of average daily net assets of GS Adjustable Rate Government,
GS Short Duration Tax-Free and GS Core Fixed Income Funds and .50% of average
daily net assets of GS Short Duration Government Fund. Until further notice,
GSFM has voluntarily agreed not to impose .10% of its investment advisory fee
for the GS Short Duration Government Fund. For the year ended October 31, 1996,
investment advisory fees of approximately $103,000 were waived for the GS Short
Duration Government Fund.
The adviser has voluntarily agreed to limit certain of the Funds' expenses
(excluding investment advisory fees, taxes, interest, brokerage, litigation,
administrative and service share fees, indemnification and other extraordinary
expenses and with respect to GS Adjustable Rate Government Class A shares,
distribution and authorized dealer service fees) to the extent that such
expenses exceed .05% per annum of each Fund's average daily net assets. For the
year ended October 31, 1996, the amount of reimbursed expenses for the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and GS Core Fixed Income Funds were approximately $387,000, $169,000,
$238,000 and $233,000, respectively. The amounts reimbursable to the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and the GS Core Fixed Income Funds at October 31, 1996 were
approximately $29,000, $12,000, $31,000 and $19,000, respectively, and are
included in "Other assets" in the accompanying Statements of Assets and
Liabilities.
Goldman Sachs serves as Distributor of the shares of the Funds pursuant to
a Distribution Agreement and receives no compensation in this capacity with the
exception of GS Adjustable Rate Government Fund Class A shares. At October 31,
1996, Goldman Sachs retained approximately $79,000 of sales load related to
Class A shares. Goldman Sachs also serves as Transfer Agent of the Funds for a
fee.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
The Trust, on behalf of the GS Adjustable Rate Government Fund, has
adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 for the Class A
shares. Under the Plan, Goldman Sachs is entitled to receive a quarterly
distribution fee equal, on an annual basis, to .25% of the average daily net
assets of Class A shares. Currently, Goldman Sachs has agreed to voluntarily
waive this distribution fee. Distribution fees waived for the period amounted to
approximately $31,000.
The Trust, on behalf of the GS Adjustable Rate Government Fund, has
adopted a non-Rule 12b-1 Authorized Dealer Service Plan (the "Service Plan")
pursuant to which Goldman Sachs and Authorized Dealers are compensated for
providing personal and account maintenance services. GS Adjustable Rate
Government Fund pays a fee under the Service Plan equal, on an annual basis, to
.25% of its average daily net assets attributable to Class A shares.
For the year ended October 31, 1996, GS Adjustable Rate Government Fund,
GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS Core
Fixed Income Fund incurred commission expenses of approximately $108,000,
$24,000, $1,000 and $4,000, respectively, in connection with futures contracts
entered into with Goldman Sachs. At October 31, 1996, GS Adjustable Rate
Government Fund had approximately $20,000, payable to Goldman Sachs related to
variation margin on futures contracts. Approximately $5,000 relating to
variation margin was due to the GS Core Fixed Income Fund from Goldman Sachs.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving
line of credit facility to be used solely for temporary or emergency purposes.
Under the most restrictive arrangement, each fund must own securities having a
market value in excess of 300% of the total bank borrowings. The interest rate
on the borrowings is based on the federal funds rate. During the year ended
October 31, 1996, the Funds did not have any borrowings under this facility.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for
the year ended October 31, 1996, were as follows:
================================================================================
GS GS GS
Adjustable Short Short GS
Rate Duration Duration Core Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
- --------------------------------------------------------------------------------
Purchases of U.S.
Government and
agency obligations $319,204,368 $117,205,724 -- $227,149,602
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) -- -- $101,504,852 41,015,852
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 370,448,093 113,784,637 -- 251,512,185
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) -- -- 128,041,004 19,684,141
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
Fund Dollars Shares
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $391,363,204 39,981,299
Reinvestment of dividends and
distributions 17,432,484 1,780,288
Shares repurchased (456,776,795) (46,666,343)
----------------------------------------
(47,981,107) (4,904,756)
----------------------------------------
Administration Shares:
Shares sold 1,457,872 148,981
Reinvestment of dividends and
distributions 94,420 9,641
Shares repurchased (1,356,764) (138,609)
----------------------------------------
195,528 20,013
----------------------------------------
37
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund: Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares:
Shares sold $ 13,765,298 1,404,698
Reinvestment of dividends and distributions 654,744 66,854
Shares repurchased (18,974,355) (1,936,518)
-------------------------------------
(4,554,313) (464,966)
-------------------------------------
Total $ (52,339,892) (5,349,709)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 39,855,638 4,072,082
Reinvestment of dividends and distributions 4,137,041 422,559
Shares repurchased (47,875,174) (4,893,286)
-------------------------------------
(3,882,495) (398,645)
-------------------------------------
Administration Shares:
Shares sold 326,101 33,251
Reinvestment of dividends and distributions 2,032 207
Shares repurchased (77,312) (7,921)
-------------------------------------
250,821 25,537
-------------------------------------
Service Shares:
Shares sold 1,837,702 188,134
Reinvestment of dividends and distributions 14,743 1,508
Shares repurchased (40,626) (4,150)
-------------------------------------
1,811,819 185,492
-------------------------------------
Total $ (1,819,855) (187,616)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 20,777,050 2,085,253
Reinvestment of dividends and distributions 1,383,351 139,126
Shares repurchased (45,664,878) (4,601,865)
-------------------------------------
(23,504,477) (2,377,486)
-------------------------------------
Administration Shares:
Shares sold 105,302 10,672
Reinvestment of dividends and distributions 2,017 203
Shares repurchased (105,478) (10,644)
-------------------------------------
1,841 231
-------------------------------------
Service Shares:
Shares sold $ 1,366,332 137,557
Reinvestment of dividends and distributions 16,124 1,621
Shares repurchased (1,148,044) (115,450)
-------------------------------------
234,412 23,728
-------------------------------------
Total $ (23,268,224) (2,353,527)
=====================================
GS Core Fixed Income Fund
Institutional Shares:
Shares sold $ 20,524,422 2,094,833
Reinvestment of dividends and distributions 4,292,533 436,903
Shares repurchased (7,431,360) (769,104)
-------------------------------------
17,385,595 1,762,632
-------------------------------------
Administration Shares:
Shares sold 1,029,912 106,074
Reinvestment of dividends and distributions 17,883 1,847
Shares repurchased (358,284) (36,681)
-------------------------------------
689,511 71,240
-------------------------------------
Service Shares:
Shares sold 422,233 43,525
Reinvestment of dividends and distributions 5,332 549
Shares repurchased (50,931) (5,292)
-------------------------------------
376,634 38,782
-------------------------------------
Total $ 18,451,740 1,872,654
=====================================
</TABLE>
- --------------------------------------------------------------------------------
Share activity for the year ended October 31, 1995 is as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $ 445,293,934 45,635,666
Shares exchanged in reorganization 18,823,725 1,926,438
Reinvestment of dividends and distributions 20,730,137 2,125,494
Shares repurchased (771,265,543) (79,186,935)
-------------------------------------
(286,417,747) (29,499,337)
-------------------------------------
Administration Shares:
Shares sold 648,042 66,628
Shares exchanged in reorganization 1,561,584 159,814
Reinvestment of dividends and distributions 124,368 12,743
Shares repurchased (5,731,937) (588,307)
-------------------------------------
(3,397,943) (349,122)
-------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
============================================================================================
<S> <C> <C>
Class A Shares:
Shares sold 10,820,993 1,106,877
Shares exchanged in reorganization 17,208,471 1,756,917
Reinvestment of dividends and distributions 419,180 42,880
Shares repurchased (13,214,046) (1,350,373)
-------------------------------------
15,234,598 1,556,301
-------------------------------------
Total $(274,581,092) (28,292,158)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 49,032,419 5,071,865
Reinvestment of dividends and distributions 4,993,225 516,155
Shares repurchased (145,260,300) (15,059,774)
-------------------------------------
(91,234,656) (9,471,754)
-------------------------------------
Administration Shares:
Shares sold 1,604 165
Reinvestment of dividends and distributions 218 23
Shares repurchased (728,374) (75,889)
-------------------------------------
(726,552) (75,701)
-------------------------------------
Total $ (91,961,208) (9,547,455)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 18,780,011 1,920,432
Reinvestment of dividends and distributions 1,860,104 189,624
Shares repurchased (46,762,899) (4,787,105)
-------------------------------------
(26,122,784) (2,677,049)
-------------------------------------
Administration Shares:
Shares sold -- --
Reinvestment of dividends and distributions 2,483 246
Shares repurchased (3,800,930) (390,639)
-------------------------------------
(3,798,447) (390,393)
-------------------------------------
Service Shares:
Shares sold 17,688,889 1,812,950
Reinvestment of dividends and distributions 10,567 1,072
Shares repurchased (17,301,340) (1,772,550)
-------------------------------------
398,116 41,472
-------------------------------------
Total $(29,523,115) (3,025,970)
=====================================
</TABLE>
7. Repurchase Agreements
- --------------------------------------------------------------------------------
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Fund's custodian, or at subcustodians. GSFM and GSAM
monitor the market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having
advisory agreements with GSFM and GSAM or their affiliates, transfer uninvested
cash balances into a joint account, the daily aggregate balance of which is
invested in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of October 31, 1996, the GS Adjustable Rate Government, GS Short Duration
Government and GS Core Fixed Income Funds had an .49%, .04% and .52%,
respectively, undivided interest in the repurchase agreements in the following
joint account which equaled $13,000,000, $1,000,000 and $13,900,000,
respectively, in principal amount.
- --------------------------------------------------------------------------------
39
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
As of October 31, 1996, the repurchase agreement in the joint account along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,290,445, 5.5%--8.50%, 2.1.09-6/1/26; FHLMC: $165,859,789, 5.50%--8.50%,
9/1/98--8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (U.S. Treasury
Notes: $942,903,967, 4.38%--8.50%, 11/15/96--8/15/03)
924,700,000 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,600,142, 5.50%--8.00%, 2/1/02-10/1/26; FHLMC:
$464,523,981, 6.00%--9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S. Treasury
Interest Only Stripped Securities: $11,653,277, 2/15/98--5/15/02; U.S. Treasury
Notes: $85,997,728, 5.25%--7.75%, 5/15/97-10/15/06; U.S. Treasury Principal
Only Stripped Securities: $33,993,571, 5/15/97--5/15/05; U.S. Treasury Bills:
$41,756,285, 12/12/96--3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price
$175,026,979
(Treasury Notes: $178,528,739, 6.88%--7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement $2,669,700,000
================================================================================
</TABLE>
9. Administration and Service Plans
The Funds have adopted Administration and Service Plans. These plans allow
for Administration shares and Service shares, respectively, to compensate
service organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
10. Other Matters
On April 28, 1995, the GS Adjustable Rate Government Fund acquired the
assets of GS Government Agency Portfolio (For Financial Institutions) in
exchange solely for (i) the issuance of Institutional shares and Administration
shares of beneficial interest of the GS Adjustable Rate Government Fund and
(ii) the assumption by GS Adjustable Rate Government Fund of the liabilities of
GS Government Agency Portfolio (For Financial Institutions). Following this
transfer, GS Government Agency Portfolio (For Financial Institutions) was
liquidated and GS Adjustable Rate Government Fund's Institutional and
Administration shares were distributed to the former shareholders of GS
Government Agency Portfolio (For Financial Institutions).
The Reorganization was accomplished by a tax-free transfer of assets whereby
each shareholder of GS Government Agency Portfolio (For Financial Institutions)
received a number of full and fractional shares of GS Adjustable Rate Government
Fund having a total net asset value of their shares of GS Government Agency
Portfolio (For Financial Institutions) held on April 28, 1995. The net assets,
including $370,489 of unrealized depreciation for the GS Government Agency
Portfolio (For Financial Institutions), net asset values per share and shares
outstanding as of April 28, 1995 were:
================================================================================
GS Government
Agency
Portfolio
(For Financial GS Adjustable GS Adjustable
Institutions Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
Net Assets $20,385,309 $673,292,455 $693,677,764
Shares Outstanding
Institutional Shares 1,912,506 68,506,367 70,432,805
Administration Shares 158,661 401,122 560,936
Net Asset Value Per Share
Institutional Shares 9.84 9.77 9.77
Administration Shares 9.84 9.77 9.77
================================================================================
On May 11, 1995, shareholders of the GS Adjustable Rate Mortgage Fund
approved a Plan of Reorganization (the Plan) which was completed on May 12,
1995. Under the Plan, GS Adjustable Rate Mortgage Fund was reorganized as a
separate class (Class A) of the GS
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Adjustable Rate Government Fund. GS Adjustable Rate Mortgage Fund's assets were
acquired by GS Adjustable Rate Government Fund in exchange solely for (i) the
issuance of Class A shares of beneficial interest of GS Adjustable Rate
Government Fund and (ii) the assumption by GS Adjustable Rate Government Fund of
the liabilities of GS Adjustable Rate Mortgage Fund. Following this transfer, GS
Adjustable Rate Mortgage Fund was liquidated and GS Adjustable Rate Government
Fund Class A shares were distributed to the former shareholders of GS Adjustable
Rate Mortgage Fund.
The Reorganization was accomplished by a tax-free transfer of assets
whereby each shareholder of GS Adjustable Rate Mortgage Fund received a number
of Class A full and fractional shares of GS Adjustable Rate Government Fund
having a total net asset value of their shares of GS Adjustable Rate Mortgage
Fund held as of May 12, 1995. The net assets, including $45,684 of net
unrealized depreciation for the GS Adjustable Rate Mortgage Fund, net asset
values per share and shares outstanding as of May 12, 1995 were:
================================================================================
<TABLE>
<CAPTION>
GS Adjustable
Rate Mortgage GS Adjustable GS Adjustable
Fund Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Assets $17,208,471 $727,300,372 $744,508,843
Shares Outstanding
Institutional Shares -- 73,743,084 73,743,084
Administration Shares -- 561,352 561,352
Class A Shares 3,552,167 -- 1,756,917
Net Asset Value Per Share
Institutions Shares -- 9.79 9.79
Administration Shares -- 9.79 9.79
Class A Shares 4.84 -- 9.79
</TABLE>
================================================================================
The total amount of capital loss carryforward brought on to the books of
the GS Adjustable Rate Government Fund due to these reorganization was
approximately $3,154,000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing
and Retirement Income Plan was beneficial owner of approximately 29% of the
outstanding shares of the GS Short Duration Government Fund.
11. Certain Reclassifications
In accordance with Statement of Position 93-2, the GS Adjustable Rate
Government Fund, GS Short Duration Tax-Free Fund, and GS Core Fixed Income Fund
have reclassified $20,849, $36,587, $22,735, and $24,162, respectively, from
paid-in capital to accumulated undistributed net investment income. These
reclassifications have no impact on the net asset value of the Fund and are
designed to present the Fund's capital accounts on a tax basis.
- --------------------------------------------------------------------------------
41
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
=================================================================== ============================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option of net
beginning investment futures related investment investment and futures investment
of period income transactions transactions operations income transactions income
================================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ $9.77 $0.5759(a) $0.0772(a) -- $0.6531 $ (0.5725) -- $ (0.0206)
1996-Administration
Shares............ 9.77 0.5489(a) 0.0797(a) -- 0.6286 (0.5489) -- (0.0198)
1996-Class A
Shares............ 9.77 0.5481(a) 0.0806(a) -- 0.6287 (0.5489) -- (0.0198)
1995-Institutional
Shares............ 9.74 0.5630(a) 0.0717(a) -- 0.6347 (0.5759) -- (0.0287)
1995-Administration
Shares............ 9.74 0.5366(a) 0.0737(a) -- 0.6103 (0.5528) -- (0.0275)
1995-Class A
Shares(c)......... 9.79 0.2721(a) (0.0090)(a) -- 0.2631 (0.2697) -- (0.0134)
1994-Institutional
Shares............ 10.00 0.4341(a) (0.2455)(a) -- 0.1886 (0.4486) -- --
1994-Administration
Shares............ 10.00 0.4211(a) (0.2572)(a) -- 0.1639 (0.4239) -- --
1993-Institutional
Shares............ 10.04 0.4397 (0.0376)(d) -- 0.4021 (0.4397) -- (0.0024)
1993-Administration
Shares(e)......... 10.02 0.2146 (0.0173)(d) -- 0.1973 (0.2146) -- (0.0027)
1992-Institutional
Shares............ 10.03 0.5599 (0.0029)(d) -- 0.5570 (0.5470) -- --
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 10.00 0.1531 0.0322(d) -- 0.1853 (0.1553) -- --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
=========================================
In excess of
net realized Net
gain on increase Ratio of
investment, From Total (decrease) Net asset net
option and paid distributions in net value at expenses
futures in to asset end of Total to average
transactions capital shareholders value period return(k) net assets
==============================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ -- -- $(0.5931) $0.0600 $9.83 6.86% 0.45%
1996-Administration
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1996-Class A
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1995-Institutional
Shares............ -- -- (0.6046) 0.0301 9.77 6.75 0.46
1995-Administration
Shares............ -- -- (0.5803) 0.0300 9.77 6.48 0.71
1995-Class A
Shares(c)......... -- -- (0.2831) (0.0200) 9.77 2.74(f) 0.69(b)
1994-Institutional
Shares............ -- -- (0.4486) (0.2600) 9.74 1.88 0.46
1994-Administration
Shares............ -- -- (0.4239) (0.2600) 9.74 1.63 0.71
1993-Institutional
Shares............ -- -- (0.4421) (0.0400) 10.00 4.13 0.45
1993-Administration
Shares(e)......... -- -- (0.2173) (0.0200) 10.00 2.01(f) 0.70(b)
1992-Institutional
Shares............ -- -- (0.5470) 0.0100 10.04 6.12 0.42
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ -- -- (0.1553) 0.0300 10.03 2.14(f) 0.20(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
=============================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
========================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ 5.85% 52.36% $613,149 0.51% 5.79%
1996-Administration
Shares............ 5.59 52.36 3,792 0.76 5.53
1996-Class A
Shares............ 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares............ 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares............ 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares(c)......... 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institutional
Shares............ 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares............ 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares............ 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares(e)......... 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institutional
Shares............ 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations Distributions to shareholders
---------------------------------------------------------- ----------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------------------
GS SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares ........... $9.82 $0.6290/(a)/ $0.0136/(a)/ -- $0.6426 $(0.6326) --
1996-Administration
Shares/(h)/ ...... 9.86 0.3837/(a)/ 0.0003/(a)/ -- 0.3840 (0.3940) --
1996-Service
Shares/(i)/ ...... 9.72 0.3134/(a)/ 0.1018/(a)/ -- 0.4152 (0.3152) --
1995-Institutional
Shares ........... 9.64 0.6652/(a)/ 0.1666/(a)/ -- 0.8318 (0.6518) --
1995-Administration
Shares ........... 9.64 0.2384/(a)/ (0.0433)/(a)/ -- 0.1951 (0.2051) --
1994-Institutional
Shares ........... 10.14 0.5628/(a)/ (0.4592)/(a)/ -- 0.1036 (0.5598) (0.0438)
1994-Administration
Shares ........... 10.14 0.5329/(a)/ (0.4539)/(a)/ -- 0.0790 (0.5352) (0.0438)
1993-Institutional
Shares ........... 10.16 0.5627 (0.0135)/(d)/ -- 0.5492 (0.5627) --
1993-Administration
Shares/(e)/ ...... 10.23 0.2725 (0.0900)/(d)/ -- 0.1825 (0.2725) --
1992-Institutional
Shares ........... 10.22 0.6703 (0.0600)/(d) -- 0.6103 (0.6703) --
1991-Institutional
Shares ........... 10.00 0.8020 0.2200/(d)/ -- 1.0220 (0.8020) --
1990-Institutional
Shares ........... 10.07 0.8300 (0.0700)/(d) -- 0.7600 (0.8300) --
1989-Institutional
Shares ........... 10.10 0.8800 -- -- 0.8800 (0.8800) --
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ........... 10.00 0.1800 0.1000/(d)/ -- 0.2800 (0.1800) --
<CAPTION>
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of
income transactions capital shareholders value period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
1996-Institutional
Shares ............ -- -- -- $(0.6326) $0.0100 $9.83
1996-Administration
Shares/(h)/ ....... -- -- -- (0.3940) (0.0100) 9.85
1996-Service
Shares/(i)/ ....... -- -- -- (0.3152) 0.1000 9.82
1995-Institutional
Shares ............ -- -- -- (0.6518) 0.1800 9.82
1995-Administration
Shares ............ -- -- -- (0.2051) (0.0100) 9.63/(h)/
1994-Institutional
Shares ............ -- -- -- (0.6036) (0.5000) 9.64
1994-Administration
Shares ............ -- -- -- (0.5790) (0.5000) 9.64
1993-Institutional
Shares ............ (0.0065) -- -- (0.5692) (0.0200) 10.14
1993-Administration
Shares/(e)/ ....... -- -- -- (0.2725) (0.9000) 10.14
1992-Institutional
Shares ............ -- -- -- (0.6703) (0.0600) 10.16
1991-Institutional
Shares ............ -- -- -- (0.8020) 0.2200 10.22
1990-Institutional
Shares ............ -- -- -- (0.8300) (0.0700) 10.00
1989-Institutional
Shares ............ -- -- (0.0300) (0.9100) (0.0300) 10.07
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ -- -- -- (0.1800) 0.1000 10.10
<CAPTION>
Ratios assuming
not voluntary waiver
of fees or
expense limitations
--------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
Total to average to average turnover period to average to average
return/(k)/ net assets net assets rate/(d)/ (in 000s) net assets net assets
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
1996-Institutional
Shares ............ 6.75% 0.45% 6.44% 115.45% $99,944 0.71% 6.18%
1996-Administration
Shares/(h)/ ....... 4.00/(f)/ 0.70%/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/ ....... 4.35/(f)/ 0.95/(b)/ 6.05/(b) 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional
Shares ............ 8.97 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares ............ 2.10 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional
Shares ............ 0.99 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares ............ 0.73 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares ............ 5.55 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/ ....... 1.74 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional
Shares ............ 6.24 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares ............ 10.93 0.45 8.25 155.44 158,948 0.79 7.91
1990-Institutional
Shares ............ 8.23 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares ............ 9.03 0.46 8.71 137.37 31,015 1.39 7.78
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ 3.30/(f)/ 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
================================================ ===================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
===============================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $9.94 $0.4192/(a)/ $0.0200/(a)/ -- $0.4392 $(0.4192) --
1996-Administration Shares.......... 9.94 0.3944/(a)/ 0.0200/(a)/ -- 0.4144 (0.3944) --
1996-Service Shares................. 9.95 0.3697/(a)/ 0.0200/(a)/ -- 0.3897 (0.3697) --
1995-Institutional Shares........... 9.79 0.4235/(a)/ 0.1500/(a)/ -- 0.5735 (0.4235) --
1995-Administration Shares.......... 9.79 0.3989/(a)/ 0.1500/(a)/ -- 0.5489 (0.3989) --
1995-Service Shares................. 9.79 0.3744/(a)/ 0.1600/(a)/ -- 0.5344 (0.3744) --
1994-Institutional Shares........... 10.23 0.3787/(a)/ (0.3575)/(a)/ -- 0.0212 (0.3787) (0.0825)
1994-Administration Shares.......... 10.23 0.3537/(a)/ (0.3575)/(a)/ -- (0.0038) (0.3537) (0.0825)
1994-Service Shares/(j)/............ 9.86 0.0475/(a)/ (0.0700)/(a)/ -- (0.0225) (0.0475) --
1993-Institutional Shares........... 9.93 0.3834 0.3000/(d)/ -- 0.6834 (0.3834) --
1993-Administration Shares/(j)/..... 10.16 0.1555 0.0720/(d)/ -- 0.2275 (0.1555) --
For the Period October 1, 1992/(g)/ through October 31,
- ----------------------------------------------------
1992-Institutional Shares........... 10.00 0.0341 (0.0700)/(d)/ -- (0.0359) (0.0341) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
==================================
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return/(k)/ net assets
==================================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
====================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.4192) $0.0300 $9.96 4.50% 0.45%
1996-Administration Shares.......... -- -- -- (0.3944) 0.0300 9.96 4.24 0.70
1996-Service Shares................. -- -- -- (0.3697) 0.0200 9.97 3.98 0.95
1995-Institutional Shares........... -- -- -- (0.4235) 0.1500 9.94 5.98 0.45
1995-Administration Shares.......... -- -- -- (0.3989) 0.1500 9.94 5.76 0.70
1995-Service Shares................. -- -- -- (0.3744) 0.1600 9.95 5.59 0.95
1994-Institutional Shares........... -- -- -- (0.4612) (0.4400) 9.79 0.17 0.45
1994-Administration Shares.......... -- -- -- (0.4362) (0.4400) 9.79 (0.11) 0.70
1994-Service Shares/(j)/............ -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/ 0.95/(b)/
1993-Institutional Shares........... -- -- -- (0.3834) 0.3000 10.23 7.03 0.41
1993-Administration Shares/(j)/..... -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/ 0.70/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/ 0.05/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
==================================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate/(d)/ (in 000s) net assets net assets
==========================================================
GS SHORT DURATION TAX-FREE FUND
- --------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 4.21% 231.65% $34,814 1.01% 3.65%
1996-Administration Shares.......... 3.96 231.65 48 1.26 3.40
1996-Service Shares................. 3.74 231.65 695 1.51 3.18
1995-Institutional Shares........... 4.31 259.52 58,389 0.77 3.99
1995-Administration Shares.......... 4.14 259.52 46 1.02 3.82
1995-Service Shares................. 3.87 259.52 454 1.27 3.55
1994-Institutional Shares........... 3.74 354.00 83,704 0.61 3.58
1994-Administration Shares.......... 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/............ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares........... 3.70 404.60 115,803 1.06 3.05
1993-Administration Shares/(j)/..... 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
----------------------------------------------------- ------------------------------
Net realized
Net realized and From net
and unrealized unrealized Total realized gain
gain (loss) gain (loss) income on
Net asset on investment, on foreign (loss) investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-----------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $10.00 $0.6448 $(0.0704) -- $0.5744 $(0.6438) $(0.0806)
1996-Administrative Shares(l)....... 9.91 0.4083 (0.0703) -- 0.3380 (0.4080) --
1996-Service Shares(l).............. 9.77 0.3756 0.0898 -- 0.4654 (0.3754) --
1995-Institutional Shares........... 9.24 0.6423 0.7610 -- 1.4033 (0.6433) --
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 10.00 0.4648 (0.7617) -- (0.2969) (0.4648) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
---------------------------------------------------
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return(k) net assets
--------------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.7244) $(0.1500) $9.85 5.98% 0.45%
1996-Administrative Shares(l)....... -- -- -- (0.4080) (0.0700) 9.84 3.56(f) 0.70(b)
1996-Service Shares(l).............. -- -- -- (0.3754) 0.0900 9.86 4.90(f) 0.95(b)
1995-Institutional Shares........... -- -- -- (0.6433) 0.7600 10.00 15.72 0.45
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... -- -- -- (0.4648) (0.7617) 9.24 (3.00) 0.45(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
-------------------------
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 6.51% 414.20% $72,061 0.83% 6.13%
1996-Administrative Shares(l)....... 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service Shares(l).............. 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional Shares........... 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
</TABLE>
- ------------------
(a)Calculated based on the average shares outstanding methodology.
(b)Annualized.
(c)Class A share activity commenced on May 15, 1995.
(d)Includes the effect of mortgage dollar roll transactions.
(e)Administration share activity commenced on April 15, 1993.
(f)Not annualized.
(g)Commencement of operations.
(h)GS Short Duration Government Fund Administration shares were redeemed in
full on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
(i)Service share activity commenced on April 10, 1996.
(j)Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
(k)Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and not sales
charges. For Class A shares only, total return would be reduced if a sales
charge were taken into account.
(l)Administration and Service share activity commenced on February 28, 1996 and
March 13, 1996 respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the GS Adjustable Rate Government
Fund, GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS
Core Fixed Income Fund:
We have audited the accompanying statements of assets and liabilities of the
GS Adjustable Rate Government Fund, GS Short Duration Government Fund, GS Short
Duration Tax-Free Fund and GS Core Fixed Income Fund (portfolios of Goldman
Sachs Trust, a Massachusetts Business Trust) including the statements of
investments, as of October 31, 1996, and the related statements of operations,
the statements of changes in net assets and the financial highlights for each of
the periods presented. These financial statements and the financial highlights
are the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the GS Adjustable Rate Government Fund, GS Short Duration Government
Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund as of
October 31, 1996, the results of their operations and the changes in their net
assets and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 12, 1996
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
-------------------------------------------------------------------
Annual Report
October 31, 1996
GS Adjustable Rate Government Fund
GS Short Duration Government Fund
GS Short Duration Tax-Free Fund
GS Core Fixed Income Fund
Goldman
Sachs
GST/AR/1096(INST)
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning each Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with a
robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and Treasury
prices remained in a narrow trading range throughout the summer and fall. During
September and October, however, interest rates retreated and the bond market
strengthened. The rebound was primarily due to evidence of a slowing U.S.
economy and strong demand for Treasury bonds from the central banks of China,
Japan and Germany, which accelerated their purchases dramatically toward the end
of the period. By the end of October, prices of 30-year Treasuries broke out of
the trading range that had persisted for over six months.
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 24
Goldman Sachs Government Income Fund 4 Notes to Financial Statements 28
Goldman Sachs Global Income Fund 11 Financial Highlights 36
Goldman Sachs Municipal Income Fund 17
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Treasuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Retail Treasury Bar Chart
<S> <C> <C>
10/31/95 10/31/96
3-Month 5.49% 5.13
6-Month 5.55 5.26
1 5.54 5.4
2 5.61 5.73
3 5.68 5.86
5 5.81 6.07
10 6.02 6.34
30 6.33 6.64
</TABLE>
Source: Bloomberg, L.P.
The yield curve steepened on the short end and shifted upward on the longer
end.
The Dollar's Climb Versus the Mark and the Yen
Continued
During the period under review, the U.S. dollar appreciated against both the
Deutsche mark and Japanese yen, rising more against the yen. The dollar
strengthened relative to the mark as the Bundesbank progressively edged rates
lower during the period to stimulate the sluggish German economy, reaching a 15-
month high against the mark in May. By October, the dollar had retreated
slightly as further Bundesbank cuts became less likely. In contrast, the
dollar's climb against the yen continued through the end of October, when it
reached a three-and-a-half-year high. The yen's weakness was primarily due to
the softness in Japan's economic recovery. However, in November the yen rose
against the dollar as Japanese officials made it clear that they believed the
yen had weakened enough.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a Republican-
controlled Congress, which points toward continued budgetary restraint.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and we
look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head, Goldman Sach Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head, Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Government Income Fund seeks to provide shareholders with
a high level of current income consistent with safety of principal. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
U.S. government securities and in repurchase agreements collateralized by such
securities. The fund may also invest in securities of nongovernmental issuers,
including asset-backed securities, privately issued mortgage-backed securities
and corporate debt obligations. Such securities will be rated triple-A at the
time of investment or, if unrated, deemed to be of comparable quality by Goldman
Sachs Asset Management, the fund's investment adviser. The fund's interest rate
sensitivity is expected to be comparable to that of a five-year bond.
Mortgage-Backed Securities Strengthened Amid Slowing Prepayments
During the 12-month period under review, the performance of mortgage-backed
securities (MBSs) was closely linked to the changing direction of interest
rates. From November 1995 through February 1996, declining interest rates
spurred homeowners to switch to long-term, fixed rate mortgages, resulting in a
high level of refinancing activity and widening spreads between MBSs and
Treasuries. Long-term interest rates began to rise at the end of January and
prepayments peaked in February. Throughout the spring, the mortgage-backed
securities market strengthened due to declining prepayment fears, and adjustable
rate mortgages (ARMs) and fixed rate mortgage pass-throughs continued to do well
when rates stabilized during the summer. However, the direction of interest
rates reversed course beginning in September, and by the end of October, rates
on 30-year mortgages had slipped below 8%. The decline increased some
homeowners' incentive to refinance, but rates continued to be significantly
above their levels of a year earlier and "seasoned" mortgage-backed securities
(securities backed by older mortgages that typically have lower prepayment risk)
continued to do well. In addition, the market's technical balance remained
strong, with prices supported by healthy investor demand coupled with no
significant new issuance.
Performance Review: Fund Performed Well Due to Mortgage-and Asset-Backed
Securities
During the 12-month period ended October 31, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to favorable results from the fund's positions in collateralized
mortgage obligations (CMOs) and asset-backed securities (ABSs). The fund's Class
B shares, which opened on May 1, 1996 when interest rates were still rising,
also achieved positive returns.
The fund performed well compared with its peers. The fund's Class A shares
ranked eighth out of 124 intermediate U.S. government income funds based on
total return for the 12 months ended October 31, 1996, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they were in
existence less than 12 months.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
--------- ---------
<S> <C> <C>
Total Return (based on net asset value) 5.80% 4.85%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 6.56% 3.01%
- --------------------------------------------------------------------------------
Return From Price Depreciation/ -0.76% 1.84%
Appreciation
- --------------------------------------------------------------------------------
Total Return of Lehman Brothers
Government/Mortgage Index 5.74% 5.12%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.36 $14.37
- --------------------------------------------------------------------------------
NAV Change -$0.11 +$0.26
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Portfolio Composition and Investment Strategies
During the period under review, we significantly reduced the portfolio's
holdings of U.S. Treasuries in favor of mortgage-backed and asset-backed
securities.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Agency Debentures 0.4%
Repos/Cash Equivalents 1.1%
U.S. Treasuries 16.2%
Asset-Backed Securities 19.9%
CMOs 22.0%
Fixed Rate Mortgage Pass-Throughs 40.4%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Fixed Rate Mortgage Pass-Throughs. The fund's single largest position as of
October 31, 1996 was in fixed rate mortgage pass-throughs at 40.4% (nearly
unchanged from a year ago), which was overweighted relative to the Index
allocation of 36.4%. Overall, the fund benefited from the sector's incremental
yield compared with similar-duration Treasury securities. Although pass-throughs
suffered from a high rate of mortgage prepayments when the period began, the
sector improved when interest rates began to rise at the end of January.
During the period, we occasionally used mortgage dollar rolls, which helped
the portfolio to benefit from short-term supply and demand imbalances in the
mortgage settlement process. (Mortgage dollar rolls refer to transactions that
involve selling mortgage securities owned by the fund and simultaneously
contracting to buy back similar mortgage securities with the same coupon on a
specified future date -- usually one month forward.) At all times, we "cover"
the mortgage dollar rolls by keeping cash or high-grade liquid debt securities
equal to the dollar amount of the forward commitment in a segregated account
with the fund's custodian.
. CMOs. As of October 31, the fund's allocation in CMOs was 22.0%, up from
7.7% a year ago. These securities included sequential-pay/support CMOs (13.0%),
a position we initiated in February, which offered relative stability and
attractive spreads compared with Treasuries. We cut the portfolio's allocation
in planned amortization class (PAC) CMOs to 5.5% from 6.3% a year ago in favor
of other sectors that offered greater relative value. We also held very small
positions in inverse floaters, interest-only (IO) and principal-only (PO)
securities, discussed below.
. Asset-Backed Securities. The portfolio's ABS holdings, which were primarily
issues backed by credit card and automobile debt, represented 19.9% of the
portfolio, up from 14.3% a year ago. This position consisted of short-term,
triple-A-rated issues that offered attractive incremental yield over similar-
duration Treasuries. The ABS market began the period on a weak note, as concerns
surrounding credit card delinquencies impacted the sector during November and
December 1995. From January through the end of the period, these uncertainties
faded and the sector strengthened. Spreads between ABSs and Treasuries
tightened, as the ABS market benefited from strong investor demand from a
variety of sources: foreign banks, insurance companies and an increasing number
of corporate and CMO "crossover" accounts. ABS supply was robust as well, with a
wide variety of innovative new issues across a range of maturities, collateral
types and structures, but demand kept pace.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. We reduced the
fund's allocation in U.S. Treasuries and repurchase agreements/cash equivalents
to take advantage of securities in other sectors that offered better relative
value. As of October 31, Treasuries accounted for 16.2% of the portfolio,
significantly
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
underweighted relative to the Index (55.4%), while cash equivalents were a 1.1%
position.
. Agency Debentures. During the period, we reduced the fund's holdings in
agency debentures (bonds issued by agencies of the U.S. government) to a scant
0.4% because we determined that the sector's tight spreads compared with
Treasuries did not offer attractive return potential.
. Issuer Composition. The breakdown of the portfolio's mortgage-backed
security holdings by issuer was 23.3% in Federal National Mortgage Association
(FNMA) issues, 14.0% in Government National Mortgage Association (GNMA) issues,
9.8% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 15.3% in
private issues.
. Credit Quality. As of October 31, U.S. government and agency securities
accounted for 66.6% of the portfolio, triple-A-rated securities were 32.3% of
the portfolio and cash equivalents were 1.1% of the portfolio.
. Prudent Use of Derivatives. As noted, sequential-pay/ support and PAC CMOs,
which are generally considered to be lower risk derivative instruments,
accounted for 13.0% and 5.5% of the portfolio, respectively. The portfolio also
held inverse floaters (1.3%) for their potential to add incremental yield, as
well as a "combo" consisting of minor positions in interest-only and principal-
only CMOs. When IOs are held along with POs, they can produce a position with a
similar risk profile as a fixed rate mortgage pass-through but with a higher
yield. In addition, we used futures as a tool to help manage the portfolio's
duration.
. Duration. The fund's duration as of October 31 was 4.5 years, in line with
the Index. We carefully manage the fund's duration to approximate that of the
Index rather than attempting to make interest rate predictions. Instead, we seek
excess return over the Index through our sector weightings and specific security
selection.
Fund Outlook
We have a cautiously optimistic view of the mortgage pass-through market in
general. Certain segments continue to be attractively valued, and we believe
that our current seasoned holdings should fare well relative to other sectors if
interest rates continue to fall and prepayments increase. We have a neutral
outlook for the CMO sector in general, which we believe does not offer
significant value over mortgage pass-throughs. However, we continue to identify
specific CMO securities that present attractive investment opportunities. In the
ABS market, significant spread premiums relative to comparably rated corporate
securities are expected to continue to buoy investor demand. In addition, Fed
surveys indicate that banks have been tightening their underwriting standards
over the last three quarters, which should help to allay lingering investor
concerns surrounding consumer credit card delinquencies. During the coming year,
we will continue to actively allocate the portfolio's assets among the various
fixed income sectors as their relative value changes.
Distribution Policy
The fund's Class A shares paid out monthly distributions of approximately
$0.92 per share during the 12-month period ended October 31, 1996. From their
inception on May 1, 1996 through October 31, 1996, the fund's Class B shares
paid out approximately $0.41 per share. Dividends are declared daily and paid on
a monthly basis. The fund distributes substantially all of its taxable income,
as is required for all investment companies.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
We thank you for your support and look forward to continuing to serve your
investment needs in the future.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Erica Adelberg
Erica Adelberg
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Government Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Government Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares), is
compared with its benchmarks--the Lehman Brothers Mutual Fund
Government/Mortgage Index ("Lehman Gov't/MBS Index") and the Lehman Brothers
Mutual Fund General U.S. Government Index ("Lehman U.S. Gov't Index"). All
performance data shown represents past performance and should not be considered
indicative of future performance which will fluctuate as market conditions
change. The investment return and principal value of an investment will
fluctuate with changes in market conditions so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
HYPOTHETICAL $10,000 INVESTMENT
Class A/(a)/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Lehman
(no sales (w/sales Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3/1/93 $10,000 $ 9,550 $10,000 $10,000
10/31/93 10,506 10,033 10,584 10,699
10/31/94 10,192 9,734 10,267 10,220
10/31/95 11,710 11,183 11,819 11,792
10/31/96 12,392 11,834 12,500 12,395
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares Lehman Lehman
(no redemption (w/redemption Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
10/31/96 10,485 9,985 10,512 10,508
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(b)/
- -----------------------------------------------------------------------------
<S> <C> <C>
Class A, excluding sales 5.80% 6.72%
charge
- -----------------------------------------------------------------------------
Class A, including sales 1.06% 5.41%
charge
- -----------------------------------------------------------------------------
Class B, excluding
redemption charge N/A 4.85%/(c)/
- -----------------------------------------------------------------------------
Class B, including
redemption charge N/A (0.15%)/(c)/
- -----------------------------------------------------------------------------
</TABLE>
/a/ For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
/b/ Class A and Class B shares commenced operations February 10, 1993 and May 1,
1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
8
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--55.5%
Federal Home Loan Mortgage Corp.(FHLMC)--10.3%
$ 3,000,000 7.50% TBA 30-Yr/(a)/ $ 3,010,290
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--16.5%
$ 989,360 7.00 02/01/26 $ 970,493
831,317 8.50 07/01/26 860,147
168,683 8.50 09/01/26 174,533
1,000,000 7.00 TBA 30-Yr/(a)/ 1,034,680
2,000,000 8.00 TBA 30-Yr/(a)/ 2,040,000
- --------------------------------------------------------------------------------
$ 5,079,853
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA)--14.1%
$ 939,735 7.00% 08/15/23 $ 927,115
353,966 9.00 TBA 30-Yr/(a)/ 377,748
1,363,733 7.50 TBA 30-Yr/(a)/ 995,228
2,000,000 8.00 TBA 30-Yr/(a)/ 2,045,000
- --------------------------------------------------------------------------------
$ 4,345,091
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--26.4%
Interest Only--0.7%
FNMA Interest-Only Stripped Security, Series 151, Class 2
$ 712,363/(b)/ 9.50% 07/25/22 $ 225,926
- --------------------------------------------------------------------------------
Inverse Floater--1.3%
FNMA Remic Trust, Series 1992-62, Class S
404,038 10.00%/(c)/ 05/25/99 413,699
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC)--5.4%
FNMA Remic Trust, Series 1993-160, Class PG
1,000,000 6.30% 09/25/18 987,500
GE Capital Mortgage Services, Inc. Series 1994-11, Class A1
693,546 6.50 03/25/24 694,191
- --------------------------------------------------------------------------------
$ 1,681,691
- --------------------------------------------------------------------------------
Principal Only--1.4%
FNMA Remic Trust, Series G-35, Class N
575,000/(e)/ 5.28% 10/25/21 415,369
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--2.9%
Citicorp Mortgage Securities Series 1993-11, Class A6
907,177 6.25% 09/25/08 880,207
- --------------------------------------------------------------------------------
Support--13.2%
Bear Stearns Mortgage Securities, Inc., Series 1996-7, Class AD
$ 988,793 6.50% 11/27/23 900,395
GE Capital Mortgage Services, Inc. Series 1994-10, Class A22
996,703 6.50 03/25/24 874,966
Housing Securities, Inc. Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,370,928
Prudential Securities Series 1995-2, Class A
916,596 5.76 11/15/15 918,243
- --------------------------------------------------------------------------------
$ 4,064,532
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,681,424
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $16,959,996) $17,106,368
- --------------------------------------------------------------------------------
Asset-Backed Securities--16.6%
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
$ 720,000 6.23% 06/15/03 $ 717,746
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 593,870
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 629,077
MBNA Master Credit Card Trust, Series 1991-1, Class A
245,000 7.75 10/15/98 245,688
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
304,971 6.55 11/20/01 306,780
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
540,182 6.85 06/15/01 544,666
Premier Auto Trust, Series 1993-6, Class A2
403,341 4.65 11/02/99 398,675
Premier Auto Trust, Series 1994-1, Class A3
310,533 4.75 02/02/00 308,592
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 483,000
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 875,583
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $5,174,476) $ 5,103,677
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
===============================================================================
<S> <C> <C> <C>
U.S. Government Agency Obligations--0.4%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 110,000 8.20% 01/16/98 $ 110,636
- -------------------------------------------------------------------------------
Total Government Agency Obligations
(Cost $113,163) $ 110,636
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--15.9%
United States Treasury Bonds/(d)/
$ 360,000 8.75% 05/15/17 $ 440,550
280,000 8.75 08/15/20 345,668
United States Treasury Notes/(d)/
2,210,000 7.38 11/15/97 2,249,360
700,000 5.88 04/30/98 702,184
700,000 6.88 08/31/99 717,500
United States Treasury Principal-Only Stripped Securities/(e)/
230,000 6.41 11/15/04 138,344
1,550,000 6.95 05/15/20 307,570
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $4,910,644) $ 4,901,176
- -------------------------------------------------------------------------------
Repurchase Agreement--27.0%
Joint Repurchase Agreement Account/(d)/
$8,400,000 5.58% 11/01/96 $ 8,400,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $8,400,000) $ 8,400,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $38,555,545/(f)/) $38,632,147
===============================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(/g/) Month Gain
- -------------------------- ------------- ----------------- -----------
Euro Dollars 3 September 1997 $2,850
5 Year U.S. Treasury Notes 4 December 1996 3,000
10 Year U.S. Treasury Notes 2 December 1996 8,313
U.S. Long Term Bond 14 December 1996 60,437
------------
$74,600
===============================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 260,565
Gross unrealized loss for investments in which cost exceeds
value (195,408)
- -------------------------------------------------------------------------------
Net unrealized gain $ 65,157
===============================================================================
</TABLE>
/(a)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally +/-2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(b)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(c)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(d)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(e)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(f)/The aggregate cost for federal income tax purposes is $38,566,990.
/(g)/Each 10-Year U.S. Treasury Note, 5-Year Treasury Note and U.S. Treasury
Bond contract represents $100,000 in notional par value. Each Euro Dollar
contract represents $1,000,000 in notional par value. The total notional
amount and market value are $5,000,000 and $2,936,825, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Global Income Fund seeks high total return, composed of
both current income and capital appreciation. The fund is permitted to invest in
government and other high-quality (double-A or better) fixed income securities
issued in the United States and in foreign markets. The fund has the additional
flexibility to invest in sovereign (government) debt rated single-A (or better)
or deemed to be of comparable quality. The maximum duration of the fund is 7.5
years and its approximate interest rate sensitivity is comparable to that of a
six-year bond. Under normal market conditions, the fund's neutral position is to
be fully hedged into U.S. dollars to best serve the needs of U.S. shareholders.
However, the fund may engage in currency transactions, both to hedge exchange
rate risk and to seek to enhance returns.
European Bond Markets Achieved the Strongest Performance While Treasuries Lagged
During the 12 months ended October 31, 1996, global bonds generally
performed well, particularly during the second half of the period, with a number
of markets achieving extremely strong returns. Most international bond markets
have outperformed the United States, thus illustrating the benefits of
diversification.
The European higher yielding bonds (Italy, Spain and Sweden) were the best
performers of all the major bond markets during the period, while most of the
other European bond markets achieved good, albeit more modest, returns (hedged
into U.S. dollars). In general, European bond markets benefited from an
accommodative environment of sluggish economic growth and low inflation.
European bonds were also buoyed by tighter fiscal policies, as several European
countries attempted to reduce their deficits enough to qualify for European
monetary union. To counter less government spending, several countries (notably
Germany) attempted to stimulate economic growth by lowering their interest
rates.
The total return of Japanese Government Bonds (JGBs) during the period
under review was lower than those of most European bond markets but still
favorable (hedged into U.S. dollars). After lackluster performance during the
first half of the period amid fears of accelerating growth, JGBs experienced a
volatile, halting recovery when Japan's economy showed signs of weakening during
the summer and fall of 1996.
U.S. Treasuries underperformed all of the major bond markets. Though
Treasuries performed well in November and December 1995, accelerating economic
growth triggered a sharp correction from January through May 1996. The U.S. bond
market partially recovered when it rallied during September and October, but it
continued to lag. Within the dollar bloc, Canadian bonds did particularly well
during the period, reflecting a continuing easing of monetary policy by the Bank
of Canada, a strong currency and a relatively weak economy.
Performance Review: Favorable Country Allocations Benefited Fund Performance
During the period under review, the Goldman Sachs Global Income Fund's
Class A and Institutional shares outperformed the fund's benchmark, the J.P.
Morgan Global Government Bond Index (hedged into U.S. dollars) (the "Index").
The Index covers 14 major bond markets and reflects their currency exposures.
That favorable performance relative to the benchmark was primarily due to the
fact that during most of the period the fund was overweighted in European bonds
and moderately underweighted in U.S. Treasuries.
The fund's Class B shares, which began operations on May 1, 1996 while U.S.
interest rates were still rising, underperformed the benchmark.
- --------------------------------------------------------------------------------
11
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B* Institutional
(10/31/95- (5/1/96- (10/31/95-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net asset 11.05% 6.24% 11.55%
value)
- --------------------------------------------------------------------------------
Return From Monthly 10.50% 2.68% 11.07%
Distributions
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.55% 3.56% 0.48%
- --------------------------------------------------------------------------------
Total Return of J.P. Morgan 10.06% 6.53% 10.06%
Global Government Bond Index
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.53 $14.53 $14.52
- --------------------------------------------------------------------------------
NAV Change +$0.08 +$0.50 +$0.07
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Though the portfolio is typically fully hedged into U.S. dollars, we
occasionally employed currency strategies during the period. These included the
initiation of a long position in the U.S. dollar against the yen and European
currencies, which helped the fund's performance when the dollar strengthened
during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Sweden 1.9%
Denmark 2.5%
Spain 2.6%
Netherlands 2.6%
Ireland 2.7%
Italy 5.7%
U.K. 6.3%
Japan 9.0%
Germany 15.0%
Cash 15.4%
U.S. 36.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Dollar Bloc. As of October 31, 1996, U.S. Treasuries were the fund's sole
allocation in the dollar bloc countries. However, during the period, we
intermittently held positions in Canadian and Australian bonds.
U.S. During most of the period, the portfolio was underweighted in U.S.
Treasuries relative to the benchmark, which worked to its advantage when the
U.S. market was impacted by rising interest rates. In September and October, we
raised the fund's Treasury allocation, and the shift helped performance when the
Treasury market rallied during those months. As of October 31, the portfolio
held a 36.3% Treasury allocation, in line with the benchmark.
Other Dollar Bloc. The fund began the period overweighted in Canada (7.7%
as of October 31, 1995). However, we reduced the position in January and
liquidated the remainder in May on the expectation that Canada's current round
of interest rate easing had run its course, which proved not to be the case. In
July, we reestablished an overweighting in Canada, then sold the position the
following month after the market rallied. During September and October, the
Canadian bond market rose again on weaker economic news, but the fund did not
participate. Though the fund was not invested in Australia as of October 31, it
held an overweighted position at times during the period, which contributed to
performance when the market strengthened in anticipation of easing monetary
policy.
. Europe. The fund benefited from being overweighted in Europe during much of
the period. After we sold part of the allocation in the region at a profit, the
fund was slightly underweighted in European bonds relative to the Index, 39.3%
versus 43.9%, as of October 31.
Germany. Germany's economic growth was anemic during the first half of the
period, with real GDP declining during the fourth quarter of 1995 and the first
quarter of 1996. To help stimulate growth amid a tight fiscal policy, the
Bundesbank aggressively cut interest rates, which proved only modestly
successful as high unemployment and weak manufacturing activity continued to
persist. To
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
participate in Germany's favorable bond market environment, we significantly
overweighted our holdings at 15.0% (versus 9.6% for the Index), preferring
Germany over France in the core European markets.
Italy, Spain and Sweden. During the period, we increased the fund's
allocation in the higher yielding European markets, then trimmed its exposure
after these markets became less favorably valued. In January, we initiated a
position in Italy, which was attractive due to its tight fiscal policy, expected
interest rate cuts and better than anticipated inflation data. As of October 31,
Italy was overweighted relative to the benchmark, 5.7% versus 5.2%, and it
significantly benefited the fund as it proved to be the best performing bond
market during the period. Spain, another top-performing bond market, was cut to
a 2.6% position as of October 31 after we determined the market fully reflected
expectations that Spain would meet the criteria for European monetary union. We
also benefited by establishing and maintaining an overweighted position in
Sweden during most of the period, then subsequently reduced the position to
1.9%, nearly in line with the benchmark.
U.K. The U.K.'s economy was sluggish during much of the period, but by
September economic activity began to rebound, particularly in the consumer
sector. In anticipation of renewed inflationary pressures, as well as political
uncertainty related to the forthcoming general election, we sold approximately
half of the portfolio's U.K. position during the period. As of October 31, the
portfolio's 6.3% U.K. weighting was in line with the benchmark.
Ireland, the Netherlands and Denmark. Small, new positions added during the
period included Ireland (2.7%), the Netherlands (2.6%) and Denmark (2.5%). Like
the rest of Europe, these countries had attractive bond market environments, and
they contributed to the fund's performance. We believe Ireland is particularly
attractive as it has an exemption on its debt level, enabling it to join
European monetary union (EMU) on the first round.
France. Over the course of the year we reduced the fund's position in
France, finally liquidating our remaining holdings in July, in favor of German
bonds that we believed were more attractively valued. Unfortunately, this
strategy was not successful when France subsequently outperformed Germany.
Belgium. Belgium, a 3.5% allocation last year, performed well and we
trimmed the position over the course of the year. In October, we sold the fund's
remaining holdings in Belgium in favor of the Netherlands, which our analysis
determined offered greater total return potential.
. Japan. JGBs accounted for 9.0% of the portfolio, significantly
underweighted compared with the benchmark (15.1%), which benefited the fund when
JGBs were weak during the first half of the period, but did not work in its
favor when JGBs rebounded in the second half of the year. However, the fund
partially participated in the Japanese bond rally through a call option on JGBs,
as well as its direct investments.
. Cash Equivalents. The fund's allocation in cash equivalents was 15.4%,
approximately the same as a year ago (16.4%). We anticipate reducing the
position as we identify attractive investment opportunities.
. Credit Quality. The portfolio was 100% invested in triple-A-rated
securities as of the end of the period.
. Duration. As of October 31, the fund's duration of 4.4 years was
approximately a half year lower than that of the benchmark. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's net asset value [NAV] should move in relation
to interest rate fluctuations.) The duration difference was primarily due to the
portfolio's cash equivalent position and its underweighting in Japan.
- --------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
Fund Outlook
Going forward, we expect European bonds to continue to outperform U.S.
Treasuries, in terms of both capital gains and yields. In general, European
economies are weaker than that of the United States, with slow growth, high
unemployment and tight fiscal policies. Germany's economic recovery appears
intact, which makes us somewhat more cautious on German bonds at current low
yield levels. Nevertheless, German bonds still offer excess returns over cash,
provided German monetary policy remains on hold. Longer term, we favor the U.K.
gilt, as we believe the market has overreacted to the U.K.'s lack of
participation in European monetary union and its recent political uncertainty.
We also have a positive longer term view of the higher yielding markets of Italy
and Spain, though they have not offered investors a sufficient risk premium in
recent months. As of this writing, we are neutral on U.S. Treasuries, but we
will be watching for signs that the U.S. Federal Reserve expects to preempt any
potential inflationary pressure with tighter monetary policy in the near future.
Our analysis indicates that after their spectacular run, Canadian bonds do not
offer attractive relative value, but we are considering reestablishing a
position in Australia, which is experiencing slowing growth and waning
inflationary pressures. We expect to remain underweighted in Japan because we
anticipate that its economic recovery will resume despite recent weakness,
opening the possibility for monetary tightening. With JGBs currently yielding
just under 3%, our analysis indicates that we would not be adequately
compensated for their level of risk.
Distribution Policy
During the 12-month period under review, the fund's Class A and
Institutional shares paid out distributions of $1.43 and $1.50 per share,
respectively. From their inception on May 1, 1996 through October 31, 1996, the
fund's Class B shares paid out $0.36 per share. The fund declares and pays
dividends on a monthly basis. The fund distributes substantially all of its
taxable income, as is required for all investment companies.
As always, we will utilize the resources of Goldman, Sachs & Co.'s London-
based Economics Research Group for economic and market trend analysis as we
continue to seek out attractive global bond investment opportunities. We
appreciate your investment in the Goldman Sachs Global Income Fund and look
forward to continuing to help you achieve your investment goals.
Sincerely,
/s/ Stephen C. Fitzgerald
Stephen C. Fitzgerald
Portfolio Manager, Fixed Income Investments
/s/ Andrew F. Wilson
Andrew F. Wilson
Portfolio Manager, Fixed Income Investments
/s/ Gareth I. Evans
Gareth I. Evans
Portfolio Manager, Currency
Goldman Sachs Global Income Fund
London, November 29, 1996
- --------------------------------------------------------------------------------
14
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Global Income Fund (assuming both the maximum
sales charge of 4.5% and no sales charge for the Class A shares, the first year
maximum redemption fee of 5% and no redemption fee for the Class B shares and
net asset value for the Institutional shares) is compared with its benchmark--
the J.P. Morgan Global Government Bond Index hedged to U.S. Dollars ("J.P.
Morgan GGB Index-$ Hedged"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
HYPOTHETICAL $10,000 INVESTMENT
[CHART APPEARS HERE]
Class A Shares (a)
<TABLE>
<CAPTION>
Class A Shares Class A Shares J.P. Morgan GGB Index-
(no sales charge) (w/sales charge) $ Hedged
<S> <C> <C> <C>
09/01/91 $10,000 $9,500 $10,000
10/31/91 $10,145 $9,688 $10,263
10/31/92 $11,034 $10,538 $11,156
10/31/93 $12,220 $11,670 $12,509
10/31/94 $11,672 $11,146 $12,051
10/31/95 $13,432 $12,827 $13,903
10/31/96 $14,921 $14,250 $15,306
</TABLE>
Class B Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares J.P. Morgan GGB
(no redemption charge) (w/redemption charge) Index-$ Hedged
<S> <C> <C> <C>
05/01/96 $10,000 $10,000 $10,000
10/31/96 $10,624 $10,124 $10,653
</TABLE>
Institutional shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional J.P. Morgan GGB
Shares Index-$ Hedged
<S> <C> <C>
08/01/95 $10,000 $10,000
10/31/95 $10,442 $10,351
10/31/96 $11,651 $11,395
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
Average Annual Total Return
----------------------------------------------------
One Year Five Year Since Inception(b)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, excluding
sales charge 11.05% 8.01% 8.02%
- ---------------------------------------------------------------------------
Class A, including
sales charge 6.08% 7.02% 7.08%
- ---------------------------------------------------------------------------
Class B, excluding
redemption charge N/A N/A 6.24%(c)
- ---------------------------------------------------------------------------
Class B, including
redemption charge N/A N/A 1.24%(c)
- ---------------------------------------------------------------------------
Institutional Class 11.55% N/A 12.95%
- ---------------------------------------------------------------------------
</TABLE>
(a) For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations of
the Class A shares.
(b) The Class A, Class B and Institutional shares commenced operations August 2,
1991, May 1, 1996 and August 1, 1995, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount (a) Rate Date Value
================================================================================
<S> <C> <C> <C>
Debt Obligations--83.2%
British Pound Sterling--6.2%
United Kingdom Treasury
BPS 9,000,000 8.50% 12/07/05 $ 15,573,120
- --------------------------------------------------------------------------------
Danish Krone--2.5%
Kingdom of Denmark
DKK 33,000,000 9.00% 11/15/00 $ 6,415,484
- --------------------------------------------------------------------------------
Deutschemark--14.8%
Federal Republic of Germany
DEM 8,000,000 7.12% 12/20/02 $ 5,742,980
7,500,000 6.75 07/15/04 5,245,292
33,000,000 6.50 10/14/05 22,549,455
3,500,000 7.38 01/03/05 2,528,510
Treuhandanstalt
2,000,000 6.50 04/23/03 1,388,437
- --------------------------------------------------------------------------------
$ 37,454,674
- --------------------------------------------------------------------------------
Irish Pound--2.7%
Republic of Ireland
IEP 4,000,000 8.00% 10/18/00 $ 6,905,421
- --------------------------------------------------------------------------------
Italian Lira--5.4%
Republic of Italy
ITL 19,000,000,000 10.50% 11/01/00 $ 13,851,419
- --------------------------------------------------------------------------------
Japanese Yen--8.9%
International Bank for Reconstruction &
Development
JPY 700,000,000 6.75% 06/18/01 $ 7,536,474
Japanese Developmental Bank
1,400,000,000 6.50 09/20/01 15,019,116
- --------------------------------------------------------------------------------
$ 22,555,590
- --------------------------------------------------------------------------------
Netherlands Guilder--2.5%
Dutch Government Bond
NLG 10,000,000 7.00% 06/15/05 $ 6,350,937
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 500,000,000 10.30% 06/15/02 $ 4,448,842
Kingdom of Spain
200,000,000 10.15 01/31/06 1,804,930
- --------------------------------------------------------------------------------
$ 6,253,772
- --------------------------------------------------------------------------------
Swedish Krona--1.8%
Kingdom of Sweden
SEK 32,000,000 6.00% 02/09/05 $ 4,489,558
- --------------------------------------------------------------------------------
United States Dollar--35.9%
United States Treasury Notes
USD 10,000,000 6.88% 07/31/99 $ 10,243,700
18,000,000 5.25 01/31/01 17,507,880
17,000,000 6.38 03/31/01 17,196,520
8,200,000 6.25 02/15/03 8,229,438
10,000,000 7.88 11/15/04 10,975,000
12,000,000 6.50 08/15/05 12,125,640
14,000,000 7.00 07/15/06 14,616,840
- --------------------------------------------------------------------------------
$ 90,895,018
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $206,293,080) $210,744,993
- --------------------------------------------------------------------------------
Short-Term Obligations--15.4%
Euro-Time Deposit
USD 38,987,507 5.50% 11/01/96 38,987,507
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $38,987,507) $ 38,987,507
- --------------------------------------------------------------------------------
Total Investments
(Cost $245,280,587/(b)/ ) $249,732,500
================================================================================
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $6,414,087
Gross unrealized loss for investments in which cost
exceeds value (2,188,683)
- --------------------------------------------------------------------------------
Net unrealized gain $4,225,404
================================================================================
</TABLE>
/(a)/ The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
BPS = British Pound Sterling ITL = Italian Lira
NLG = Netherlands Guilder JPY = Japanese Yen
DKK = Danish Krone ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
IEP = Irish Pound USD = United States Dollar
/(b)/ The aggregate cost for federal income tax purposes is $245,507,096. The
percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Municipal Income Fund seeks to provide a high level of
current income that is exempt from regular federal income tax, consistent with
the preservation of capital. In pursuit of its objective, the fund invests in a
diversified portfolio of municipal securities with a weighted average credit
quality of double-A or better. The fund buys only investment-grade securities
or, if unrated, deemed to be of comparable quality. Under normal interest rate
conditions, the fund's duration is expected to be within one year of its
benchmark, the Lehman Brothers 15-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a 15-year bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a 15-year municipal bond (as
calculated from data provided by Municipal Market Data, an independent municipal
market information provider) rose approximately 0.50%, while yields declined
from 5.35% on October 31, 1995 to 5.30% on October 31, 1996.
The municipal bond market began the period under review on a weak note. Tax
reform uncertainty impacted investor demand during November and December 1995,
while municipal bond supply was high due to seasonably heavy year-end issuance
and relatively low interest rates. The market environment improved during
January and February 1996, when fading tax reform concerns helped to revive
investor interest in the sector and issuance declined. From March through the
end of the period, the market's technical balance was generally healthy, though
occasional spikes in supply periodically overwhelmed demand and briefly impacted
performance. The largest of these surges occurred in June when supply rose to
its highest level since late 1995, but subsequently both new issuance and
secondary supply fell dramatically from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (who control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[YIELD CURVE LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year of Maturity 10/31/96 10/31/95
---------------- -------- --------
<S> <C> <C>
1997 3.6 3.9
1998 3.9 4.1
1999 4.15 4.2
2000 4.3 4.3
2001 4.4 4.4
2002 4.5 4.5
2003 4.6 4.6
2004 4.7 4.7
2005 4.8 4.8
2006 4.9 4.95
2007 5 5.05
2008 5.1 5.15
2009 5.2 5.25
2010 5.25 5.35
2011 5.3 5.4
2012 5.35 5.45
2013 5.4 5.5
2014 5.4 5.55
2015 5.45 5.55
2016 5.45 5.55
2017 5.45 5.55
2018 5.5 5.55
2019 5.5 5.6
2020 5.5 5.6
2021 5.5 5.6
2022 5.5 5.6
2023 5.5 5.6
2024 5.5 5.6
2025 5.5 5.6
</TABLE>
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review: Term Structure, Sector Weightings and Security Selection
Contributed to the Fund's Favorable Performance
During the period under review, the fund's Class A shares outperformed
their benchmark, the Lehman Brothers 15-Year Municipal Bond Index (the "Index").
The fund's Class B shares, which opened on May 1, 1996 while interest rates were
still rising, also performed well but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We are pleased to report that the fund's Class A shares outperformed most of
their peers. For the 12 months ended October 31, 1996, Class A shares ranked in
the top 20% of general municipal debt funds (36 out of 228) based on total
return, according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results. Class B shares were not included because they
were not in existence during the entire 12-month period.)
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
-------- --------
<S> <C> <C>
Total Return (based on net asset value) 6.13% 4.40%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 4.72% 1.98%
- --------------------------------------------------------------------------------
Return From Price Appreciation 1.41% 2.42%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal
Bond Index 5.99% 4.80%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.37 $14.37
- --------------------------------------------------------------------------------
NAV Change +$0.20 +$0.34
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
. The portfolio's neutral term structure is "credit-barbelled," emphasizing
high-quality bonds with maturities of 20 to 30 years on the long end of the
yield curve and lower quality bonds with four to ten year maturities on the
short end of the curve. However, during the period, we regularly adjusted the
term structure to take advantage of changing market conditions. For example,
when the municipal bond yield curve flattened during September and the beginning
of October, we sold securities in the 20- to 30-year range in favor of 15- to
20-year bonds. In mid-October, the yield curve steepened as we anticipated, and
the fund's 15- to 20-year bonds outperformed 20- to 30-year bonds. By the end of
the month, when longer maturity bonds had become more attractively valued, we
reestablished a more evenly distributed maturity structure.
. In September, we underweighted the fund's municipal bond position relative
to the Index when our analysis indicated that municipal bonds had become
expensive compared with Treasuries. We replaced a small percentage of the fund's
duration with U.S. Treasury bond futures contracts, which we preferred over
buying Treasuries directly because they allowed us to participate in a Treasury
rally without incurring taxable net investment income. This strategy proved
successful when municipal bonds underperformed Treasuries in October, and we
returned the fund to its 100% municipal bond weighting after municipals had
cheapened to an attractive level at the end of the month.
. The fund's performance also benefited from our extensive credit analysis.
Our research helped us identify specific investment opportunities, such as
"story" bonds. These securities are often misunderstood or incorrectly valued,
but can have unique security structures and attractive yield potential.
Portfolio Composition and Investment Strategies:
Revenue Bonds Were Stressed Over GOs
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Variable Rate Demand Notes 7.6%
General Obligations 5.5%
Insured Revenue Bonds 34.7%
Revenue Bonds 27.9%
Insured General Obligations 24.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of October 31, the fund held a 62.6% position in a combination of insured and
uninsured revenue bonds, overweighted compared with the Index (53.9%). (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. As of October 31, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 29.8% versus 45.6%. Though the fund's total
GO allocation was little changed from a year ago, we did increase its weighting
in insured GOs (to 24.3% versus 12.6% last year) and reduced uninsured GOs (to
5.5% versus 16.6% last year) due to security-specific investment opportunities.
. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. The position
accounted for 7.6% of the portfolio, nearly unchanged from last year.
. Credit Quality. During the period, the fund's average credit quality has
remained double-A. However, in contrast to last year's emphasis on triple-A-
rated bonds, this year the fund's credit quality was structured like a
"barbell," with higher quality securities at the long end of the yield curve and
lower quality securities (but still investment grade) at the short end. As of
October 31, 70.5% of the fund was invested in triple-A-rated securities, nearly
the same as a year ago, while double-A- and single-A-rated securities were
reduced to 9.3% and 1.8%, respectively. In the late spring of 1996, we initiated
a new position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 18.4% of the portfolio by the
end of the period. We used extensive credit research to identify specific
securities that offered higher yields than average triple-B-rated securities,
but still were of sound credit quality. The triple-B-rated position benefited
the fund's performance during the period by enabling us to lock in above-market
yields and providing greater price appreciation potential relative to the
market. Each of these positions is monitored carefully, and we will remain
vigilant for any changes in their credit quality.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
During the period under review, the fund's Class A shares paid out
distributions of $0.65 per share. The fund's Class B shares, which opened on May
1, 1996, paid out $0.27 per share from their inception through October 31, 1996.
Dividends are declared daily and paid on a monthly basis. The fund intends to
distribute substantially all of its investment company tax-exempt and taxable
income, as required by tax law.
- --------------------------------------------------------------------------------
19
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We value your investment in the Goldman Sachs Municipal Income Fund and we
look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Municipal Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
20
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Municipal Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares) is
compared with its benchmark--the Lehman Brothers 15-Year Municipal Bond Index
("Lehman 15-Year Muni Index"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
HYPOTHETICAL $10,000 INVESTMENT
Class A /(a)/
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman 15-year
Date (no sales charge) (w/sales charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
8/1/93 $10,000 $9,550 $10,000
- --------------------------------------------------------------------------------
10/31/93 $10,455 $9,984 $10,385
- --------------------------------------------------------------------------------
10/31/94 $9,878 $9,434 $9,860
- --------------------------------------------------------------------------------
10/31/95 $11,241 $10,735 $11,414
- --------------------------------------------------------------------------------
10/31/96 $11,933 $11,395 $12,100
- --------------------------------------------------------------------------------
</TABLE>
Class B
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman
(no redemption (w/redemption 15-year
Date charge) charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
- --------------------------------------------------------------------------------
Oct 31, 96 10,440 9,940 10,480
- --------------------------------------------------------------------------------
</TABLE>
-----------------------------------
Average Annual Total Return
-----------------------------------
One Year Since Inception/(b)/
--------------------------------------------------------
Class A, excluding
sales charge 6.13% 5.27%
--------------------------------------------------------
Class A, including
sales charge 1.35% 3.80%
--------------------------------------------------------
Class B, excluding
redemption charge N/A 4.40%/(c)/
--------------------------------------------------------
Class B, including
redemption charge N/A (0.60%)/(c)/
--------------------------------------------------------
/(a)/For comparative purposes, Class A initial investment is assumed to be made
on the first day of the month following the Fund's commencement of
operations.
/(b)/Class A and Class B commenced operations July 20, 1993 and May 1, 1996,
respectively.
/(c)/An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
21
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations--102.2%
Arizona--5.1%
Maricopa County, AZ Unified School District No. 41 GO
(FSA)(AAA/Aaa)
$2,500,000 6.25% 07/01/15 $ 2,653,300
- --------------------------------------------------------------------------------
California--8.1%
Contra Costa, CA Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $ 2,022,980
San Buenaventura, CA Sewer Revenue RB (FGIC)
(AAA/Aaa)
2,255,000 5.50 03/01/15 2,231,435
- --------------------------------------------------------------------------------
$ 4,254,415
- --------------------------------------------------------------------------------
Colorado--4.8%
Englewood MFH RB (BBB)
$2,500,000 6.65% 12/01/26 $ 2,499,750
- --------------------------------------------------------------------------------
Connecticut--3.9%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $ 2,072,220
- --------------------------------------------------------------------------------
Florida--2.8%
Escambia County, FL Housing Authority, Single Family
(GNMA/FNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $ 1,464,949
- --------------------------------------------------------------------------------
Illinois--19.1%
Chicago, IL GO Series A-2 (AMBAC) (AAA/Aaa) (e)
$1,750,000 6.25% 01/01/14 $ 1,877,873
Cook County, IL GO(FGIC) (AAA/Aaa)
2,000,000 5.75 11/15/12 2,015,720
Lake County, IL Unified School District No. 116 GO (FSA) (AAA/Aaa)
2,000,000 7.60 02/01/14 2,428,340
1,525,000 6.10 02/01/16 1,588,089
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,109,780
- --------------------------------------------------------------------------------
$10,019,802
- --------------------------------------------------------------------------------
Indiana--9.5%
East Allen, IN Elementary School Building Corp. RB (FSA)
(AAA/Aaa)
$3,115,000 5.88% 07/01/12 $ 3,178,079
Indiana Transportation Finance Authority RB Series A
(MBIA) (AAA/Aaa)
1,500,000 7.25 06/01/15 1,789,305
- --------------------------------------------------------------------------------
$ 4,967,384
================================================================================
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Kentucky--2.0%
Nelson County, KY Industrial Building RB for Mabex
Universal Corp. Project AMT (A3)
$1,000,000 6.50% 04/01/05 $ 1,066,790
- --------------------------------------------------------------------------------
Maine--1.5%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 725,000 6.80% 12/01/07 $ 765,462
- --------------------------------------------------------------------------------
Michigan--3.6%
Detroit, MI GO (BBB-)
$1,885,000 5.70% 05/01/02 $ 1,907,714
- --------------------------------------------------------------------------------
New York--9.0%
New York State Municipal Bond Agency RB, Series A (BBB+)
$1,610,000 6.60% 03/15/01 $ 1,699,854
New York State Thruway Authority Highway & Bridges RB
(BBB/Baa1)
1,000,000 5.25 04/01/03 1,004,630
Syracuse, NY IDA RB (AA)
2,000,000 5.13 10/15/02 2,005,600
- --------------------------------------------------------------------------------
$ 4,710,084
- --------------------------------------------------------------------------------
North Dakota--3.8%
Mercer County, ND PCRB for Basin Electric Power 2nd
Series (AMBAC) (AAA/Aaa) (e)
$2,000,000 6.05% 01/01/19 $ 2,055,380
- --------------------------------------------------------------------------------
Ohio--8.9% Akron, OH COPs (a) (BBB) (c)
$2,000,000 6.90% 12/01/16 $ 1,438,500
Kent State University RB (MBIA) (AAA/Aaa)
2,280,000 5.50 05/01/28 2,181,504
Trumbull County, OH GO (AMBAC) (AAA/Aaa)
1,000,000 5.75 12/01/03 1,061,870
- --------------------------------------------------------------------------------
$ 4,681,874
- --------------------------------------------------------------------------------
Texas--8.8%
Denison, TX Waterworks & Sewer RB (AAA/Aaa)
$1,250,000 5.50% 09/01/08 $ 1,258,525
1,250,000 5.40 09/01/09 $ 1,258,475
East Texas Criminal Justice Facilities Financing Corp. RB
(AMBAC) (AAA/Aaa)
$2,000,000 5.75 11/01/09 $ 2,032,560
Fort Bend, TX Independent School District RB (AAA/Aaa)
50,000 5.00 02/15/18 46,226
- --------------------------------------------------------------------------------
$ 4,595,786
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
22
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations(continued)
Washington--7.1%
Chelan County, WA Public Utility RB (AAA/Aaa)/c/
$2,500,000 6.35% 07/01/28 $ 2,540,125
Washington State Series C GO (AA/Aa)
1,155,000 6.50 07/01/00 1,232,373
- --------------------------------------------------------------------------------
$ 3,772,498
- --------------------------------------------------------------------------------
Wisconsin--4.2%
Wisconsin Housing & Economic Development Authority RB,
Series B (AA/Aa)/e/
$2,060,000 7.10% 09/01/15 $ 2,181,623
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $52,677,902) $53,669,031
- --------------------------------------------------------------------------------
Short-Term Obligations--8.4%
Alabama--6.5%
Columbia County, AL IDB/b/ (A/A2)
$1,200,000 3.65% 11/01/96 $ 1,200,000
Parrish, AL IDB/b/ (A/A1)
2,200,000 3.65 11/01/96 2,200,000
- --------------------------------------------------------------------------------
$ 3,400,000
- --------------------------------------------------------------------------------
Wyoming--1.9%
Converse, WY PCRB/b/ (AAA)
$1,000,000 3.65% 11/01/96 $ 1,000,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $4,400,000) $ 4,400,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $57,077,902/d/) $58,069,031
================================================================================
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 1,018,643
Gross unrealized loss for investments in which cost
exceeds value (27,514)
- --------------------------------------------------------------------------------
Net unrealized gain $ 991,129
================================================================================
/a/The interest rate disclosed for these securities represents effective
yields to maturity.
/b/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/c/When-issued security.
/d/The amount stated also represents aggregate cost for federal income tax
purposes.
/e/Portions of these securities are being segregated for when-issued securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal
Bond Assurance Corp.
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty
Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
================================================================================
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
23
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
========================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $38,555,545, $245,280,587
and $57,077,902) $38,632,147 $249,732,500 $58,069,031
Receivables:
Investment securities sold 3,011,458 -- --
Interest 255,950 4,572,733 688,717
Forward foreign currency exchange contracts -- 1,073,237 --
Fund shares sold 38,729 23,757 12,145
Foreign tax withheld -- 100,251 --
Cash 17,149 248 48,127
Variation margin 6,788 -- --
Deferred organization expenses, net 23,998 -- 30,090
Other assets 65,284 31,883 29,773
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 42,051,503 255,534,609 58,877,883
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 11,129,422 -- 6,076,685
Forward foreign currency exchange contracts -- 1,816,332 --
Fund shares repurchased 14,381 124,500 128,184
Investment adviser fees 6,423 94,713 18,124
Administration fees -- 32,334 6,857
Authorized dealer service fees 6,166 44,409 9,224
Distribution fees 151 35,488 154
Accrued expenses and other liabilities 57,538 211,388 116,255
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 11,214,081 2,359,164 6,355,483
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 30,678,648 247,410,169 52,495,830
Accumulated undistributed net investment income 53,331 6,704,225 60,331
Accumulated net realized loss on investment transactions (45,759) (4,636,687) (1,024,890)
Accumulated net realized foreign currency gain -- 43,634 --
Net unrealized gain on investments and futures 151,202 4,864,862 991,129
Net unrealized loss on translation of assets and liabilities denominated in foreign
currencies -- (1,210,758) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets $30,837,422 $253,175,445 $52,522,400
==================================================================================================================================
Net asset value, offering /(a)/ and redemption price per share
Class A $14.36 $14.53 $14.37
Class B $14.37 $14.53 $14.37
Institutional -- $14.52 --
==================================================================================================================================
Shares Outstanding
Class A 2,131,467 13,670,270 3,637,437
Class B 16,317 17,603 17,778
Institutional -- 3,735,251 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 2,147,784 17,423,124 3,655,215
==================================================================================================================================
</TABLE>
/(a)/Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $15.04, $15.21 and $15.05 for Government Income, Global Income
and Municipal Income, respectively. At redemption, Class B shares are
subject to a contingent deferred sales charge, assessed on the amount equal
to the lesser of the current net asset value or the original purchase price
of the shares.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Trust
- ------------------------------------------------------------------------------
Statements of Operations
For the Year Ended October 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
======================================
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $2,048,891 $18,287,214 $2,869,729
- ------------------------------------------------------------------------------
Total income 2,048,891 18,287,214 2,869,729
- ------------------------------------------------------------------------------
Expenses:
Investment adviser fees 148,120 1,965,605 211,283
Administration fees 44,433 393,263 79,231
Authorized dealer service fees 74,171 549,289 132,051
Distribution fees 74,281 549,538 132,304
Custodian fees 44,987 210,420 36,172
Transfer agent fees 72,237 121,212 90,284
Professional fees 58,897 92,538 60,094
Registration fees 14,992 63,673 32,549
Amortization of deferred organization
expenses 18,848 46,256 17,593
Trustee fees 478 3,073 707
Other 8,763 78,430 27,214
- ------------------------------------------------------------------------------
Total expenses 560,207 4,073,297 819,482
Less--expenses reimbursable and fees
waived by Goldman Sachs (411,644) (1,241,452) (370,128)
- ------------------------------------------------------------------------------
Net expenses 148,563 2,831,845 449,354
- ------------------------------------------------------------------------------
Net investment income 1,900,328 15,455,369 2,420,375
- ------------------------------------------------------------------------------
Realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions:
Net realized gain (loss) from:
Investment transactions 115,970 9,268,666 1,390,846
Futures transactions (68,389) -- (151,156)
Foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on:
Investments and options (332,205) 54,149 (513,085)
Futures 74,600 -- --
Translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions (210,024) 12,079,256 726,605
- ------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $1,690,304 $27,534,625 $3,146,980
==============================================================================
</TABLE>
/(a)/Net of $96,252 in foreign withholding tax for the Global Income
Fund.
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,900,328 $ 15,455,369 $ 2,420,375
Net realized gain from investment transactions 47,581 9,268,666 1,239,690
Net realized loss from foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on investments, futures and options (257,605) 54,149 (513,085)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,690,304 27,534,625 3,146,980
- ------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,898,372) (22,455,377) (2,418,570)
Class B (3,324) (3,052) (1,805)
Institutional Class -- (4,050,770) --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,901,696) (26,509,199) (2,420,375)
- ------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 8,922,548 39,747,372 6,389,765
Reinvestment of dividends and distributions 1,614,587 16,968,046 1,484,778
Cost of shares repurchased (8,990,920) (82,019,748) (9,875,982)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 1,546,215 (25,304,330) (2,001,439)
- ------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 1,334,823 (24,278,904) (1,274,834)
Net assets:
Beginning of year 29,502,599 277,454,349 53,797,234
- ------------------------------------------------------------------------------------------------------------------------
End of year $ 30,837,422 $ 253,175,445 $ 52,522,400
========================================================================================================================
Accumulated undistributed net investment income $ 53,331 $ 6,704,225 $ 60,331
========================================================================================================================
Summary of share transactions:
Shares sold 624,626 2,811,314 449,496
Reinvestment of dividends and distributions 112,977 1,198,568 104,201
Shares repurchased (628,175) (5,784,097) (694,794)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 109,428 (1,774,215) (141,097)
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,357,262 $ 19,658,884 $ 2,466,930
Net realized gain from investment transactions 603,048 5,556,002 938,332
Net realized gain from foreign currency related transactions -- 18,804,029 --
Net change in unrealized gain on investments 902,391 14,759,004 3,055,111
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies -- (15,288,240) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,862,701 43,489,679 6,460,373
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (1,361,620) (20,883,123)(a) (2,466,930)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,361,620) (20,883,123) (2,466,930)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 15,973,014 53,349,100 11,879,853
Reinvestment of dividends and distributions 1,123,498 13,008,610 1,551,121
Cost of shares repurchased (3,546,816) (208,094,050) (11,000,210)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 13,549,696 (141,736,340) 2,430,764
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 15,050,777 (119,129,784) 6,424,207
Net assets:
Beginning of year 14,451,822 396,584,133 47,373,027
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $29,502,599 $ 277,454,349 $ 53,797,234
====================================================================================================================================
Accumulated undistributed net investment income $ 36,251 $ 16,641,827 $ 42,738
====================================================================================================================================
Summary of share transactions:
Shares sold 1,139,008 3,822,903 876,447
Reinvestment of dividends and distributions 80,152 935,191 113,767
Shares repurchased (253,583) (15,079,626) (816,569)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 965,577 (10,321,532) 173,645
====================================================================================================================================
</TABLE>
(a) The Global Income Fund distributed $20,322,640 and $560,483 from net
investment income for the Class A and Institutional class of shares,
respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end, management
investment company. Included in this report are the financial statements for the
Goldman Sachs Government Income Fund (Government Income), the Goldman Sachs
Global Income Fund (Global Income) and the Goldman Sachs Municipal Income Fund
(Municipal Income), collectively, "the Funds" or individually a "Fund."
Government Income and Municipal Income are diversified portfolios whereas Global
Income is a non-diversified portfolio. As of October 31, 1996, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. As of October 31, 1996, there outstanding no Service shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in debt securities, other than money market instruments, held by the
Funds are valued on the basis of dealer-supplied quotations or by a pricing
service approved by the Board of Trustees if such prices are believed by the
investment adviser to accurately represent market value. The prices derived by a
pricing agent reflect broker/dealer-supplied valuations and electronic data
processing techniques. If those prices are not deemed by the Fund's Investment
Adviser to be representative of the market values at the time the net asset
value is calculated, then such securities will be valued at fair value as
described below. Options and futures contracts are valued at the last sale price
on the market where any such option or futures contract is principally traded.
Forward foreign currency exchange contracts are valued at the mean between the
last bid and asked quotations supplied by a dealer in such contracts. All other
securities and other assets, including debt securities, for which prices are
supplied by a pricing agent but are not deemed by the Fund's Investment Adviser
to be representative of market values, restricted securities and securities for
which no market quotation is available, but excluding money market instruments
with a remaining maturity of sixty days or less, are valued at fair value as
determined in good faith pursuant to procedures established by the Board of
Trustees. Money market instruments held by the Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which
approximates market value.
Investments in portfolio securities held by Government Income and Municipal
Income for which accurate market quotations are readily available are valued on
the basis of quotations furnished by a pricing service or provided by dealers in
such securities. Portfolio securities held by Government Income and Municipal
Income, for which accurate market quotations are not readily available are
valued at fair value using methods determined in good faith under procedures
established by the Trust's Board of Trustees and may include yield equivalents
or a pricing matrix. Exchange traded options and futures contracts will be
valued by the investment adviser at the last sale price on the exchange where
such contracts and options are principally traded. Short-term debt obligations
maturing in sixty days or less are valued at amortized cost.
B. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account principal prepayment
experience and estimates of future principal prepayments. Certain mortgage
security paydown gains and losses are taxable as ordinary income. Such paydown
gains and losses increase or decrease taxable ordinary income available for
distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
For Municipal Income, market premiums on other long-term debt securities are
amortized to interest income while for Global Income, market discounts on other
long-term debt securities are accreted to interest income.
C. Foreign Currency Translations
- --------------------------------
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized and unrealized gain (loss) on foreign currency transactions will
represent: (i) foreign exchange gains and losses from the sale and holdings of
foreign currencies and investments; (ii) gains and losses between trade date and
settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
interest recorded and the amounts actually received.
D. Forward Foreign Currency Exchange Contracts
- ----------------------------------------------
Global Income may enter into forward foreign exchange contracts for the purchase
or sale of a specific foreign currency at a fixed price on a future date as a
hedge or cross-hedge against either specific transactions or portfolio
positions. Global Income may also purchase and sell forward contracts to seek to
increase total return. All commitments are "marked-to-market" daily at the
applicable translation rates and any resulting unrealized gains or losses are
recorded in the Fund's financial statements. The Fund records realized gains or
losses at the time the forward contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
E. Mortgage Dollar Rolls
- ------------------------
Government Income and Global Income may enter into mortgage "dollar rolls" in
which the Fund sells securities in the current month for delivery and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund loses the right to receive principal and interest paid on the
securities sold but benefits to the extent of any price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
- --------------------------------------------------------------------------------
29
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
F. Option Accounting Principles
- -------------------------------
When call or put options are written, an amount equal to the premium received is
recorded as an asset and as an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current market value of the
option written. When a written option expires on its stipulated expiration date,
or a closing purchase transaction has been entered into, a gain or loss is
realized without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished.
Upon the purchase of a call option or a protective put option, the premium paid
is recorded as an investment, and subsequently marked-to-market to reflect the
current market value of the option. If an option which has been purchased
expires on the stipulated expiration date, a loss is realized in the amount of
the cost of the option. If a closing sale transaction has been entered into, a
gain or loss is realized, depending on whether the sale proceeds from the
closing sale transaction are greater or less than the cost of the option.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices, currency exchange rates in the case of
Global Income or to seek to increase total return. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return to the extent permitted by such
regulations. The use of futures contracts involve, to varying degrees, elements
of market risk which may exceed the amounts recognized in the Statements of
Assets and Liabilities.
Payments for futures contracts ("variation margin") are made or received by the
Funds each day, dependent on the daily fluctuations in the value of the
contract, and are recorded for financial reporting purposes, as unrealized gains
or losses. When entering into a closing transaction, the Funds will realize a
gain or loss equal to the difference between the value of the futures contract
to sell and the futures contract to buy. Futures contracts are valued at the
most recent settlement price, unless such price does not reflect the fair market
value of the contract, in which case the position will be valued using methods
as approved by the Funds' Board of Trustees.
Certain risks may arise upon entering into futures contracts. The predominant
risk is that changes in the value of the futures contract that may not directly
correlate with changes in the value of the underlying securities. The risk may
decrease the effectiveness of the Funds' hedging strategies and may also result
in a loss to the Funds.
H. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all investment company tax-exempt and taxable income to its
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of a portfolio's distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from paid-in capital, depending on the type
of book/tax differences that may exist.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. Federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ------------ ----------------
<S> <C> <C>
Global Income $4,471,734 2002
Municipal Income $1,534,884 2002
</TABLE>
I. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
J. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are allocated to the portfolios based on each portfolio's
relative average net assets for the period.
Class A and Class B shareholders of the Funds bear all expenses and fees
relating to their respective distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. Transfer
agent fees are subject to separate arrangements for each class.
3. Agreements
- -------------
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as each Fund's investment adviser
pursuant to Investment Advisory Agreements. Goldman Sachs Asset Management
International ("GSAM International"), an affiliate of Goldman Sachs, acts as
subadviser under a Subadvisory Agreement for Global Income. Under the Investment
Advisory and Subadvisory Agreements, GSAM and GSAM International, subject to the
general supervision of the Trust's Board of Trustees, manage the Funds'
portfolios. As compensation for the services rendered pursuant to the Investment
Advisory Agreements and the assumption of the expenses related thereto, GSAM is
entitled to a fee, computed daily and payable monthly at an annual rate equal to
.50%, .25% and .40% of average daily net assets of Government Income, Global
Income and Municipal Income, respectively. As compensation for the services
rendered pursuant to the Subadvisory Agreement, GSAM International is entitled
to a subadvisory fee from Global Income of .50% of the average daily net assets.
GSAM serves as each Fund's administrator pursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreement, GSAM is entitled to
a fee, computed daily and payable monthly at an annual rate equal to .15% of
each Fund's average daily net assets.
GSAM has voluntarily agreed to limit certain of the Funds' expenses (excluding
advisory, administration, distribution and authorized dealer service fees,
taxes, interest, brokerage, litigation, indemnification and other extraordinary
expenses and with respect to Global Income, transfer agent fees) to the extent
such expenses exceed .00%, .06% and .05% per annum of Government Income, Global
Income and Municipal Income, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to a
Distribution Agreement and as such may receive a portion of the sales load
imposed on the sale of Fund shares. During the year ended October 31, 1996,
Goldman Sachs retained approximately $17,300, $52,600 and $24,900 of sales loads
related to Government Income, Global Income and Municipal Income, respectively.
The Trust, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% and .75% of each Fund's average
daily net assets attributable to Class A and Class B shares, respectively.
- --------------------------------------------------------------------------------
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The Trust, on behalf of each Fund, has adopted an Authorized Dealer Service Plan
(the "Service Plan") pursuant to which Goldman Sachs and Authorized Dealers are
compensated for providing personal and account maintenance services. Each Fund
pays a fee under its Service Plan equal, on an annual basis, up to .25% of the
average daily net assets attributable to the Class A and Class B shares. Goldman
Sachs also serves as the Transfer Agent of the Funds for a fee.
For the year ended October 31, 1996, the advisors, administrators and
distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
<TABLE>
<CAPTION>
Waivers
--------------------------------------
Reimburse-
Admin- Class A Reimburse- ment
Fund Advisor istrator 12b-1 ment Outstanding
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government
Income 74 44 74 220 27
Global
Income 848 -- 56 337 7
Municipal
Income -- -- 132 238 30
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such waivers
and limitations in the future at their discretion.
For the year ended October 31, 1996, Government Income and Municipal Income
incurred commissions expense of approximately $1,200 and $2,750 respectively, in
connection with futures contracts entered into with Goldman Sachs. At October
31, 1996, Goldman Sachs owes approximately $7,000 to Government Income related
to variation margin on futures contracts.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, Global Income participates in a $50,000,000
committed, unsecured revolving line of credit facility. Both facilities are to
be used solely for temporary or emergency purposes. Under the most restrictive
arrangement, each Fund must own securities having a market value in excess of
300% of the total bank borrowings. The interest rate on borrowings is based on
the federal funds rate. The committed facility also requires a fee to be paid
based on the amount of the commitment which has not been utilized. For the year
ended October 31, 1996, the Funds did not have any borrowings under these
facilities.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for the
year ended October 31, 1996, were as follows:
<TABLE>
<CAPTION>
================================================================================
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and
agency obligations $133,097,699 $117,740,548 $ --
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 9,741,716 410,144,747 184,788,273
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 136,922,990 102,151,633 --
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) 3,909,735 446,269,068 189,391,870
================================================================================
</TABLE>
For the year ended October 31, 1996, option transactions in Global Income were
as follows:
<TABLE>
<CAPTION>
Options Purchased Cost
- --------------------------------------------------------------------------------
<S> <C>
Balance outstanding, beginning of period $ --
Options purchased 202,160
Options expired (202,160)
- --------------------------------------------------------------------------------
Balance outstanding, end of period $ --
================================================================================
</TABLE>
32
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At October 31, 1996, Global Income had outstanding forward foreign currency
exchange contracts to sell foreign currencies as follows:
<TABLE>
<CAPTION>
===============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Danish Krone
Expiring 1/22/97 $ 6,348,652 $ 6,443,676 $ (95,024)
Deutschemark
Expiring 11/27/96 37,735,809 38,044,516 (308,707)
Expiring 2/27/97 12,671,000 12,775,513 (104,513)
British Pound Sterling
Expiring 11/14/96 15,423,575 16,184,359 (760,784)
Irish Pound
Expiring 1/8/97 6,842,743 6,964,425 (121,682)
Italian Lira
Expiring 1/29/97 1,326,853 1,335,737 (8,884)
Japanese Yen
Expiring 1/24/97 23,059,781 22,755,697 304,084
Netherlands Guilder
Expiring 1/9/97 6,442,727 6,510,658 (67,931)
Spanish Peseta
Expiring 1/16/97 6,543,897 6,612,046 (68,149)
Swedish Krona
Expiring 1/28/97 4,708,899 4,736,457 (27,558)
Swiss Franc
Expiring 1/29/97 12,952,107 12,453,735 498,372
Expiring 1/29/97 12,083,214 12,109,196 (25,982)
- -------------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $146,139,257 $146,926,015 $(786,758)
===============================================================================
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered.
At October 31, 1996, Global Income had sufficient cash and/or securities to
cover any commitments under these contracts.
Global Income has recorded a "Receivable for forward foreign currency exchange
contracts" and "Payable for forward foreign currency exchange contracts"
resulting from open and closed but not settled forward foreign currency exchange
contracts of $1,073,237 and $1,816,332 respectively, in the accompanying
Statement of Assets and Liabilities. Included in the "Receivable and Payable for
forward foreign currency exchange contracts" are $270,781 and $227,118
respectively, related to forward contracts closed but not settled as of
October 31, 1996.
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $8,675,868 607,156
Reinvestment of dividends and
distributions 1,611,387 112,752
Shares repurchased (8,971,389) (626,797)
----------------------------------
1,315,866 93,111
----------------------------------
Class B Shares
Shares sold 246,680 17,470
Reinvestment of dividends
and distributions 3,200 225
Shares repurchased (19,531) (1,378)
----------------------------------
230,349 16,317
- -------------------------------------------------------------------------------
$1,546,215 109,428
===============================================================================
<CAPTION>
Global Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 15,545,777 1,089,521
Reinvestment of dividends
and distributions 13,419,614 947,846
Shares repurchased (76,216,894) (5,376,065)
----------------------------------
(47,251,503) (3,338,698)
----------------------------------
Class B Shares
Shares sold 265,053 18,628
Reinvestment of dividends
and distributions 1,708 119
Shares repurchased (16,373) (1,144)
----------------------------------
250,388 17,603
----------------------------------
Institutional Shares:
Shares sold 23,936,542 1,703,165
Reinvestment of dividends
and distributions 3,546,724 250,603
Shares repurchased (5,786,481) (406,888)
----------------------------------
21,696,785 1,546,880
- -------------------------------------------------------------------------------
$(25,304,330) (1,774,215)
================================================================================
</TABLE>
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Municipal Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 6,139,212 431,736
Reinvestment of dividends
and distributions 1,482,976 104,074
Shares repurchased (9,874,431) (694,685)
------------------------------------
(2,252,243) (158,875)
------------------------------------
Class B Shares
Shares sold 250,553 17,760
Reinvestment of dividends
and distributions 1,802 127
Shares repurchased (1,551) (109)
------------------------------------
250,804 17,778
- --------------------------------------------------------------------------------
$ (2,001,439) (141,097)
================================================================================
</TABLE>
Share activity for the year ended October 31, 1995 is as follows:
<TABLE>
<CAPTION>
Global Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 22,864,336 1,659,380
Reinvestment of dividends
and distributions 12,448,128 895,996
Shares repurchased (207,889,246) (15,065,279)
-----------------------------------
(172,576,782) (12,509,903)
-----------------------------------
Institutional Shares:
Shares sold 30,484,764 2,163,523
Reinvestment of dividends
and distributions 560,482 39,195
Shares repurchased (204,804) (14,347)
-----------------------------------
30,840,442 2,188,371
- -------------------------------------------------------------------------------
$(141,736,340) (10,321,532)
===============================================================================
</TABLE>
7. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Funds' custodian, or at subcustodians. GSAM monitors the
market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
Government Income, together with other registered investment companies having
advisory agreements with GSAM or its affiliates, transfers uninvested cash
balances into a joint account, the daily aggregate balance of which is invested
in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of October 31, 1996, Government Income had a 0.3% undivided interest in the
repurchase agreement in the joint account which equaled $8,400,000 in principal
amount. As of October 31, 1996, the repurchase agreements in the joint account
along with the corresponding underlying securities (including the type of
security, market value, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
===============================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,686,102, 5.50%-8.50%, 2/1/09-6/1/26; FHLMC: $166,359,033, 5.50%-8.50%,
9/1/98-8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (Treasury
Notes: $942,903,967, 4.38%-8.50%, 11/15/96-8/15/03)
924,700,00 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,658,433, 5.50%-8.00%, 6/1/03-10/1/26; FHLMC:
$465,441,174, 6.00%-9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S
Treasury Interest Only Stripped Securities: $11,653,277, 2/15/98-5/15/02; U.S.
Treasury Notes: $85,997,728, 5.25%-7.75%, 5/15/97-10/15/06; U.S. Treasury
Principal Only Stripped Securities: $33,993,571, 5/15/97-5/15/05; U.S.
Treasury Bills: $41,756,285, 12/12/96-3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price $175,026,979
(U.S. Treasury Notes: $178,694,649, 6.88%-7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- -------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $2,669,700,000
===============================================================================
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
9. Certain Reclassifications
In accordance with Statement of Position 93-2, the Government Income, Global
Income and Municipal Income Funds have reclassified $18,448, $46,256 and
$17,593, respectively, from paid-in capital to accumulated undistributed net
investment income. Additionally, the Global Income Fund has reclassified
$862,007, $207,585 and $380 from accumulated net realized gain, accumulated net
realized foreign currency gain and paid in capital, respectively to accumulated
undistributed net investment income. These reclassifications have no impact on
net asset values of the Funds and are designed to present the Funds' capital
accounts on a tax basis.
10. Other
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(a)/ Distributions to shareholders
============================================================== ========================================
====================================================================================================================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.47 $0.92 $(0.11) -- $0.81 $(0.92) -- --
1996-Class B shares/(c)/ 14.11 0.41 0.26 -- 0.67 (0.41) -- --
1995-Class A shares 13.47 0.94 1.00 -- 1.94 (0.94) -- --
1994-Class A shares 14.90 0.85 (1.28) -- (0.43) (0.85) (0.12) (0.02)
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 14.32 0.56 0.58 -- 1.14 (0.56) -- --
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.45 $0.71 $0.62 $0.18 $1.51 $(1.43) -- --
1996-Class B shares/(c)/ 14.03 0.34 0.41 0.11 0.86 (0.36) -- --
1996-Institutional
shares 14.45 1.15 0.32 0.10 1.57 (1.50) -- --
1995-Class A shares 13.43 0.89 0.92 0.15 1.96 (0.94) -- --
1995- Institutional
shares/(f)/ 14.09 0.22 0.34 0.06 0.62 (0.26) -- --
1994-Class A shares 15.07 0.84 (1.37) (0.12) (0.65) (0.22) (0.16) --
1993-Class A shares 14.69 0.85 1.07 (0.42) 1.50 (0.85) (0.27) --
1992-Class A shares 14.60 1.14 0.45 (0.36) 1.23 (1.14) -- --
For the Period August 2, 1991/(d)/ through October 31,
=========================================================
1991-Class A shares 14.55 0.25 0.23 (0.19) 0.29 (0.24) -- --
<CAPTION>
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
- -----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares -- -- $(0.92) $(0.11) $14.36
1996-Class B shares/(c)/ -- -- (0.41) 0.26 14.37
1995-Class A shares -- -- (0.94) 1.00 14.47
1994-Class A shares (0.01) -- (1.00) (1.43) 13.47
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares -- -- (0.56) 0.58 14.90
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------------------------
For the Years Ended October 31,
===========================================================
1996-Class A shares -- -- $(1.43) $0.08 $14.53
1996-Class B shares/(c)/ -- -- (0.36) 0.50 14.53
1996-Institutional
shares -- -- (1.50) 0.07 14.52
1995-Class A shares -- -- (0.94) 1.02 14.45
1995-Institutional
shares/(f)/ -- -- (0.26) 0.36 14.45
1994-Class A shares -- (0.61) (0.99) (1.64) 13.43
1993-Class A shares -- -- (1.12) 0.38 15.07
1992-Class A shares -- -- (1.14) 0.09 14.69
For the Period August 2, 1991 (d) through October 31,
============================================================
1991-Class A shares -- -- (0.24) 0.05 14.60
<CAPTION>
Ratio of Net
Ratio of net assets
net investment at end
expenses income Portfolio of
Total to average to average turnover period
return /(b/) net assets net assets rate /(h)/ (in 000s)
===================================================================================================
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares 5.80% 0.50% 6.42% 485.09% $30,603
1996-Class B shares/(c)/ 4.85/(g)/ 1.25/(e)/ 5.65/(e)/ 485.09 234
1995-Class A shares 14.90 0.47 6.67 449.53 29,503
1994-Class A shares (2.98) 0.11 6.06 654.90 14,452
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 8.03/(g)/ 0.00/(e)/ 4.87/(e)/ 725.41/(g/ 12,860
- ---------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares 11.05% 1.16% 5.81% 232.15% $198,665
1996-Class B shares/(c)/ 6.24/(g)/ 1.70/(e)/ 5.16/(e)/ 232.15 256
1996-Institutional
shares 11.55 0.65 6.35 232.15 54,254
1995-Class A shares 15.08 1.29 6.23 265.86 245,835
1995-Institutional
shares/(f)/ 4.42/(g)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619
1994-Class A shares (4.49) 1.28 5.73 343.74 396,584
1993-Class A shares 10.75 1.30 5.78 313.88 675,662
1992-Class A shares 8.77 1.37 7.85 270.75 588,893
For the Period August 2, 1991 (d) through October 31,
=========================================================
1991- Class A shares 2.00 0.38 /(g)/ 1.72 /(g)/ 34.22 /(g)/ 388,744
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
------------------------------
Ratio of
net
Ratio of investment
expenses income
to average to average
net assets net assets
==============================================================
- --------------------------------------------------------------
<S> <C> <C>
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.89% 5.03%
1996-Class B shares/(c)/ 2.39/(e)/ 4 .51/(e)/
1995-Class A shares 2.34 4.80
1994-Class A shares 2.86 3.31
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares 4.00/(e)/ 0.87/(e)/
- ------------------------------------------------------------
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.64% 5.33%
1996-Class B shares/(c)/ 2.14 /(e)/ 4.72/(e)/
1996-Institutional
shares 1.11 5.89
1995-Class A shares 1.58 5.94
1995-Institutional
shares/(f)/ 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.53 5.48
1993-Class A shares 1.55 5.53
1992-Class A shares 1.62 7.60
For the Period August 2, 1991 (d) through October 31,
==========================================================
1991-Class A shares 0.44/(g)/ 1.66/(g)/
- ------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations (a) Distributions to shareholders
-------------------------------------------- -----------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $14.17 $0.65 $0.20 -- $0.85 $(0.65) -- --
1996- Class B shares /(c)/ 14.03 0.27 0.34 -- 0.61 (0.27) -- --
1995- Class A shares 13.08 0.67 1.09 -- 1.76 (0.67) -- --
1994- Class A shares 14.64 0.73 (1.51) -- (0.78) (0.73) (0.05) --
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 14.32 0.22 0.32 -- 0.54 (0.22) -- --
<CAPTION>
Distributions to shareholders
----------------------------------------
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares -- -- $(0.65) $0.20 $14.37
1996- Class B shares /(c)/ -- -- (0.27) 0.34 14.37
1995- Class A shares -- -- (0.67) 1.09 14.17
1994- Class A shares -- -- (0.78) (1.56) 13.08
For the Period July 20, 1993
1993- Class A shares -- -- (0.22) 0.32 14.64
<CAPTION>
Ratio of
Ratio of net
net investment
expenses income Portfolio
Total to average to average turnover
return /(b/) net assets net assets rate /(h)/
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares 6.13% 0.85% 4.58% 344.13%
1996- Class B shares /(c)/ 4.40 /(g)/ 1.60 /(e)/ 3.55 /(e)/ 344.13
1995- Class A shares 13.79 0.76 4.93 335.55
1994- Class A shares (5.51) 0.45 5.28 357.54
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 3.73 /(g)/ 0.00 /(e)/ 5.15 /(e)/ 99.99 /(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
---------------------
Net Ratio of
assets net
at end Ratio of investment
of expenses income
period to average to average
(in 000s) net assets net assets
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $52,267 1.55% 3.88%
1996- Class B shares /(c)/ 255 2.05 /(e)/ 3.10 /(e)/
1995- Class A shares 53,797 1.49 4.20
1994- Class A shares 47,373 1.55 4.18
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 30,166 2.42 /(e)/ 2.73 /(e)/
</TABLE>
- ---------------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions, a complete redemption of the investment
at the net asset value at the end of period and no sales charge. Total
return would be reduced if a sales charge for Class A shares or a contingent
deferred sales charge for Class B shares were taken into account.
(c) Class B shares commenced operations on May 1, 1996.
(d) Commencement of operations.
(e) Annualized.
(f) Institutional shares commenced operations on June 1, 1995.
(g) Not annualized.
(h) Includes the effect of mortgage dollar roll transactions for the Government
Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Goldman Sachs Government Income
Fund, Goldman Sachs Global Income Fund and Goldman Sachs Municipal Income Fund:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund (portfolios of Goldman Sachs Trust, a
Massachusetts Business Trust), including the statements of investments, as of
October 31, 1996, and the related statements of operations, the statements of
changes in net assets and the financial highlights for each of the periods
presented. These financial statements and the financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund as of October 31, 1996, the results of their
operations and the changes in their net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
December 12, 1996
- --------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning the Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
================================================================================
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[GOLDMAN SACHS LOGO APPEARS HERE]
================================================================================
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders
- -------------------------------------------------------------------------------
Dear Shareholders:
A return of robust economic growth during the period under review fueled
fears of higher inflation, which pushed Treasury yields higher across the
maturity spectrum. In this semiannual report, we will review the performance of
the Goldman Sachs Fixed Income Funds for the six-month period ended April 30,
1997, as well as provide a brief overview of the U.S. economy and the bond
market. We are pleased to note that during the period, the Goldman Sachs Fixed
Income Funds performed well compared with their peers.
Economic Activity Rebounded, Led by Consumer Spending
After a sluggish third quarter, the pace of economic growth strengthened
during the period. During November and December, consumer spending rebounded,
the trade deficit narrowed and industrial production climbed significantly. As a
result, fourth-quarter real Gross Domestic Product (GDP) growth was 3.8%
(annualized), up from 2.1% in the prior quarter.
Economic activity continued to gain momentum during the first quarter of
1997, with real GDP surging 5.8%, the largest jump in a decade. Signs of
strength were led by a sharp increase in consumer spending, which resulted in
solid sales gains for automobile manufacturers and retailers. In addition,
upbeat reports on factory orders and inventories, construction outlays and labor
market conditions all pointed towards economic acceleration. Despite the growth
spurt, reported inflation remained surprisingly mild during the period.
Furthermore, several economic reports for April came in at the low end of
consensus expectations, which suggested that the economy could moderate during
the second quarter.
The Bond Market Rallied, Then Fell as Inflation Fears Reemerged
The U.S. fixed income market came under pressure during the period under
review. In November, bonds performed well in anticipation of a continued
slowdown in U.S. economic growth. However, the market experienced a reversal in
December when better-than-expected economic data, in particular, robust
employment figures, triggered a sell-off and drove interest rates higher. In
early February, bond prices briefly rebounded, but later faltered as it became
increasingly likely that the U.S. Federal Reserve would raise short term
interest rates in March. By the end of March, the yield on the benchmark 30-year
Treasury bond rose above the psychologically important 7% threshold. Despite the
lackluster performance of the U.S. bond market for the period as a whole, a
sharp rebound at the end of April helped bonds recoup part of their earlier
losses.
The Fed Raised the Federal Funds Rate in March
In March 1997, the Fed raised the federal funds rate by 25 basis points to
5.50%. Though there were few signs of actual inflation, the Fed tightening was
prompted by the economy's pervasive strength. The Fed's action was its first
since a quarter-point cut in January 1996.
During the period under review, the yield curve shifted higher across all
maturities. The yield on six-month Treasury bills rose from 5.26% on October 31,
1996 to approximately 5.52% on April 30, 1997. For the same period, the yield on
the 30-year U.S. Treasury bond rose more dramatically, climbing from 6.64% to
6.95%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 18
Goldman Sachs Government Income Fund 3 Notes to Financial Statements 22
Goldman Sachs Global Income Fund 8 Financial Highlights 29
Goldman Sachs Municipal Income Fund 13
----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
1
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders (continued)
- -------------------------------------------------------------------------------
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
10/31/96 4/30/97
<S> <C> <C>
3-Month 5.14% 5.23%
6-Month 5.26% 5.52%
1 5.40% 5.89%
2 5.73% 6.27%
3 5.86% 6.40%
5 6.07% 6.57%
10 6.34% 6.71%
30 6.64% 6.95%
</TABLE>
Source: Bloomberg, L.P.
The yield curve shifted upward across all maturities and steepened sharply at
the short end.
Outlook: Strengthening Economic Growth May Trigger Further Preemptive Rate Hikes
Despite reports of economic moderation and minimal price acceleration, the
economy's broad-based fundamental strength and resilient equity market make
additional Fed rate increases likely this year. Goldman Sachs' economists
believe that the speed and extent of Fed tightening will depend in large part on
the emergence of conclusive signs that the economy is nearing maximum capacity,
rather than immediate evidence of increased inflationary pressures.
In conclusion, we thank you for your support of the Goldman Sachs Fixed
Income Funds and we look forward to continuing our relationship.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
May 30, 1997
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Government Income Fund seeks to provide shareholders with
a high level of current income consistent with safety of principal. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
U.S. government securities and in repurchase agreements collateralized by such
securities. The fund may also invest in securities of nongovernmental issuers,
including asset-backed securities, privately issued mortgage-backed securities
and corporate debt obligations. Such securities will be rated triple-A at the
time of investment or, if unrated, deemed to be of comparable quality by Goldman
Sachs Asset Management, the fund's investment adviser. The fund's interest rate
sensitivity is expected to be comparable to that of a five-year bond.
Mortgage-Backed Securities Continued to Perform Well
During the period under review, mortgage-backed securities (MBS) performed
very well, buoyed by a surge in investor demand and stable prepayment activity.
Investor interest in the MBS market was triggered primarily by the favorable
interest rate environment. Throughout the period, rates remained in a fairly
tight range, allowing prepayment anxieties to subside. In addition, with other
highly rated fixed income instruments yielding approximately the same as
similar-duration Treasuries, investors turned to the mortgage-backed sector for
yield enhancement. Finally, an increase in collateralized mortgage obligation
(CMO) creation led to steady demand for underlying pass-through securities. As a
result of all of these positive factors, mortgage-backed securities became
increasingly expensive during the period as their yield spreads relative to
Treasuries tightened.
Performance Review
For the six-month period ended April 30, 1997, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to strong results from its investments in mortgage-backed
securities, particularly CMOs. The fund's Class B shares, which have higher
expenses, also achieved positive returns. The net asset value (NAV) of both
classes declined due to rising interest rates during the period.
We are pleased to report that the fund's Class A shares ranked within the
top 10% of intermediate U.S. government income funds (seventh out of 122) based
on total return for the 12 months ended April 30, 1997, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they have been
in existence less than 12 months.)
- -----------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
Total Return (based on net asset value) 1.83% 1.43%
- --------------------------------------------------------------------
Return From Monthly Distributions 3.67% 3.28%
- --------------------------------------------------------------------
Return From Price Depreciation -1.84% -1.85%
- --------------------------------------------------------------------
Total Return of Lehman Brothers 1.81% 1.81%
Government/Mortgage Index
- --------------------------------------------------------------------
NAV (as of 4/30/97) $14.10 $14.11
- --------------------------------------------------------------------
NAV Change -$0.26 -$0.26
- --------------------------------------------------------------------
</TABLE>
Portfolio Composition and Investment Strategies
The primary changes to the portfolio's sector allocations during the period
were a reduction of fixed rate mortgage pass-through and asset-backed securities
in favor of U.S. Treasuries and agency debentures.
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
U.S. Treasuries 36.7%
Fixed Rate Mortgage Pass-Throughs 26.1%
CMO's 13.0%
Asset-Backed Securities 11.0%
Agency Debentures 10.2%
Repos/Cash Equivalents 3.0%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio
held a 36.7% position in U.S. Treasuries, its single largest allocation as of
April 30. The fund's holdings in Treasuries more than doubled as we scaled back
exposure to the mortgage-backed and asset-backed sectors, both of which were
nearing full value.
. Fixed Rate Mortgage Pass-Throughs. As of April 30, the fund's investment in
fixed rate mortgage pass-throughs accounted for 26.1% of the portfolio, down
from 40.4% six months earlier. The sector performed well during the period, as
many of the factors which supported MBS through 1996 remained in place: low
volatility, range-bound interest rates, tight yield spreads on alternative
sectors, and light issuance of corporate and asset-backed securities (ABS).
However, as the MBS market repriced to reflect the favorable environment, we
reduced the position.
We also used mortgage dollar rolls during the period, which helped the
portfolio to benefit from short-term supply and demand imbalances in the
mortgage settlement process. (Mortgage dollar rolls refer to transactions that
involve selling mortgage securities owned by the fund and simultaneously
contracting to buy back similar mortgage securities with the same coupon on a
specified future date -- usually one month forward.) At all times, we "cover"
the mortgage dollar rolls by keeping cash or liquid assets equal to the dollar
amount of the forward commitment in a segregated account with the fund's
custodian.
. CMOs. The CMO market enjoyed strong demand from yield-seeking investors,
while the supply of CMOs, though rising, remained relatively low from a
historical perspective. As the sector became more expensive, we reduced the
fund's allocation to 13.0% from 22.0% last October. Specifically, we cut
sequential-pay/support CMOs to 7.2%, approximately half their weighting six
months ago, and planned amortization class (PAC) CMOs to 4.2% from 5.5%.
. Asset-Backed Securities. As of April 30, the fund's ABS position was 11.0%,
down from 19.9% last October. During the period, the ABS sector experienced some
selling pressure, in part due to negative credit events among selected credit
card and sub-prime auto lenders. Overall, however, the sector performed well:
investor interest remained broad-based, ratings held firm and, relative to
similarly rated spread products, ABSs continued to offer attractive yield
enhancement opportunities.
. Agency Debentures. Agency debentures represented 10.2% of the portfolio as
of the end of the period, constituting an overweighted position compared with
the benchmark's 8.0%. We added to the allocation during the period as
alternative sectors richened.
. Issuer Composition. The portfolio composition of the fund's mortgage-backed
security holdings by issuer was 13.6% in Federal National Mortgage Association
(FNMA) issues and 13.2% in Government National Mortgage Association (GNMA)
issues.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
. Credit Quality. As of April 30, 75.5% of the portfolio was invested in U.S.
government and agency securities, 21.5% of the portfolio was invested in triple-
A-rated securities and 3.0% of the portfolio was invested in cash equivalents.
. Prudent Use of Derivatives. As discussed earlier, the fund held a 7.2%
position in sequential-pay/support CMOs and a 4.2% position in PAC CMOs,
securities that are generally considered to be lower risk derivative
instruments. In addition, the portfolio held small positions in inverse
floaters, interest-only (IO) CMOs and principal-only (PO) CMOs for their
potential to add incremental yield. The portfolio's combined position in these
higher risk derivatives was 1.6% as of the end of the period.
. Duration. We seek excess return over the Index through sector weightings
and specific security selection rather than attempting to make interest rate
predictions. Therefore, we manage the fund's duration to approximate that of the
Index, partly through the use of futures. As of April 30, the fund's duration
was 4.4 years, in line with that of the Index.
Market Outlook
Despite some suggestion of economic moderation, we continue to believe that
interest rates are likely to move higher during the balance of the year. This
expectation is predicated on the economy's broad-based fundamental strength, as
well as the Fed's well-publicized commitment to monetary discipline.
Regarding specific fixed income sectors, investor demand for mortgage-
backed securities remains robust, but lower rates and rising volatility increase
the risk of refinancings and lead us to maintain a cautious outlook for mortgage
pass-throughs over the next few months. Similarly, while CMOs do not generally
offer significant value over mortgage pass-throughs, specific structures within
the CMO market present attractive investment opportunities. In the ABS sector,
anxiety regarding negative credit events during the first quarter appears to be
subsiding. However, we believe the market is now more alert to credit
distinctions among issuers, servicers and collateral types, and has begun
pricing securities accordingly. Consequently, it may become more challenging to
identify unrecognized value within the ABS sector, particularly among the higher
quality issues that we tend to emphasize.
Distribution Policy
The fund's Class A and Class B shares paid out monthly distributions of
approximately $0.52 and $0.47 per share, respectively, during the six-month
period ended April 30, 1997. Dividends are declared daily and paid on a monthly
basis. The fund distributes substantially all of its taxable income, as is
required for all investment companies.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Erica Adelberg
Erica Adelberg
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Government Income Fund
May 30, 1997
- --------------------------------------------------------------------------------
5
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--37.7%
Federal Home Loan Mortgage Corp. (FHLMC)--1.8%
$ 1,000,000 7.00% TBA 15-Yr /(a)/ $ 990,930
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--8.7%
$ 1,000,000/(h)/ 6.50% TBA 7-Yr /(a)/ $ 981,560
1,000,000 7.00 TBA 30-Yr /(a)/ 968,750
1,000,000 7.50 TBA 30-Yr /(a)/ 942,500
2,000,000/(h)/ 7.50 TBA 30-Yr /(a)/ 1,985,000
- --------------------------------------------------------------------------------
$ 4,877,810
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA) --13.0%
$ 238,209 9.00% 10/15/19 $ 253,098
97,383 9.00 12/15/19 103,470
315,821 7.50 04/15/23 314,933
610,646 7.50 07/15/23 608,930
368,845 7.00 08/15/23 359,162
695,669 7.00 10/15/23 677,408
61,762 7.00 11/15/23 60,141
877,541 7.00 12/15/23 854,506
1,005,084 8.00 12/15/26 1,018,690
2,000,000/(h)/ 7.50 TBA 30-Yr /(a)/ 1,982,500
1,000,000/(h)/ 8.00 TBA 30-Yr /(a)/ 1,013,430
- --------------------------------------------------------------------------------
$ 7,246,268
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--14.2%
Interest Only--0.4%
FNMA Interest-Only Stripped Security, Series 151, Class 2/(d)/
$ 643,343 11.30% 07/25/22 $ 213,024
- --------------------------------------------------------------------------------
$ 213,024
- --------------------------------------------------------------------------------
Inverse Floater--0.7%
FNMA Remic Trust, Series 1992-62, Class S
$ 404,038 9.27%/(c)/ 05/25/99 $ 405,941
- --------------------------------------------------------------------------------
$ 405,941
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC) CMOs--2.9%
FNMA Remic Trust, Series 1997-9, Class B
$ 1,000,000 6.50% 10/25/22 $ 962,510
GE Capital Mortgage Services, Inc., Series 1994-11, Class A1
644,342 6.50 03/25/24 644,941
- --------------------------------------------------------------------------------
$ 1,607,451
- --------------------------------------------------------------------------------
Principal Only--1.9%
FNMA Remic Trust, Series G-35, Class N/(d)/
$ 575,000 6.16% 10/25/21 $ 419,376
FNMA Remic Trust, Series 1993-205, Class C/(d)/
750,000 7.23% 09/25/23 625,545
- --------------------------------------------------------------------------------
$ 1,044,921
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--1.4%
Citicorp Mortgage Securities, Series 1993-11, Class A6
$ 818,108 6.25% 09/25/08 $ 788,362
- --------------------------------------------------------------------------------
$ 788,362
- --------------------------------------------------------------------------------
Support--7.0%
GE Capital Mortgage Services, Inc., Series 1994-10, Class A22
$ 996,703 6.50% 03/25/24 $ 865,497
Housing Securities, Inc., Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,329,852
Prudential Securities, Series 1995-2, Class A
797,338 5.77 11/15/15 799,578
Salomon Brothers Mortgage Securities VII, Series 1996-6H, Class A1
1,000,000 6.00 09/30/08 899,840
- --------------------------------------------------------------------------------
$ 3,894,767
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,954,466
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $21,101,884) $ 21,069,474
- --------------------------------------------------------------------------------
Asset-Backed Securities--11.6%
Asset Securitization Corp., Series 1996, Class A1
$ 300,000 6.88% 11/13/26 $ 295,699
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
720,000 6.23 06/15/03 710,546
CPS Auto Grantor Trust, Series 1993-3, Class A
855,634 6.30 08/15/02 850,107
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 589,263
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 622,980
JP Morgan Commercial Mortgage Finance Corp., Series 1997-C4
500,000 7.32 12/26/28 498,614
Morgan Stanley Capital Commercial Mortgage, Inc. Series 1997-C1
500,000 7.46 05/15/06 506,875
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
224,429 6.55 11/20/01 225,129
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset-Backed Securities(continued)
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
$ 420,638 6.85% 06/15/01 $ 424,099
Premier Auto Trust, Series 1993-6, Class A2
271,484 4.65 11/02/99 269,021
Premier Auto Trust, Series 1994-1, Class A3
176,500 4.75 02/02/00 175,672
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 473,368
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 860,533
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $6,623,680) $ 6,501,906
- --------------------------------------------------------------------------------
U.S. Government Agency Obligations--10.0%
Small Business Administration
$ 1,700,000 7.15% 03/01/17 $ 1,685,176
1,400,000 7.50 04/01/17 1,416,562
Sri Lanka Aid/(c)/
2,500,000 6.06 02/21/16 2,464,075
- --------------------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $5,562,500) $ 5,565,813
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--35.6%
United States Treasury Bonds
$ 140,000 8.75% 05/15/17 $ 165,484
270,000/(e)/ 8.88 08/15/17 322,988
3,450,000 8.75 05/15/20 4,109,813
180,000 8.75 08/15/20 214,565
690,000/(e)/ 7.63 02/15/25 740,025
United States Treasury Notes
1,460,000/(e)/ 7.38 11/15/97 1,471,636
700,000 5.88 04/30/98 699,342
5,650,000/(e)/ 6.88 08/31/99 5,712,659
3,700,000 6.13 07/31/00 3,664,739
1,100,000 5.63 11/30/00 1,070,091
1,200,000 7.50 02/15/05 1,256,436
United States Treasury Principal-Only Stripped Securities/(d)/
300,000 6.85 05/15/05 174,777
1,550,000 7.23 05/15/20 302,790
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $20,041,673) $ 19,905,345
- --------------------------------------------------------------------------------
Repurchase Agreement--19.9%
Joint Repurchase Agreement Account/(e)/
$ 11,100,000 5.49% 05/01/97 $ 11,100,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $11,100,000) $ 11,100,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $64,429,737/(f)/) $ 64,142,538
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long (Short)/(g)/ Month Gain (Loss)
- --------------------------- ------------------ -------------- -------------
<S> <C> <C> <C>
Euro Dollars 3 September 1997 $375
5 Year U.S. Treasury Notes 19 June 1997 4,312
U.S. Long Term Bond 3 June 1997 6,282
-------------
$10,969
- --------------------------------------------------------------------------------
</TABLE>
Federal Income Tax Information:
<TABLE>
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 118,460
Gross unrealized loss for investments in which cost
exceeds value (509,387)
- --------------------------------------------------------------------------------
Net unrealized loss $ (390,927)
- --------------------------------------------------------------------------------
</TABLE>
/(a)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally + / -2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(b)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(c)/Variable rate security. Coupon rate disclosed is that which is in effect at
April 30, 1997.
/(d)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(e)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(f)/The aggregate cost for federal income tax purposes is $64,533,465.
/(g)/Each 5-Year U.S. Treasury Note and U.S. Long Term Bond contract represents
$100,000 in notional par value. Each Euro Dollar contract represents
$1,000,000 in notional par value. The total notional amount and market
value at risk are $5,200,000 and $3,032,288, respectively. The
determination of notional amounts as presented here are indicative only of
volume of activity and not a measure of market risk.
/(h)/When-issued security.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Global Income Fund seeks high total return, composed of
both current income and capital appreciation. The fund is permitted to invest in
government and other high-quality (double-A or better) fixed income securities
issued in the United States and in foreign markets. The fund has the additional
flexibility to invest in sovereign (government) debt rated single-A (or better)
or deemed to be of comparable quality. The maximum duration of the fund is 7.5
years and its approximate interest rate sensitivity is comparable to that of a
six-year bond. Under normal market conditions, the fund's neutral position is to
be fully hedged into U.S. dollars to best serve the needs of U.S. shareholders.
However, the fund may engage in currency transactions, both to hedge exchange
rate risk and to seek to enhance returns.
Special Event
To accommodate different clients' needs and preferences, on March 12, 1997,
the fund opened a new share class (Service).
Favorable Economic Factors Helped European Bonds While Rising Rates Impacted
Treasuries
Global bonds began the period under review on a strong note, but weakened
during the first quarter of 1997. European bonds were the best performers during
the period, while the United States lagged along with the dollar bloc markets.
The economic fundamentals that supported most European bonds throughout
1996 -- particularly weak economic growth and contained inflation -- remained
intact during the period. This favorable backdrop, plus yield convergence ahead
of European monetary union (EMU), helped the higher yielding bonds of Spain
achieve the best performance of all the major bond markets (hedged into U.S.
dollars). The "core" European markets such as Germany also fared well due to
increased expectations of tighter fiscal policies to help them meet EMU
criteria. In contrast, the U.K. gilt underperformed most European bonds as
sharply accelerating growth triggered fears of higher inflation. In Japan, the
performance of Japanese Government Bonds (JGBs) trailed nearly all of the major
European markets but still fared reasonably well (hedged into U.S. dollars). The
Japanese market strengthened following a sharp November sell-off when continued
weakness in the financial sector made near-term rate hikes by the Bank of Japan
unlikely.
In the United States, stronger than expected economic growth pushed yields
higher and prompted the Federal Reserve to raise the federal funds rate by a
quarter-percentage point in March. As a result, U.S. Treasuries posted the
poorest performance of all the major bond markets.
Performance Review: Country Allocations Contributed to Performance
During the period under review, the Goldman Sachs Global Income Fund's
Institutional shares outperformed the fund's benchmark, the J.P. Morgan Global
Government Bond Index (hedged into U.S. dollars) (the "Index"). The Index covers
14 major bond markets and reflects their currency exposures. The fund's
favorable results were primarily due to its overweighting in German bonds, one
of the strongest European markets during the period, and its underweighting in
the United States, the weakest market.
The fund's Class A and B shares, which have higher expenses than the
Institutional shares, lagged the benchmark. The fund's Service shares achieved
positive performance since their inception on March 12, 1997; however, a partial
period of approximately 1 1/2 months is obviously too brief a period to measure
performance meaningfully.
The fund's Institutional and Class A shares fared well compared with their
peers. For the 12-month period ended April 30, the Institutional and Class A
shares ranked 25th and 29th, respectively, out of 133 global income funds based
on total return, according to Lipper Analytical Services, Inc. (Please note that
Lipper rankings do not take sales charges into account and that past
- -------------------------------------------------------------------------------
8
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
performance is not a guarantee of future results. Class B and Service shares
were not ranked for this period because they were in existence less than 12
months.)
We are also pleased to announce that for the five-year period ended April
30, 1997, the fund's Class A shares were rated "four stars" (out of 641 taxable
bond funds) by Morningstar, Inc., an independent rating agency./1/
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
Institu-
Class A Class B tional Service*
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Total Return (based on net
asset value) 3.22% 2.94% 3.50% 0.21%
- ----------------------------------------------------------------------------------------------------------------------
Return From Monthly 2.80% 2.59% 3.08% 0.01%
Distributions
- ----------------------------------------------------------------------------------------------------------------------
Return From Price 0.42% 0.35% 0.42% 0.20%
Appreciation
- ----------------------------------------------------------------------------------------------------------------------
Total Return of J.P. 3.47% 3.47% 3.47% 0.50%
Morgan Global
Government Bond Index
- ----------------------------------------------------------------------------------------------------------------------
NAV (as of 4/30/97) $14.59 $14.58 $14.58 $14.59
- ----------------------------------------------------------------------------------------------------------------------
NAV Change +$0.06 +$0.05 +$0.06 -$0.10
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period. Performance and net asset value
(NAV) change are from its inception date on 3/12/97.
- ------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Class A shares received "four stars"
for both the three- and one-year periods and were rated among 1,193 and 1,709
taxable bond funds for the three- and one-year periods, respectively. The
Morningstar ratings apply only to the fund's Class A shares; the fund's Class B,
Institutional and Service shares have not been rated. Class B and Service shares
are subject to additional fees and expenses that may have the effect of lowering
performance and may affect any future Morningstar rating. Morningstar rates each
fund against its peers in the same category. In all, there are four Morningstar
categories (domestic equity, international equity, taxable bond and municipal).
Morningstar ratings range from five stars (highest) to one star (lowest). Funds
with five-star ratings are in the top 10% of their category, four-star ratings
in the next 22.5%, three stars the next 35%, two stars the next 22.5% and one
star the lowest 10% of their categories.
During the period, we successfully employed several currency strategies
relative to our neutral position, which is to be fully hedged into U.S. dollars.
The main contributors to the positive currency performance were the fund's long
U.S. dollar positions against the yen and long positions in the high-yielding
European currencies against the Deutschemark and Swiss franc. The U.S. dollar
was supported by strong growth and rising short-term rates while the high-
yielding European currencies benefited from the EMU process gaining momentum.
Portfolio Composition and Investment Strategies
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
U.S. 33.1%
Germany 11.0%
Cash 10.7%
Japan 10.4%
U.K. 10.1%
Australia 8.5%
Italy 6.3%
Sweden 4.3%
France 3.0%
Spain 2.6%
</TABLE>
* The percentages shown are of total portfolio investments that have settled
and include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Dollar Bloc. As of April 30, 1997, the fund was slightly underweighted in
the dollar bloc countries (e.g., U.S., Canada and Australia) relative to the
Index, 41.6% versus 44.3%.
U.S. In the U.S., Treasury prices came under pressure when accelerating
economic growth drove bond yields
- -------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
higher and prompted a Fed rate hike. As noted, the fund was underweighted in
Treasuries, which significantly benefited its performance relative to the Index.
As of April 30, 33.1% of the portfolio was invested in U.S. Treasuries compared
with a 40.2% allocation for the benchmark.
Other Dollar Bloc. The fund was not invested in Australia when the period
began, but we took advantage of improving bond fundamentals and a widening of
the Australia/U.S. bond yield differential by reestablishing a position in
December 1996. As of April 30, Australian bonds accounted for 8.5% of the
portfolio, overweighted compared with the benchmark's 1.2%. The fund also
briefly held a position in Canada, which performed well and was sold at a
profit.
. Europe. European bonds were the strongest performers and they contributed
to the fund's favorable results during the period. As of April 30, the region
accounted for 37.3% of the portfolio compared with a 41.4% weighting for the
Index.
Germany. Despite a pickup in growth in mid-1996, the period under review
was marked by a return of softening economic activity. The most dramatic
indication of Germany's continuing economic difficulties was a record increase
in unemployment in January to levels last seen in 1933. The belief that an end
of the Bundesbank's very easy monetary policy was not in sight continued to
support the bond market. The fund held an overweighted position in Germany
relative to the Index, 11.0% versus 8.9%.
Spain, Sweden and Italy. When the period began, increased optimism
regarding EMU particularly benefited the higher-yielding bonds of Spain and
Sweden. Though the prospects for EMU dimmed somewhat during the first quarter,
Spain, a 2.6% position as of April 30, continued to perform well due to
favorable economic fundamentals. Sweden's portfolio weighting was in line with
the Index for most of the period, then increased to 4.3% in April in
anticipation of further rate cuts on the back of favorable inflation reports.
Finally, as of April 30, the portfolio was overweighted in Italy, 6.3% versus
4.9% for the Index, because growth remains muted and we expect it to benefit
from further yield convergence.
U.K. The U.K.'s economy continued to grow at a pace well above that of the
rest of Europe. The prospect of higher rates, as well as concerns surrounding
the general election, raised investor uncertainty and impacted the performance
of the U.K. gilt. However, we increased the portfolio's U.K. position in January
in the belief that the forward interest rate curve reflected an overly
pessimistic view of potential monetary tightening. By April 30, the U.K. was
10.1% of the portfolio, overweighted compared with the benchmark (6.4%).
France. Though the fund was not invested in France during most of the
period, we established a 3.0% position in April, as we believed that the
underperformance of shorter term bonds in that market presented an attractive
investment opportunity relative to Germany.
Ireland, Denmark and the Netherlands. During the period, we sold the
portfolio's small positions in Ireland, Denmark and the Netherlands after they
performed well and fulfilled our return expectations.
. Japan. The fund significantly underweighted Japan relative to the Index
(10.4% versus 14.3%) because economic growth, though muted, continued to point
towards economic recovery. To a significant extent, the Japanese bond market
shrugged off signs of strengthening growth as being "front loading" ahead of the
consumption tax hike on April 1. Instead, the market focused on the need for a
continuation of low rates to assist the troubled financial sector.
. Cash Equivalents. We reduced the fund's cash equivalent position to 10.7%,
down from 15.5% six months ago, in favor of attractive investment opportunities.
. Credit Quality. Throughout the period, the portfolio was 100% invested in
triple-A-rated securities.
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
. Duration. As of the end of the period, the fund's duration was shorter
than that of the Index, 4.7 years compared with 5.1 years, primarily due to its
underweighting in Japan and its cash equivalent position. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's NAV should move in relation to interest rate
fluctuations.)
Distribution Policy
During the six-month period under review, the fund's Class A, B and
Institutional shares paid out distributions of $0.40, $0.37 and $0.44 per share,
respectively. From their inception on March 12 through April 30, the fund's
Service shares paid out $0.13 per share. The fund declares and pays dividends on
a monthly basis. The fund distributes substantially all of its taxable income,
as is required for all investment companies.
Fund Outlook
The rapid pace of U.S. economic growth during the past two quarters leads
us to expect further Fed tightening. Despite early signs of a possible slowdown
in the second quarter, we continue to believe that bond yields will need to rise
from current levels to ensure that inflationary pressures remain in check.
European growth remains modest, but even more importantly, inflation
appears to be set for further declines (excluding the U.K.). Provided EMU
remains on track, short rates across Europe appear likely to stay at current
levels for a sustained period. Consequently, we expect European bonds to provide
reasonable returns, outperforming the weaker U.S. bond market. In the U.K., a
25-basis-point rate hike and greater independence for the Bank of England has
established the new Labor government's anti-inflation credentials. Any policy
that moves towards a closer relationship with continental Europe will further
highlight the fundamentally cheap levels for U.K. gilts relative to other
European bonds.
In Japan, a rate hike in the near future remains unlikely but JGBs are
vulnerable to the threat of a change in government policy or an asset allocation
shift. For example, the weakness of the life insurance companies may force the
authorities to consider the cost of maintaining historically low short-term
rates. Furthermore, the strong performance of the equity market at the end of
the period may prompt an asset allocation shift away from bonds into equities,
putting further upward pressure on Japanese yields.
/s/ Stephen C. Fitzgerald
Stephen C. Fitzgerald
Portfolio Manager, Fixed Income Investments
/s/ Andrew F. Wilson
Andrew F. Wilson
Portfolio Manager, Fixed Income Investments
/s/ Gareth I. Evans
Gareth I. Evans
Portfolio Manager, Currency
Goldman Sachs Global Income Fund
London, May 30, 1997
- -------------------------------------------------------------------------------
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount(a) Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--87.7%
Australian Dollar--8.4%
Commonwealth of Australia
AUD 21,700,000 10.00% 02/15/06 $ 19,262,621
- --------------------------------------------------------------------------------
British Pound Sterling--9.8%
United Kingdom Treasury
BPS 8,000,000 8.50% 12/07/05 $ 13,833,063
5,300,000 7.50 12/07/06 8,528,207
- --------------------------------------------------------------------------------
$ 22,361,270
- --------------------------------------------------------------------------------
Deutschemark--10.8%
Federal Republic of Germany
DEM 28,000,000 7.50% 11/11/04 $ 18,101,859
2,000,000 6.50 10/14/05 1,216,538
9,000,000 6.25 04/26/06 5,383,994
- --------------------------------------------------------------------------------
$ 24,702,391
- --------------------------------------------------------------------------------
French Franc--3.0%
Government of France
FRF 40,000,000 4.75% 03/12/02 $ 6,851,366
- --------------------------------------------------------------------------------
Italian Lira--6.1%
Republic of Italy
ITL 22,000,000,000 9.50% 05/01/01 $ 13,922,058
- --------------------------------------------------------------------------------
Japanese Yen--10.2%
International Bank for Reconstruction & Development
JPY 1,400,000,000 4.50% 06/20/00 $ 12,132,194
700,000,000 6.75 06/18/01 6,665,813
500,000,000 4.50 03/20/03 4,497,873
- --------------------------------------------------------------------------------
$ 23,295,880
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 700,000,000 10.15% 01/31/06 $ 5,841,114
- --------------------------------------------------------------------------------
Swedish Krona--4.2%
Kingdom of Sweden
SEK 50,000,000 5.50% 04/12/02 $ 6,157,023
30,000,000 6.00 02/09/05 3,586,638
- --------------------------------------------------------------------------------
$ 9,743,661
- --------------------------------------------------------------------------------
United States Dollar--32.7%
United States Treasury Notes
USD 15,000,000 5.25% 01/31/01 $ 14,392,950
17,000,000 6.38 03/31/01 16,909,730
8,200,000 6.25 02/15/03 8,059,042
10,000,000 7.88 11/15/04 10,684,400
4,000,000 6.50 08/15/05 3,940,640
14,700,000 7.00 07/15/06 14,947,989
6,200,000 6.50 10/15/06 6,098,258
- --------------------------------------------------------------------------------
$ 75,033,009
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $204,539,209) $ 201,013,370
- --------------------------------------------------------------------------------
Short-Term Obligations--13.6%
State Street Bank & Trust Euro-Time Deposit
USD 31,090,625 5.66% 05/01/97 31,090,625
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $31,090,625) $ 31,090,625
- --------------------------------------------------------------------------------
<CAPTION>
Contracts Description Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Options--0.0%
FRF 60,000,000 Government of France 4.75% Call, $ 71,961
exp 7/97, Strike yield 4.85%
FRF 40,000,000 Government of France 4.75% Put, $ 39,750
exp 7/97, Strike yield 4.85%
- --------------------------------------------------------------------------------
Total Options
(Cost $124,428) $ 111,711
- --------------------------------------------------------------------------------
Total Investments
(Cost $235,754,262(b)) $ 232,215,706
- --------------------------------------------------------------------------------
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value $ 1,972,384
exceeds cost
Gross unrealized loss for investments in which cost (5,579,488)
exceeds value
- --------------------------------------------------------------------------------
Net unrealized loss $ (3,607,104)
- --------------------------------------------------------------------------------
</TABLE>
(a)The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
AUD = Australian Dollar JPY = Japanese Yen
BPS = British Pound Sterling ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
FRF = French Franc USD = United States Dollar
ITL = Italian Lira
/(b)/The aggregate cost for federal income tax purposes is $235,822,810.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Municipal Income Fund seeks to provide a high level of
current income that is exempt from regular federal income tax, consistent with
the preservation of capital. In pursuit of its objective, the fund invests in a
diversified portfolio of municipal securities with a weighted average credit
quality of double-A or better. The fund buys only investment-grade securities
or, if unrated, securities deemed to be of comparable quality. Under normal
interest rate conditions, the fund's duration is expected to be within one year
of its benchmark, the Lehman Brothers 15-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a 15-year bond.
A Stable Municipal Bond Market
The municipal market has remained at relatively rich levels compared with
the taxable market since the end of 1996, as light primary and secondary supply
has been consumed easily by stable demand. The average price of a 15-year
municipal bond (as calculated from data provided by Municipal Market Data, an
independent municipal market information provider) declined approximately 1.07%,
while yields rose from 5.30% on October 31, 1996 to 5.40% on April 30, 1997.
Supply increased throughout most of the period, though it remained light
compared with historical averages. In November, municipal bond issuance was up
30% versus the prior three-month average. As is typical, increased supply
continued in early December due to the approaching year-end. The 1997 new issue
supply has followed historical early-month patterns, with January and February
supply well below annual averages (slightly more than $10 billion each month)
and March and April supply closer to normal levels ($13 to $14 billion).
Demand from individual investors (who control approximately two-thirds of
municipal bond ownership either through mutual funds or direct investment)
remained stable, but not strong, as long-term municipal yields were below the
psychologically significant 6% level. While yields have not yet cracked that
barrier, President Clinton's reelection and the loss of Republican momentum have
put talk of tax reform and talk of significant changes in the tax-exempt status
of municipal bonds on the back burner, comforting some of the investors
concerned about the market. In addition, the emergence of "nontraditional"
buyers during April has helped support the long end of the market.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Yield
Year of Maturity 4/30/97 10/31/96
<S> <C> <C>
1998 3.85% 3.90%
1999 4.40% 4.15%
2000 4.60% 4.30%
2001 4.70% 4.40%
2002 4.80% 4.50%
2003 4.85% 4.60%
2004 4.90% 4.70%
2005 4.95% 4.80%
2006 5.00% 4.90%
2007 5.05% 5.00%
2008 5.10% 5.10%
2009 5.20% 5.20%
2010 5.30% 5.25%
2011 5.35% 5.30%
2012 5.40% 5.35%
2013 5.45% 5.40%
2014 5.50% 5.40%
2015 5.50% 5.45%
2016 5.55% 5.45%
2017 5.55% 5.45%
2018 5.55% 5.50%
2019 5.55% 5.50%
2020 5.60% 5.50%
2021 5.60% 5.50%
2022 5.60% 5.50%
2023 5.60% 5.50%
2024 5.60% 5.50%
2025 5.60% 5.50%
2026 5.60% 5.50%
2027 5.60% 5.50%
</TABLE>
The yield curve steepened and shifted upward at the short end, remained nearly
the same in the mid-range, and shifted marginally upward at the longer end, in
contrast to six months ago.
Performance Review: The Fund's Positive Performance Reflects Active Management
of Term Structure, Sector Weightings and Security Selection
During the period under review, the fund's Class A shares outperformed
their benchmark, the Lehman Brothers 15-Year Municipal Bond Index (the "Index").
The fund's Class B shares also performed well, although slightly below the
Index.
We are pleased to report that the fund's Class A shares outperformed most
of their peers. For the one-year period ended April 30, 1997, Class A shares
ranked in the top 10% of general municipal debt funds (20 out of 231) based on
total return, according to Lipper Analytical Services, Inc. The fund's Class B
shares were not in existence for the entire one-year period and were not
included in the ranking. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.)
- -------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
Class A Class B
------- -------
<S> <C> <C>
Total Return (based on net asset 2.57% 2.18%
value (NAV))
- --------------------------------------------------------------------------------
Return From Monthly Distributions 2.36% 1.97%
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.21% 0.21%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal 2.49% 2.49%
Bond Index
- --------------------------------------------------------------------------------
NAV (as of 4/30/97) $14.40 $14.40
- --------------------------------------------------------------------------------
NAV Change +$0.03 +$0.03
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
As always, we did not make any bets on the direction of interest rates, but
rather kept the fund's duration in line with the Index, occasionally using
municipal and Treasury futures contracts to manage sector allocation and
duration.
. The portfolio's structure is "credit-barbelled," emphasizing high-quality
bonds with maturities of 20 to 30 years on the long end of the yield curve and
lower quality bonds with four- to 10-year maturities on the short end of the
curve. This strategy allows us to extract extra yield from the shorter end of
the market while maintaining higher quality on the more interest-rate-sensitive
long end of the market. However, during the period, we regularly adjusted the
credit and term structure to take advantage of changing market conditions.
. During the period, we employed several strategies using municipal and/or
treasury futures contracts. These trades are designed to exploit relative
pricing discrepancies between different markets, and are not designed to incur
additional interest rate risk. The fund stood at a 100% municipal bond weighting
(no Treasury or municipal contracts) at the end of the reporting period,
indicating attractive opportunities across the length of the municipal yield
curve.
. The fund's performance also benefited from our extensive credit analysis.
Our research helped us identify specific investment opportunities, such as
"story" bonds. These securities are often misunderstood or incorrectly valued,
but can have unique security structures and attractive yield potential.
Portfolio Composition and Investment Strategies:
Emphasis on Revenue Bonds
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Revenue Bonds 44.1%
Insured Revenue Bonds 35.4%
Insured General Obligations 20.5%
</TABLE>
* The percentages shown are of total portfolio investments that have settled
and include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of April 30, the fund held a 79.5% position in a combination of insured and
uninsured revenue bonds, overweighted compared with the Index (53.9%). (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. As of April 30, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 20.5% versus 45.6%. Though the fund's total
GO allocation of 20.5% was down from 29.8% six months ago, the GO category is
now exclusively
- -------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- -------------------------------------------------------------------------------
weighted in insured GOs. Security-specific investment opportunities and the
relative cheapness of bond insurance for issuers enable the fund to purchase
higher yielding insured GOs without sacrificing quality.
. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. VRDNs fell
from 7.6% to 4.4% of the portfolio. The 4.4% VRDN allocation consists of 3.0%
GOs and 1.4% Revenue-Backed VRDNs.
. Credit Quality. During the period, the fund's average credit quality has
remained double-A. The fund's credit quality maintained a "barbell" structure,
with higher quality securities at the long end of the yield curve and lower
quality securities (but still investment grade) at the short end, though there
have been slight increases in the double-A and single-A categories. As of April
30, 59.8% of the fund was invested in triple-A-rated securities, down from 70.5%
six months ago, while double-A- and single-A-rated securities were increased to
14.4% and 9.8% from 9.3% and 1.8%, respectively. We continued to maintain a
position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 16.0% of the portfolio, down
slightly from 18.4%. We used extensive credit research to identify specific
securities that offered higher yields than average triple-B-rated securities,
but still were of sound credit quality. The triple-B-rated position benefited
the fund's performance during the period by enabling us to lock in above-market
yields and providing greater price appreciation potential relative to the
market. Each of these positions is monitored carefully, and we will remain
vigilant for any changes in their credit quality.
Market Outlook
Our long-term outlook for municipal bond supply is essentially neutral, as
rates are at high levels compared with one year ago. As a result, the current
rate environment encourages neither supply (low rates bring refinancing) nor
demand (high rates attract buyers). At this point, the municipal market does not
perceive any real threats from the federal budget accord. Without any
fundamental problems in view for tax-exempts, we are left with technical forces
as the key driver in relative market performance.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the period
under review, the fund's Class A and B shares paid out distributions of $0.34
and $0.32 per share, respectively. The fund intends to distribute substantially
all of its investment company tax-exempt and taxable income, as required by tax
law.
We value your investment in the Goldman Sachs Municipal Income Fund and we
look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Municipal Income Fund
May 30, 1997
- -------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--95.6%
Arizona--7.6%
Maricopa County MFH IDA (A)
$1,795,000 5.85% 01/01/08 $1,824,546
Maricopa County Unified School District No. 41 GO (FSA)
(AAA/Aaa)
2,500,000 6.25 07/01/15 2,618,500
- --------------------------------------------------------------------
$4,443,046
- --------------------------------------------------------------------
California--3.4%
Contra Costa Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $2,014,700
- --------------------------------------------------------------------
Colorado--4.3%
Englewood MFH RB (BBB)/(d)/
$2,500,000 6.65% 12/01/26 $2,495,575
- --------------------------------------------------------------------
Connecticut--3.6%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $2,107,780
- --------------------------------------------------------------------
Florida--6.7%
Escambia County Housing Authority, Single Family
Multi-County (FNMA/GNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $1,460,070
Santa Rosa Bay Bridge Authority RB (BBB-)
2,500,000 6.25 07/01/28 2,472,900
- --------------------------------------------------------------------
$3,932,970
- --------------------------------------------------------------------
Illinois--14.6%
Chicago Midway Airport RB (MBIA)(AAA/Aaa)
$2,500,000 5.50% 01/01/10 $2,498,800
Lake County Unified School District No. 116 GO (FSA)
(AAA/Aaa)
2,000,000 7.60 02/01/14 2,423,180
1,525,000 6.10 02/01/16 1,555,988
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,104,080
- --------------------------------------------------------------------
$8,582,048
- --------------------------------------------------------------------
Indiana--7.0%
Indiana Bond Bank for Hendricks County RB (AA-)/(b)/
$1,420,000 6.00% 02/01/12 $1,472,540
Indiana Transportation Airport Series A RB (AAA/Aaa)
2,500,000 6.00 11/01/11 2,618,025
- --------------------------------------------------------------------
$4,090,565
- --------------------------------------------------------------------
Kentucky--1.8%
Nelson County Industrial Building RB for Mabex
Universal Corp. Project (A3)
$1,000,000 6.50% 04/01/05 $1,060,850
- --------------------------------------------------------------------
Louisiana--4.3%
South Louisiana Port RB for Cargill Corp. (Aa3)
$2,500,000 5.85% 04/01/17 $2,499,950
- --------------------------------------------------------------------
Maine--1.2%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 675,000 6.80% 12/01/07 $ 721,177
- --------------------------------------------------------------------
Missouri--3.6%
St. Louis Municipal Finance Leasehold RB (A/Aa3)
$2,100,000 5.30% 07/15/02 $2,128,854
- --------------------------------------------------------------------
Nevada--3.1%
Washoe County GO (MBIA)(AAA/Aaa)
$2,000,000 5.00% 06/01/17 $1,822,080
- --------------------------------------------------------------------
New York--3.4%
Syracuse IDA RB (AA)
$2,000,000 5.13% 10/15/02 $1,992,580
- --------------------------------------------------------------------
North Dakota--3.5%
Mercer County PCRB for Basin Electric & Power 2nd
Series (AMBAC) (AAA/Aaa)/(d)/
$2,000,000 6.05% 01/01/19 $2,051,720
- --------------------------------------------------------------------
Ohio--1.0%
Cuyahoga County for Rock & Roll Hall of Fame RB (BBB)
$ 600,000 5.45% 12/01/05 $ 594,018
- --------------------------------------------------------------------
Oklahoma--4.0%
Holdenville IDA RB (BBB/Baa)
$1,245,000 5.95% 07/01/02 $1,279,001
Tulsa County Public Facilities RB (A-)
1,000,000 6.60 11/01/08 1,070,250
- --------------------------------------------------------------------
$2,349,251
- --------------------------------------------------------------------
Pennsylvania--3.5%
Bethlehem School District GO Bond (MBIA)(AAA/Aaa)
$2,000,000 6.00% 03/01/16 $2,035,940
- --------------------------------------------------------------------
South Carolina--2.5%
Piedmont Municipal Power Agency RB (MBIA)(AAA/Aaa)
$1,465,000 5.50% 01/01/10 $1,461,718
- --------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations(continued)
Tennessee--2.6%
McMinnville Housing Authority RB (A2)
$1,550,000 6.00% 10/01/09 $ 1,551,240
- --------------------------------------------------------------------
Texas--5.2%
Denison Water & Sewer RB (AMBAC)(AAA/Aaa)
$1,000,000 5.50% 09/01/09 $ 1,014,700
East Texas Criminal Justice Facilities Financing Corp.
RB (AMBAC) (AAA/Aaa)
2,000,000 5.75 11/01/09 2,035,100
- --------------------------------------------------------------------
$ 3,049,800
- --------------------------------------------------------------------
Washington--8.7%
Chelan County Public Utility RB (MBIA)(AAA/Aaa)
$2,500,000 6.35% 07/01/28 $ 2,586,650
Washington State Public Power Supply System Series A RB
(AMBAC)(AAA/Aaa)
2,500,000 5.70 07/01/11 2,491,850
- --------------------------------------------------------------------
$ 5,078,500
- --------------------------------------------------------------------
Total Debt Obligations
(Cost $55,481,930) $ 56,064,362
- --------------------------------------------------------------------
Short-Term Obligations--5.0%
Alabama--0.7%
Phenix City IDA RB (Toronto Dominion LOC)(AA)/(a)/
$ 400,000 5.05% 05/01/97 $ 400,000
- --------------------------------------------------------------------
New York--3.4%
New York GO (Kredietbank LOC)(AA-)/(a)/
$2,000,000 4.45% 05/01/97 $ 2,000,000
- --------------------------------------------------------------------
Texas--0.9%
Sabine River PCRB (Union Bank of Switzerland
LOC)(AA+)/(a)/
$ 500,000 5.55% 05/01/97 $ 500,000
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $2,900,000) $ 2,900,000
- --------------------------------------------------------------------
Total Investments
(Cost $58,381,930/(c)/) $58,964,362
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value $739,962
exceeds cost
Gross unrealized loss for investments in which cost (157,530)
exceeds value
- --------------------------------------------------------------------
Net unrealized gain $582,432
- --------------------------------------------------------------------
</TABLE>
/(a)/ Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/(b)/ When-issued security.
/(c)/ The amount stated also represents aggregate cost for federal income
tax purposes.
/(d)/ Portions of these securities are being segregated for when-issued
securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Abbreviations:
<S> <C>
AMBAC --Insured by American Municipal
Bond Assurance Corp.
FNMA --Insured by Federal National
Mortgage Association
FSA --Financial Security Assurance Co.
GNMA --Insured by Government National
Mortgage Association
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $64,429,737, $235,754,262 and $58,381,930) $64,142,538 $232,215,706 $58,964,362
Cash, at value 94,169 324,863 90,406
Receivables:
Investment securities sold 1,004,854 -- --
Interest 587,522 3,982,620 1,009,894
Forward foreign currency exchange contracts -- 2,735,490 --
Fund shares sold 664,318 373,902 93,800
Variation margin 6,413 -- --
Foreign tax withheld -- 87,755 --
Deferred organization expenses, net 14,677 -- 21,390
Other assets 63,375 3,239 9,208
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 66,577,866 239,723,575 60,189,060
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 10,549,108 8,691,808 1,387,075
Forward foreign currency exchange contracts -- 1,125,990 --
Fund shares repurchased 23,074 332,497 10,350
Income distribution 81,478 7,496 92,940
Investment adviser fees 10,999 82,520 19,312
Administration fees -- 28,132 7,242
Authorized dealer service fees 10,285 38,021 9,984
Distribution fees 1,290 30,045 169
Accrued expenses and other liabilities 19,056 98,644 12,103
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,695,290 10,435,153 1,539,175
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 56,393,312 222,342,678 58,551,259
Accumulated undistributed net investment income 53,331 6,196,133 60,331
Accumulated net realized loss on investment transactions (287,837) (989,524) (544,137)
Accumulated net realized foreign currency gain -- 3,713,328 --
Net unrealized gain (loss) on investments and futures (276,230) 682,535 582,432
Net unrealized loss on translation of assets and liabilities denominated
in foreign currencies -- (2,656,728) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $55,882,576 $229,288,422 $58,649,885
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:/(a)/
Class A $14.10 $14.59 $14.40
Class B $14.11 $14.58 $14.40
Institutional -- $14.58 --
Service -- $14.59 --
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Class A 3,754,506 11,765,253 4,031,092
Class B 208,089 75,162 42,867
Institutional -- 3,870,161 --
Service -- 6,466 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 3,962,595 15,717,042 4,073,959
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $14.76, $15.28 and $15.08 for Government Income, Global Income
and Municipal Income, respectively. At redemption, Class B shares are
subject to a contingent deferred sales charge, assessed on the amount
equal to the lesser of the current net asset value or the original
purchase price of the shares.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Operations
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $ 1,346,191 $ 7,675,570 $1,514,540
- ----------------------------------------------------------------------------------------------------------------------------------
Total income 1,346,191 7,675,570 1,514,540
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 98,534 915,292 109,080
Administration fees 29,560 183,102 40,904
Authorized dealer service fees 49,266 235,877 68,174
Distribution fees 51,745 237,238 69,406
Custodian fees 31,954 76,892 20,721
Transfer agent fees 42,728 53,004 44,706
Professional fees 30,344 40,805 29,494
Registration fees 13,207 28,146 14,522
Amortization of deferred organization expenses 9,321 -- 8,700
Trustee fees 332 2,324 553
Other 6,659 23,235 6,641
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 363,650 1,795,915 412,901
Less--expenses reimbursable and fees waived by Goldman Sachs (261,399) (513,953) (179,441)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 102,251 1,281,962 233,460
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income 1,243,940 6,393,608 1,281,080
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions (102,548) 3,647,163 384,465
Futures transactions 19,662 -- 96,288
Foreign currency related transactions -- 3,669,694 --
Net change in unrealized gain (loss) on:
Investments (363,801) (4,182,327) (408,697)
Futures (63,631) -- --
Translation of assets and liabilities denominated in foreign currencies -- (1,445,970) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, futures and foreign
currency transactions (510,318) 1,688,560 72,056
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 733,622 $ 8,082,168 $1,353,136
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Net of $94,607 in foreign withholding tax for the Global Income Fund.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
-------------------------------------------
<S> <C> <C> <C>
From operations:
Net investment income $ 1,243,940 $ 6,393,608 $1,281,080
Net realized gain (loss) from investment transactions (82,886) 3,647,163 480,753
Net realized gain from foreign currency related transactions -- 3,669,694 --
Net change in unrealized gain (loss) on investments and futures (427,432) (4,182,327) (408,697)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- (1,445,970) --
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 733,622 8,082,168 1,353,136
- -------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,217,324) (5,196,561) (1,272,366)
Class B (26,616) (15,612) (8,714)
Institutional Class -- (1,688,968) --
Service Class -- (559) --
Net realized gain on investment transactions
Class A (157,412) -- --
Class B (1,780) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,403,132) (6,901,700) (1,281,080)
- -------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 32,392,263 19,707,735 10,342,628
Reinvestment of dividends and distributions 1,137,480 4,631,079 756,256
Cost of shares repurchased (7,815,079) (49,406,305) (5,043,455)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 25,714,664 (25,067,491) 6,055,429
- -------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 25,045,154 (23,887,023) 6,127,485
Net assets:
Beginning of period 30,837,422 253,175,445 52,522,400
- -------------------------------------------------------------------------------------------------------------------------------
End of period $ 55,882,576 $ 229,288,422 $58,649,885
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income $ 53,331 $ 6,196,133 $ 60,331
- -------------------------------------------------------------------------------------------------------------------------------
Summary of share transactions:
Shares sold 2,285,678 1,345,225 716,106
Reinvestment of dividends and distributions 80,099 316,808 52,251
Shares repurchased (550,966) (3,368,115) (349,613)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 1,814,811 (1,706,082) 418,744
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
From operations:
Net investment income $ 1,900,328 $ 15,455,369 $ 2,420,375
Net realized gain from investment transactions 47,581 9,268,666 1,239,690
Net realized loss from foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on investments and futures (257,605) 54,149 (513,085)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,690,304 27,534,625 3,146,980
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,898,372) (22,455,377) (2,418,570)
Class B (3,324) (3,052) (1,805)
Institutional Class -- (4,050,770) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,901,696) (26,509,199) (2,420,375)
- ---------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 8,922,548 39,747,372 6,389,765
Reinvestment of dividends and distributions 1,614,587 16,968,046 1,484,778
Cost of shares repurchased (8,990,920) (82,019,748) (9,875,982)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 1,546,215 (25,304,330) (2,001,439)
- ---------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 1,334,823 (24,278,904) (1,274,834)
Net assets:
Beginning of year 29,502,599 277,454,349 53,797,234
- ---------------------------------------------------------------------------------------------------------------------------------
End of year $ 30,837,422 $ 253,175,445 $ 52,522,400
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income $ 53,331 $ 6,704,225 $ 60,331
- ---------------------------------------------------------------------------------------------------------------------------------
Summary of share transactions:
Shares sold 624,626 2,811,314 449,496
Reinvestment of dividends and distributions 112,977 1,198,568 104,201
Shares repurchased (628,175) (5,784,097) (694,794)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 109,428 (1,774,215) (141,097)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end, management
investment company. Included in this report are the financial statements for the
Goldman Sachs Government Income Fund (Government Income), the Goldman Sachs
Global Income Fund (Global Income) and the Goldman Sachs Municipal Income Fund
(Municipal Income), collectively, "the Funds" or individually a "Fund."
Government Income and Municipal Income are diversified portfolios whereas Global
Income is a non-diversified portfolio. As of April 30, 1997, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. Effective May 1, 1997, the Trust was reorganized from a
Massachusetts business trust to a Delaware business trust and various
operational changes were approved, including updating certain investment
restrictions and amending the management contracts.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations for
which accurate market quotations are readily available are valued on the basis
of quotations furnished by a pricing service or provided by dealers in such
securities. Portfolio securities for which accurate market quotations are not
readily available are valued based on yield equivalents, pricing matrix or other
sources, under valuation procedures established by the Trust's Board of
Trustees. Short-term debt obligations maturing in sixty days or less are valued
at amortized cost.
B. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account principal prepayment
experience and estimates of future principal prepayments. Certain mortgage
security paydown gains and losses are taxable as ordinary income. Such paydown
gains and losses increase or decrease taxable ordinary income available for
distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
For Municipal Income, market premiums on other long-term debt securities are
amortized to interest income while for Global Income, market discounts on other
long-term debt securities are accreted to interest income.
C. Foreign Currency Translations
- --------------------------------
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized and unrealized gain (loss) on foreign currency transactions
will represent: (i) foreign exchange
- -------------------------------------------------------------------------------
22
<PAGE>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
gains and losses from the sale and holdings of foreign currencies and
investments; (ii) gains and losses between trade date and settlement date on
investment securities transactions and forward exchange contracts; and (iii)
gains and losses from the difference between amounts of interest recorded and
the amounts actually received.
D. Forward Foreign Currency Exchange Contracts
- ----------------------------------------------
Global Income may enter into forward foreign exchange contracts for the purchase
or sale of a specific foreign currency at a fixed price on a future date as a
hedge or cross-hedge against either specific transactions or portfolio
positions. Global Income may also purchase and sell forward contracts to seek to
increase total return. All commitments are "marked-to-market" daily at the
applicable translation rates and any resulting unrealized gains or losses are
recorded in the Fund's financial statements. The Fund records realized gains or
losses at the time the forward contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
E. Mortgage Dollar Rolls
- ------------------------
Government Income and Global Income may enter into mortgage "dollar rolls" in
which the Fund sells securities in the current month for delivery and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund loses the right to receive principal and interest paid on the
securities sold but benefits to the extent of any price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
F. Option Accounting Principles
- -------------------------------
The Funds may purchase or write call and put options to hedge against changes in
security prices. When call or put options are written, an amount equal to the
premium received is recorded as a liability in the Statement of Assets and
Liabilities which is subsequently marked-to-market to reflect the current value
of the written option. Upon the purchase of a call option or a protective put
option, the premium paid is recorded as an investment, and subsequently
marked-to-market to reflect the current market value of the option. If a closing
transaction has been entered into, a gain or loss may be realized on the written
or purchased option. When options expire, the premium received from a written
option is treated as a realized gain while the cost of a purchased option is
treated as a realized loss. If an option is exercised, the premium paid or
received will be offset against the proceeds on the sale or the purchase cost of
the underlying security to determine realized gains or losses. Gains and losses
are reported in the Statement of Operations.
Certain risks arise upon entering into options contracts. The risk in
writing a call option is that the Fund gives up the opportunity to profit if the
underlying security's market value increases beyond the exercise price and the
option is exercised. The risk in writing a put option is that the Fund may
realize a loss if the market price of an underlying security declines and the
option is exercised. A premium must be paid for purchased options regardless of
whether or not the option is exercised. The Fund also has the risk of not being
able to enter into a closing transaction if a liquid secondary market does not
exist.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices,
- -------------------------------------------------------------------------------
23
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
currency exchange rates (in the case of Global Income) or to seek to increase
total return.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Payments for futures contracts ("variation margin") are paid or received by the
Funds daily, dependent on the daily fluctuations in the value of the contracts,
and are recorded for financial reporting purposes, as unrealized gains or
losses. When contracts are closed, the Funds realize a gain or loss equal to the
difference between the value of the futures contract to sell and the value of
the futures contract to buy. Gains and losses are reported in the Statement of
Operations.
The use of futures contracts involve, to varying degrees, elements of
market and counterparty risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities. Changes in the value of the futures
contract may not directly correlate with changes in the value of the underlying
securities decreasing the effectiveness of the Funds' hedging strategies
potentially resulting in a loss.
H. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute
substantially all investment company tax-exempt and taxable income to its
shareholders each year. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial
reporting purposes is determined in accordance with income tax rules. Therefore,
the source of a portfolio's distributions may be shown in the accompanying
financial statements as either from or in excess of net investment income or net
realized gain on investment transactions, or from paid-in capital, depending on
the type of book/tax differences that may exist.
The Funds, at their most recent tax year-ends (October 31, 1996 for Global
Income and December 31, 1996 for Government Income and Municipal Income) had
approximately the following amounts of capital loss carryforwards for U.S.
federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ---------------- --------------
<S> <C> <C>
Global Income $4,471,734 2004
Municipal Income $ 702,691 2004
</TABLE>
I. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
J. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are generally allocated to the portfolios based on each
portfolio's relative average net assets for the period.
Class A and Class B shareholders of the Funds bear all expenses and fees
relating to their respective distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. Transfer
agent fees are subject to separate arrangements for each class. Shareholders of
Service shares bear all expenses and fees paid to service organizations for
their services with respect to such shares as well as other expenses (subject to
expense limitations) which are directly attributable to such shares.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as each Fund's investment adviser
pursuant to Investment Advisory Agreements. Goldman Sachs Asset Management
International ("GSAM International"), an affiliate of Goldman Sachs, acts as
subadviser under a Subadvisory Agreement for Global Income. Under the Investment
Advisory and Subadvisory Agreements, GSAM and GSAM International, subject to the
general supervision of the Trust's Board of Trustees, manage the Funds'
portfolios. As compensation for the services rendered pursuant to the Investment
Advisory Agreements and the assumption of the expenses related thereto, GSAM is
entitled to a fee, computed daily and
- -------------------------------------------------------------------------------
24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
payable monthly at an annual rate equal to .50%, .25% and .40% of average daily
net assets of Government Income, Global Income and Municipal Income,
respectively. As compensation for the services rendered pursuant to the
Subadvisory Agreement, GSAM International is entitled to a subadvisory fee from
Global Income of .50% of the average daily net assets.
GSAM serves as each Fund's administrator pursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreement, GSAM is entitled to
a fee, computed daily and payable monthly at an annual rate equal to .15% of
each Fund's average daily net assets.
GSAM has voluntarily agreed to limit certain of the Funds' expenses
(excluding advisory, administration, distribution and authorized dealer service
fees, taxes, interest, brokerage, litigation, indemnification and other
extraordinary expenses and with respect to Global Income, transfer agent fees)
to the extent such expenses exceed .00%, .06% and .05% per annum of Government
Income, Global Income and Municipal Income, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to
a Distribution Agreement and as such may receive a portion of the sales load
imposed on the sale of Fund shares. During the period ended April 30, 1997,
Goldman Sachs retained approximately $134,700, $46,600 and $40,300 of sales
loads related to sales of Government Income, Global Income and Municipal Income,
respectively.
The Trust, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% and .75% of each Fund's average
daily net assets attributable to Class A and Class B shares, respectively. The
Trust, on behalf of each Fund, has adopted an Authorized Dealer Service Plan
(the "Service Plan") pursuant to which Goldman Sachs and Authorized Dealers are
compensated for providing personal and account maintenance services. Each Fund
pays a fee under its Service Plan equal, on an annual basis, up to .25% of the
average daily net assets attributable to the Class A and Class B shares. Goldman
Sachs also serves as the Transfer Agent of the Funds for a fee.
For the six months ended April 30, 1997, the advisors, administrators and
distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
<TABLE>
<CAPTION>
Waivers
-------------------------------
Reimburse-
Admin- Class A Reimburse- ment
Fund Advisor istrator 12b-1 ment Outstanding
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government
Income $49 $30 $48 $134 $24
Global
Income 378 -- 38 98 --
Municipal
Income --- -- 68 111 9
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such
waivers and limitations in the future at their discretion.
For the six months ended April 30, 1997, Government Income and Municipal
Income incurred commissions expense of approximately $877 and $500 respectively,
in connection with futures contracts entered into with Goldman Sachs. At April
30, 1997, Goldman Sachs owes approximately $6,400 to Government Income related
to variation margin on futures contracts.
As of May 1, 1997 each Fund's advisory and administration agreements were
combined into a single management agreement encompassing the same services and
fee structure. The investment adviser for Global Income changed from GSAM to
GSAM International.
4. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, Global Income participates in a $50,000,000
committed, unsecured revolving line of credit facility. Both facilities
- -------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
are to be used solely for temporary or emergency purposes. Under the most
restrictive arrangement, each Fund must own securities having a market value in
excess of 300% of the total bank borrowings. The interest rate on borrowings is
based on the federal funds rate. The committed facility also requires a fee to
be paid based on the amount of the commitment which has not been utilized. For
the period ended April 30, 1997, the Funds did not have any borrowings under
these facilities.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for the
six months ended April 30, 1997, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and agency
obligations $89,868,153 $31,460,469 $ --
- --------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 2,626,912 251,582,253 52,647,833
- --------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 66,314,796 46,245,813 --
- --------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and agency
obligations) 2,926,850 234,275,222 50,202,452
- --------------------------------------------------------------------
</TABLE>
At April 30, 1997, Global Income had outstanding forward foreign currency
exchange contracts, both to purchase and sell foreign currencies as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Value on
Foreign Currency Settlement Current Unrealized
Purchase Contracts Date Value (Loss)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Finnish Markka
Expiring 7/10/97 $ 5,769,651 $ 5,743,713 $ (25,938)
Norwegian Krone
Expiring 7/18/97 6,967,220 6,931,393 (35,827)
- ----------------------------------------------------------------------------
Total Foreign Currency
Purchase Contracts $12,736,871 $12,675,106 $ (61,765)
- ----------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
Expiring 6/16/97 $ 19,731,038 $ 19,370,358 $ 360,680
British Pound Sterling
Expiring 5/15/97 22,990,248 22,842,002 148,246
Deutschemark
Expiring 5/23/97 9,189,539 9,098,874 90,665
Expiring 7/10/97 5,769,651 5,746,603 23,048
French Franc
Expiring 7/22/97 19,223,491 18,986,663 236,828
Italian Lira
Expiring 5/23/97 14,576,014 14,452,635 123,379
Japanese Yen
Expiring 7/24/97 46,975,472 46,670,841 304,631
Spanish Peseta
Expiring 6/11/97 5,856,184 5,819,307 36,877
Swedish Krona
Expiring 6/12/97 10,186,641 9,919,416 267,225
Swiss Franc
Expiring 5/23/97 240,202 240,493 (291)
Expiring 5/23/97 11,211,600 11,103,780 107,820
- ----------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $165,950,080 $164,250,972 $1,699,108
- ----------------------------------------------------------------------------
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
At April 30, 1997, Global Income had sufficient cash and/or securities to
cover any commitments under these contracts.
Global Income has recorded a "Receivable for forward foreign currency
exchange contracts" and "Payable for forward foreign currency exchange
contracts" resulting from open and closed but not settled forward foreign
currency exchange contracts of $2,735,490 and $1,125,990 respectively, in the
accompanying Statement of Assets and Liabilities. Included in the "Receivable
and Payable for forward foreign currency exchange contracts" are $1,036,091 and
$1,063,934 respectively, related to forward contracts closed but not settled as
of April 30, 1997.
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the six months ended April 30, 1997 is as follows:
<TABLE>
<CAPTION>
Government Income Global Income Municipal Income
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 2,087,525 $29,588,339 1,091,068 $15,982,653 687,045 $9,922,452
Reinvestment of dividends and
distributions 78,520 1,115,153 240,916 3,522,418 51,831 750,177
Shares repurchased (543,006) (7,702,748) (3,237,001) (47,484,511) (345,221) (4,979,641)
--------------------------------------------------------------------------------------
1,623,039 23,000,744 (1,905,017) (27,979,440) 393,655 5,692,988
--------------------------------------------------------------------------------------
Class B shares
Shares sold 198,153 2,803,924 65,331 958,124 29,061 420,176
Reinvestment of dividends and
distributions 1,579 22,327 715 10,428 420 6,079
Shares repurchased (7,960) (112,331) (8,487) (124,059) (4,392) (63,814)
--------------------------------------------------------------------------------------
191,772 2,713,920 57,559 844,493 25,089 362,441
--------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 182,398 2,673,084 -- --
Reinvestment of dividends and
distributions -- -- 75,139 1,097,674 -- --
Shares repurchased -- -- (122,627) (1,797,735) -- --
--------------------------------------------------------------------------------------
-- -- 134,910 1,973,023 -- --
--------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 6,428 93,874 -- --
Reinvestment of dividends and
distributions -- -- 38 559 -- --
Shares repurchased -- -- -- -- -- --
--------------------------------------------------------------------------------------
-- -- 6,466 94,433 -- --
--------------------------------------------------------------------------------------
Net increase (decrease) 1,814,811 $25,714,664 (1,706,082)$(25,067,491) 418,744 $6,055,429
=====================================================================================-
</TABLE>
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Global Income Municipal Income
- --------------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 607,156 $8,675,868 1,089,521 $15,545,777 431,736 $6,139,212
Reinvestment of dividends and
distributions 112,752 1,611,387 947,846 13,419,614 104,074 1,482,976
Shares repurchased (626,797) (8,971,389) (5,376,065) (76,216,894) (694,685) (9,874,431)
--------------------------------------------------------------------------------------
93,111 1,315,866 (3,338,698) (47,251,503) (158,875) (2,252,243)
--------------------------------------------------------------------------------------
Class B shares
Shares sold 17,470 246,680 18,628 265,053 17,760 250,553
Reinvestment of dividends and
distributions 225 3,200 119 1,708 127 1,802
Shares repurchased (1,378) (19,531) (1,144) (16,373) (109) (1,551)
--------------------------------------------------------------------------------------
16,317 230,349 17,603 250,388 17,778 250,804
--------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 1,703,165 23,936,542 -- --
Reinvestment of dividends and
distributions -- -- 250,603 3,546,724 -- --
Shares repurchased -- -- (406,888) (5,786,481) -- --
--------------------------------------------------------------------------------------
-- -- 1,546,880 21,696,785 -- --
--------------------------------------------------------------------------------------
Net increase (decrease) 109,428 $1,546,215 (1,774,215)$(25,304,330) (141,097) $(2,001,439)
======================================================================================
</TABLE>
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
7. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Funds' custodian.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSAM, transfer uninvested cash balances into joint accounts, the
daily aggregate balance of which is invested in one or more repurchase
agreements. The underlying securities for the repurchase agreements are U.S.
Treasury and agency obligations. At April 30, 1997, Government Income had an
undivided interest in the repurchase agreement in the following joint account
which equaled $11,100,000 in principal amount. At April 30, the repurchase
agreements held in this joint account, along with the corresponding underlying
securities (including the type of security, market value, interest rate and
maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns & Co., dated 4/30/97, repurchase price
$680,103,889 (GNMA: $59,497,211, 7.50%-9.00%,
12/15/21-12/15/26; FNMA: $267,568,394, 5.50%,
02/01/09-04/01/27; FHLMC: $373,405,594, 5.50%-7.50%,
2/01/98-4/01/27)
$680,000,000 5.50% 5/01/97 $680,000,000
Nomura Securities International, Inc. dated 4/30/97,
repurchase price $300,045,833 (FNMA: $182,812,268,
5.94%-8.01%, 7/22/97-5/11/05; FHLMC: $38,631,543,
6.02%-6.75%, 1/28/00-12/04/01, FCSB: $49,581,430,
6.05%-6.25%, 5/10/99-12/03/99, SLMA: $29,222,430,
6.00%, 1/16/01)
300,000,000 5.50 5/01/97 300,000,000
Credit Suisse First Boston, dated 4/30/97, repurchase
price $52,307,845 (U.S. Treasury Bill: $53,475,803,
2/05/98)
52,300,000 5.40 5/01/97 52,300,000
- --------------------------------------------------------------------
Total Joint Repurchase Agreement Account $1,032,300,000
- --------------------------------------------------------------------
</TABLE>
9. Other
As of April 30, 1997, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 16% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
28
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions/(a)/ transactions operations income transactions
--------------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997-Class A shares $14.36 $0.46 $(0.20) -- $0.26 $(0.45) $(0.07)
1997-Class B shares 14.37 0.40 (0.19) -- 0.21 (0.40) (0.07)
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 14.47 0.92 (0.11) -- 0.81 (0.92) --
1996-Class B shares/(c)/ 14.11 0.41 0.26 -- 0.67 (0.41) --
1995-Class A shares 13.47 0.94 1.00 -- 1.94 (0.94) --
1994-Class A shares 14.90 0.85 (1.28) -- (0.43) (0.85) (0.12)
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares 14.32 0.56 0.58 -- 1.14 (0.56) --
GLOBAL INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares $14.53 $0.25 $(0.07) $0.28 $0.46 $(0.40) --
1997-Class B shares 14.53 0.36 (0.02) 0.08 0.42 (0.37) --
1997-Institutional shares 14.52 0.42 (0.02) 0.10 0.50 (0.44) --
1997-Service shares/(i)/ 14.69 0.10 0.02 (0.09) 0.03 (0.13) --
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 14.45 0.71 0.62 0.18 1.51 (1.43) --
1996-Class B shares/(c)/ 14.03 0.34 0.41 0.11 0.86 (0.36) --
1996-Institutional shares 14.45 1.15 0.32 0.10 1.57 (1.50) --
1995-Class A shares 13.43 0.89 0.92 0.15 1.96 (0.94) --
1995-Institutional shares/(f)/ 14.09 0.22 0.34 0.06 0.62 (0.26) --
1994-Class A shares 15.07 0.84 (1.37) (0.12) (0.65) (0.22) (0.16)
1993-Class A shares 14.69 0.85 1.07 (0.42) 1.50 (0.85) (0.27)
1992-Class A shares 14.60 1.14 0.45 (0.36) 1.23 (1.14) --
For the Period August 2, 1991/(d)/through October 31,
- -----------------------------------------------------------------
1991-Class A shares 14.55 0.25 0.23 (0.19) 0.29 (0.24) --
<CAPTION>
Distributions to shareholders
-----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(b)/
-----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997-Class A shares -- -- -- $(0.52) $(0.26) $14.10 1.83%/(g)/
1997-Class B shares -- -- -- (0.47) (0.26) 14.11 1.43/(g)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares -- -- -- (0.92) (0.11) 14.36 5.80
1996-Class B shares/(c)/ -- -- -- (0.41) 0.26 14.37 4.85/(g)/
1995-Class A shares -- -- -- (0.94) 1.00 14.47 14.90
1994-Class A shares (0.02) (0.01) -- (1.00) (1.43) 13.47 (2.98)
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares -- -- -- (0.56) 0.58 14.90 8.03/(g)/
GLOBAL INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares -- -- -- $(0.40) $0.06 $14.59 3.22%/(g)/
1997-Class B shares -- -- -- (0.37) 0.05 14.58 2.94/(g)/
1997-Institutional shares -- -- -- (0.44) 0.06 14.58 3.50/(g)/
1997-Service shares/(i)/ -- -- -- (0.13) (0.10) 14.59 0.21/(g)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares -- -- -- (1.43) 0.08 14.53 11.05
1996-Class B shares/(c)/ -- -- -- (0.36) 0.50 14.53 6.24/(g)/
1996-Institutional shares -- -- -- (1.50) 0.07 14.52 11.55
1995-Class A shares -- -- -- (0.94) 1.02 14.45 15.08
1995-Institutional shares/(f)/ -- -- -- (0.26) 0.36 14.45 4.42/(g)/
1994-Class A shares -- -- (0.61) (0.99) (1.64) 13.43 (4.49)
1993-Class A shares -- -- -- (1.12) 0.38 15.07 10.75
1992-Class A shares -- -- -- (1.14) 0.09 14.69 8.77
For the Period August 2, 1991/(d)/through October 31,
- ---------------------------------------------------------------------
1991-Class A shares -- -- -- (0.24) 0.05 14.60 2.00
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Net Ratio of
Ratio of net assets net
net investment at end Ratio of investment
expenses income Portfolio of expenses income
to average to average turnover period to average to average
net assets net assets rate/(h)/ (in 000s) net assets net assets
--------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997-Class A shares 0.50%/(e)/ 6.34%/(e)/ 182.25%/(g)/ $52,946 1.83%/(e)/ 5.01%/(e)/
1997-Class B shares 1.25/(e)/ 5.37/(e)/ 182.25/(g)/ 2,937 2.33/(e)/ 4.29/(e)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 0.50 6.42 485.09 30,603 1.89 5.03
1996-Class B shares/(c)/ 1.25/(e)/ 5.65/(e)/ 485.09 234 2.39/(e)/ 4.51/(e)/
1995-Class A shares 0.47 6.67 449.53 29,503 2.34 4.80
1994-Class A shares 0.11 6.06 654.90 14,452 2.86 3.31
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares 0.00/(e)/ 4.87/(e)/ 725.41/(g)/ 12,860 4.00/(e)/ 0.87/(e)/
GLOBAL INCOME FUND
- ---------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares 1.17%/(e)/ 5.12%/(e)/ 136.72%/(g)/ $171,668 1.60%/(e)/ 4.69%/(e)/
1997-Class B shares 1.71/(e)/ 4.73/(e)/ 136.72/(g)/ 1,095 2.10/(e)/ 4.34/(e)/
1997-Institutional shares 0.65/(e)/ 5.64/(e)/ 136.72/(g)/ 56,431 1.04/(e)/ 5.25/(e)/
1997-Service shares/(i)/ 1.15/(e)/ 5.85/(e)/ 136.72/(g)/ 94 1.54/(e)/ 5.46/(e)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 1.16 5.81 232.15 198,665 1.64 5.33
1996-Class B shares/(c)/ 1.70/(e)/ 5.16/(e)/ 232.15 256 2.14/(e)/ 4.72/(e)/
1996-Institutional shares 0.65 6.35 232.15 54,254 1.11 5.89
1995-Class A shares 1.29 6.23 265.86 245,835 1.58 5.94
1995-Institutional shares/(f)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.28 5.73 343.74 396,584 1.53 5.48
1993-Class A shares 1.30 5.78 313.88 675,662 1.55 5.53
1992-Class A shares 1.37 7.85 270.75 588,893 1.62 7.60
For the Period August 2, 1991/(d)/through October 31,
- -----------------------------------------------------------------
1991-Class A shares 0.38/(g)/ 1.72/(g)/ 34.22/(g)/ 388,744 0.44/(g)/ 1.66/(g)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(a)/ Distributions to shareholders
------------------------------------------------------------- ------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions/a/ transactions operations income transactions
---------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares $14.37 $0.34 $0.03 -- $0.37 $(0.34) --
1997-Class B shares 14.37 0.28 0.03 -- 0.31 (0.28) --
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares 14.17 0.65 0.20 -- 0.85 (0.65) --
1996-Class B shares/(c)/ 14.03 0.27 0.34 -- 0.61 (0.27) --
1995-Class A shares 13.08 0.67 1.09 -- 1.76 (0.67) --
1994-Class A shares 14.64 0.73 (1.51) -- (0.78) (0.73) (0.05)
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares 14.32 0.22 0.32 -- 0.54 (0.22) --
<CAPTION>
Distributions to shareholders
----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(b)/
------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares -- -- -- $(0.34) $0.03 $14.40 2.57%/(g)/
1997-Class B shares -- -- -- (0.28) 0.03 14.40 2.18/(g)/
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares -- -- -- (0.65) 0.20 14.37 6.13
1996-Class B shares/(c)/ -- -- -- (0.27) 0.34 14.37 4.40/(g)/
1995-Class A shares -- -- -- (0.67) 1.09 14.17 13.79
1994-Class A shares -- -- -- (0.78) (1.56) 13.08 (5.51)
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares -- -- -- (0.22) 0.32 14.64 3.73/(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Net Ratio of
Ratio of net assets net
net investment at end Ratio of investment
expenses income Portfolio of expenses income
to average to average turnover period to average to average
net assets net assets rate/(h)/ (in 000s) net assets net assets
------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares 0.85%/(e)/ 4.70%/(e)/ 90.46%/(g)/ $58,033 1.51%/(e)/ 4.04%/(e)/
1997-Class B shares 1.60/(e)/ 3.92/(e)/ 90.46/(g)/ 617 2.01/(e)/ 3.51/(e)/
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares 0.85 4.58 344.13 52,267 1.55 3.88
1996-Class B shares/(c)/ 1.60/(e)/ 3.55/(e)/ 344.13 255 2.05/(e)/ 3.10/(e)/
1995-Class A shares 0.76 4.93 335.55 53,797 1.49 4.20
1994-Class A shares 0.45 5.28 357.54 47,373 1.55 4.18
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares 0.00/(e)/ 5.15/(e)/ 99.99/(g)/ 30,166 2.42/(e)/ 2.73/(e)/
</TABLE>
- ---------------------------
/(a)/ Includes the balancing effect of calculating per share amounts.
/(b)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions, a complete redemption of the
investment at the net asset value at the end of period and no sales
charge. Total return would be reduced if a sales charge for Class A
shares or a contingent deferred sales charge for Class B shares were
taken into account.
/(c)/ Class B shares commenced operations on May 1, 1996.
/(d)/ Commencement of operations.
/(e)/ Annualized.
/(f)/ Institutional shares commenced operations on June 1, 1995.
/(g)/ Not annualized.
/(h)/ Includes the effect of mortgage dollar roll transactions for the
Government Income Fund.
/(i)/ Service Class shares commenced operations on March 12, 1997.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Semiannual Report is authorized for distribution to prospective investors
only when preceded or accompanied by a Goldman Sachs Trust Prospectus which
contains facts concerning the Fund's objectives and policies, management,
expenses and other information.
- --------------------------------------------------------------------------------
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
John P. McNulty
Mary P. McPherson
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser,
Distributor and Transfer Agent
FISARRET
The Goldman Sachs
Fixed Income Funds
- --------------------------------------------------------------------------------
Semiannual Report
April 30, 1997
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders
- -------------------------------------------------------------------------------
Dear Shareholders:
A return of robust economic growth during the period under review fueled
fears of higher inflation, which pushed Treasury yields higher across the
maturity spectrum. In this semiannual report, we will review the performance of
the Goldman Sachs Fixed Income Funds for the six-month period ended April 30,
1997, as well as provide a brief overview of the U.S. economy and the bond
market. We are pleased to note that during the period, the Goldman Sachs Fixed
Income Funds performed well compared with their peers.
Economic Activity Rebounded, Led by Consumer Spending
After a sluggish third quarter, the pace of economic growth strengthened
during the period. During November and December, consumer spending rebounded,
the trade deficit narrowed and industrial production climbed significantly. As a
result, fourth-quarter real Gross Domestic Product (GDP) growth was 3.8%
(annualized), up from 2.1% in the prior quarter.
Economic activity continued to gain momentum during the first quarter of
1997, with real GDP surging 5.8%, the largest jump in a decade. Signs of
strength were led by a sharp increase in consumer spending, which resulted in
solid sales gains for automobile manufacturers and retailers. In addition,
upbeat reports on factory orders and inventories, construction outlays and labor
market conditions all pointed towards economic acceleration. Despite the growth
spurt, reported inflation remained surprisingly mild during the period.
Furthermore, several economic reports for April came in at the low end of
consensus expectations, which suggested that the economy could moderate during
the second quarter.
The Bond Market Rallied, Then Fell as Inflation Fears Reemerged
The U.S. fixed income market came under pressure during the period under
review. In November, bonds performed well in anticipation of a continued
slowdown in U.S. economic growth. However, the market experienced a reversal in
December when better-than-expected economic data, in particular, robust
employment figures, triggered a sell-off and drove interest rates higher. In
early February, bond prices briefly rebounded, but later faltered as it became
increasingly likely that the U.S. Federal Reserve would raise short term
interest rates in March. By the end of March, the yield on the benchmark 30-year
Treasury bond rose above the psychologically important 7% threshold. Despite the
lackluster performance of the U.S. bond market for the period as a whole, a
sharp rebound at the end of April helped bonds recoup part of their earlier
losses.
The Fed Raised the Federal Funds Rate in March
In March 1997, the Fed raised the federal funds rate by 25 basis points to
5.50%. Though there were few signs of actual inflation, the Fed tightening was
prompted by the economy's pervasive strength. The Fed's action was its first
since a quarter-point cut in January 1996.
During the period under review, the yield curve shifted higher across all
maturities. The yield on six-month Treasury bills rose from 5.26% on October 31,
1996 to approximately 5.52% on April 30, 1997. For the same period, the yield on
the 30-year U.S. Treasury bond rose more dramatically, climbing from 6.64% to
6.95%.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Table of Contents
<S> <C>
Market Overview 1
Goldman Sachs Adjustable Rate Government Fund 3
Goldman Sachs Short Duration Government Fund 9
Goldman Sachs Short Duration Tax-Free Fund 14
Goldman Sachs Core Fixed Income Fund 20
Financial Statements 28
Notes to Financial Statements 32
Financial Highlights 39
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
1
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
10/31/96 4/30/97
<S> <C> <C>
3-Month 5.14% 5.23%
6-Month 5.26% 5.52%
1 5.40% 5.89%
2 5.73% 6.27%
3 5.86% 6.40%
5 6.07% 6.57%
10 6.34% 6.71%
15 6.64% 6.95%
</TABLE>
Source: Bloomberg, L.P.
The yield curve shifted upward across all maturities and steepened sharply at
the short end.
Outlook: Strengthening Economic Growth May
Trigger Further Preemptive Rate Hikes
Despite reports of economic moderation and minimal price acceleration, the
economy's broad-based fundamental strength and resilient equity market make
additional Fed rate increases likely this year. Goldman Sachs' economists
believe that the speed and extent of Fed tightening will depend in large part on
the emergence of conclusive signs that the economy is nearing maximum capacity,
rather than immediate evidence of increased inflationary pressures.
In conclusion, we thank you for your support of the Goldman Sachs Fixed
Income Funds and we look forward to continuing our relationship.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
May 30, 1997
- -------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Adjustable Rate Government Fund seeks a high level
of current income consistent with low volatility of principal. The portfolio
ordinarily invests substantially all of its assets in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, with
primary emphasis on adjustable rate mortgage securities (ARMs). Under normal
interest rate conditions, the fund's duration is expected to be in a range
approximately equal to that of a six-month to one-year U.S. Treasury security.
Special Events
As of March 27, 1997, the fund opened a new share class (Service). In
addition, effective May 1, 1997, the name of the GS Adjustable Rate Government
Fund was changed to the Goldman Sachs Adjustable Rate Government Fund. The
fund's objective and investment focus remain the same.
ARM Market Performed Well, Buoyed by Low Volatility and Strong Investor Demand
The ARM market performed well during the period under review, supported by
low volatility and stable prepayments. In addition, investor interest in the
sector increased as opportunities in short-duration alternatives diminished. In
combination, these factors drove ARM spreads approximately 15 basis points
tighter over the period.
Performance Review
During the six-month period ended April 30, the fund's Institutional,
Administration and Class A shares all outperformed the six-month U.S. Treasury
bill and the one-year U.S. Treasury bill. (The fund's duration as of April 30
was 0.7 years, in between that of the six-month and the one-year U.S. Treasury
bill.) The fund's positive performance was due to the tightening of yield
spreads between ARMs and Treasuries, as well as the incremental yield of ARMs
over similar-duration Treasuries.
The fund also performed well compared with its peers. For the 12 months
ended April 30, 1997, the fund's Institutional shares ranked 11th out of 47
adjustable rate mortgage funds based on total return, as tracked by Lipper
Analytical Services, Inc. (Lipper does not rank the fund's Administration,
Service and Class A shares. Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.)
We are pleased to announce that for the three- and five-year periods ended
April 30, 1997, the fund's Institutional shares were rated "five stars" (out of
1,193 taxable bond funds) and "four stars" (out of 641 taxable bond funds),
respectively, according to Morningstar, Inc., an independent rating agency. In
addition, as of April 30, Morningstar rated the fund's Administration shares
"five stars" for the one-year period (out of 1,709 taxable bond funds) and "four
stars" (out of 1,193 taxable bond funds) for the three-year period./1/
- ------------------------------------------------
/1/Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received "five
stars" for the one-year period and were rated among 1,709 taxable bond funds.
The Morningstar ratings apply only to the fund's Institutional and
Administration shares; the fund's Class A and Service shares have not been
rated. Class A and Service shares are subject to additional fees and expenses
which may have the effect of lowering performance and may affect any future
Morningstar rating. Morningstar rates each fund against its peers in the same
category. In all, there are four Morningstar categories (domestic equity,
international equity, taxable bond and municipal). Morningstar ratings range
from five stars (highest) to one star (lowest). Funds with five-star ratings are
in the top 10% of their category, four-star ratings in the next 22.5%, three
stars the next 35%, two stars the next 22.5% and one star the lowest 10% of
their categories.
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
6-Month 1-Year
Institu- Adminis- Treasury Treasury
tional tration Class A Service* Bill Bill
------ ------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Return 3.28% 3.16% 3.16% 0.74% 2.65% 2.56%
(based on net
asset value)
- --------------------------------------------------------------------------------
Return From 2.97% 2.85% 2.85% 0.20% NA NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From 0.31% 0.31% 0.31% 0.54% NA NA
Price
Appreciation
- --------------------------------------------------------------------------------
NAV (4/30/97) $9.86 $9.86 $9.86 $9.86 NA NA
- --------------------------------------------------------------------------------
NAV Change +$0.03 +$0.03 $0.03 $0.02 NA NA
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period. Performance and net asset value
(NAV) change are from its inception date on 3/27/97.
Portfolio Composition and Investment Strategies
Portfolio composition remained similar compared with six months ago, with
the exception of a slight reduction in collateralized mortgage obligations
(CMOs) and an increase in repurchase agreements/cash equivalents.
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
ARMs 85.8%
SBA Floaters 7.4%
Repos/Cash Equivalents 4.8%
CMOs 2.0%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. ARMs. As of April 30, 1997, the fund's primary investment continued to be
in ARMs, which accounted for 85.8% of the portfolio. We emphasized seasoned,
fully indexed one-year Constant Maturity Treasury (CMT) securities that were
issued prior to 1990, which are attractive because of their lower prepayment
risk. (Seasoned issues are less likely to be impacted by prepayments than newly
issued mortgages because homeowners who did not refinance in earlier periods of
lower rates are generally less likely to refinance in the future.)
. SBA Floaters. The portfolio's position in securities backed by Small
Business Administration (SBA) loans was 7.4%, approximately the same as six
months ago. The sector offered incremental yield over similar-duration
Treasuries and increased fund diversification.
. CMOs. We reduced the portfolio's CMO allocation to 2.0%, down from 3.5%
last October. Within the sector, the fund's largest holding was a 1.1% position
in super floaters. Because super floaters are generally considered to be higher
risk than conventional floaters, we use them selectively in seeking to enhance
fund performance. The remainder of the CMO position (0.9%) was invested in a
variety of other structures.
. Duration. We seek excess return over similar-duration U.S. Treasuries
through our sector weightings and specific security selection rather than
attempting to make interest rate predictions. Therefore, we manage the fund's
duration to approximate that of the Index, partly through the use of futures. As
of April 30, the fund's duration was 0.7 years, unchanged from six months ago.
Credit Quality. The fund invests exclusively in securities issued by the U.S.
government, its agencies or instrumentalities, which are considered to be of the
highest credit quality.
Market Outlook
Despite some suggestion of economic moderation, we continue to believe that
interest rates are likely to move higher during the balance of the year. This
expectation is
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
- --------------------------------------------------------------------------------
predicated on the economy's broad-based fundamental strength, as well as the
Fed's well-publicized commitment to monetary discipline.
As of the end of the period, we have a neutral outlook for the ARM sector.
ARMs are currently trading at fair value, reflecting a stable prepayment
outlook. Seasoned one-year CMT ARMs remain attractive as a core holding due to
their prepayment stability in a falling rate environment and reduced cap risk in
a rising rate environment.
Distribution Policy
During the six-month period ended April 30, 1997, the fund's
Institutional, Administration and Class A shares distributed $0.29, $0.28 and
$0.28 per share, respectively. From their inception on March 27 through April
30, the fund's Service shares paid out $0.05 per share.
The fund distributes substantially all of its investment company taxable
income. The dividend is set at the start of each month, based on the income the
fund is expected to generate. However, because the fund invests primarily in
mortgage securities that are subject to prepayments, we cannot precisely predict
the amount of principal and interest that a portfolio will receive. Therefore,
at times a portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy has not affected the management of
the fund or significantly affected its NAV per share.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
Goldman Sachs Adjustable Rate Government Fund
May 30, 1997
- --------------------------------------------------------------------------------
5
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--94.4%
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a)--25.6%
$ 2,499,665 7.41% 07/01/18 $ 2,603,551
1,337,640 7.57 12/01/18 1,390,932
10,052,878 7.45 05/01/19 10,420,411
19,024,919 7.65 11/01/19/(b)/ 19,952,383
4,828,320 7.75 05/01/20 5,061,431
17,560,720 7.50 06/01/20/(b)/ 18,260,339
36,305,075 7.77 02/01/22/(b)/ 38,097,820
6,736,255 7.27 06/01/22 6,940,632
3,743,219 7.48 08/01/22 3,889,430
6,343,944 7.55 09/01/22 6,616,543
5,798,265 7.29 09/01/22 5,961,312
16,426,906 7.65 11/01/22 17,181,558
9,544,724 7.68 06/01/24 10,002,584
3,422,929 7.32 02/01/28 3,543,279
1,677,210 7.68 07/01/30 1,756,089
- -------------------------------------------------------------------------------
$ 151,678,294
- -------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association (FNMA)(a)--53.9%
$ 1,626,928 7.45% 04/01/03 $ 1,648,729
1,063,451 7.81 11/01/14 1,116,453
671,988 7.60 12/01/15 696,771
5,800,505 6.72 03/01/17 5,911,063
3,475,919 7.56 03/01/17 3,625,279
11,078,486 7.04 04/01/17 11,476,093
734,378 7.51 11/01/17 764,216
4,070,446 6.49 03/01/18 4,114,976
755,256 7.67 05/01/18 781,101
1,196,229 7.88 05/01/18 1,250,167
1,291,177 7.32 06/01/18/(c)/ 1,326,271
7,811,611 7.50 06/01/18 8,172,898
4,895,608 7.48 07/01/18 5,117,428
6,964,915 7.61 07/01/18 7,297,907
5,963,754 7.27 08/01/18 6,190,198
3,775,708 7.75 08/01/18 3,964,493
3,424,816 7.60 10/01/18 3,584,275
6,244,935 7.49 11/01/18 6,486,927
1,919,120 7.39 12/01/18 1,992,296
12,663,766 7.67 12/01/18/(b)/ 13,296,954
3,245,589 7.37 06/01/19 3,366,779
4,222,057 7.31 07/01/19 4,376,415
1,572,328 7.40 07/01/19 1,632,768
1,466,614 7.35 08/01/19 1,513,589
4,212,924 7.63 09/01/19 4,404,485
2,660,817 7.31 01/01/20 2,761,848
2,845,244 7.79 03/01/20 2,987,506
8,236,162 7.39 07/01/20 8,548,889
4,385,557 7.67 02/01/21 4,600,713
4,953,699 7.40 04/01/21 5,140,998
69,652,900 7.65 09/01/21/(b)/ 72,928,676
5,721,530 7.10 01/01/22 5,920,639
20,957,781 7.66 02/01/22/(b)/ 21,972,976
13,609,253 7.80 06/01/22 14,266,989
645,000 7.56 08/01/22 661,628
2,036,342 7.73 08/01/22 2,137,202
29,003,668 7.67 09/01/22/(b)/ 30,449,210
1,821,772 7.57 02/01/23 1,868,464
272,046 6.23 12/01/23 268,986
15,812,397 7.56 04/01/25 16,501,660
16,515,667 7.59 09/01/25 17,302,804
3,390,319 7.41 08/01/27 3,523,830
2,373,397 7.43 10/01/27 2,466,102
1,077,506 7.09 07/01/29 1,111,350
- -------------------------------------------------------------------------------
$ 319,529,001
- -------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association (GNMA)(a)--3.9%
$ 1,430,321 7.00% 03/20/16 $ 1,462,732
1,877,843 7.13 08/20/17 1,929,784
975,525 7.13 08/20/18 1,004,186
6,329,270 7.00 02/20/21 6,492,439
3,551,234 6.50 01/20/22 3,624,282
4,539,525 7.13 04/20/22 4,679,978
3,724,927 7.00 03/20/23 3,816,299
- -------------------------------------------------------------------------------
$ 23,009,700
- -------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(a)--7.3%
$ 1,395,750 7.00% 10/25/14 $ 1,435,878
2,310,178 7.00 02/25/15 2,370,450
2,799,672 7.00 04/25/15 2,871,428
1,880,379 7.00 05/25/15 1,928,573
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Adjustable Rate Small Business Administration
(SBA)(continued)
$ 1,022,753 7.00% 08/25/15 $ 1,055,992
1,661,578 7.00 09/25/15 1,709,348
2,041,631 7.00 10/25/15 2,094,591
1,059,044 6.62 09/25/16 1,070,302
4,076,904 6.62 07/25/17 4,121,505
4,036,805 6.62 08/25/17 4,080,967
2,744,035 6.62 08/25/17 2,774,055
1,756,376 6.62 08/25/17 1,775,590
3,752,990 6.62 09/25/17 3,794,048
1,761,608 6.62 10/25/17 1,781,144
1,774,313 6.62 10/25/17 1,793,990
8,582,508 6.62 02/25/18 8,677,688
- -------------------------------------------------------------------------------
$ 43,335,549
- -------------------------------------------------------------------------------
Collateralized Mortgage Obligations--3.7%
Adjustable Rate CMOs/(a)/ --1.8%
FNMA Remic Trust 1990-145, Class A
$ 10,348,000 6.58% 12/25/20 $ 10,437,510
- -------------------------------------------------------------------------------
$ 10,437,510
- -------------------------------------------------------------------------------
Inverse Floater/(a)/--0.0%
FNMA Remic Trust 1991-91, Class S
$ 138,928 8.55% 07/25/98 $ 149,631
- -------------------------------------------------------------------------------
$ 149,631
- -------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only/(a)/--0.0%
FNMA Remic Trust 1992-157, Class SA
$ 1,384,066/(d)/ 55.35% 03/25/04 $ 86,712
- -------------------------------------------------------------------------------
$ 86,712
- -------------------------------------------------------------------------------
Inverse IOette--0.1%
FHLMC Series 1164, Class O
$ 33,045/(d)/ 19.07% 11/15/06 $ 431,596
- -------------------------------------------------------------------------------
$ 431,596
- -------------------------------------------------------------------------------
IOette--0.1%
FNMA Remic Trust 1990-145, Class B
$ 25,428/(d)/ 10.00% 12/25/20 $ 850,208
- -------------------------------------------------------------------------------
$ 850,208
- -------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--0.6%
FHLMC Series 1645, Class B
$ 2,956,606 5.50% 01/15/08 $ 2,730,573
FNMA Remic Trust 1990-65, Class U
185,451 9.50 11/25/06 185,160
FNMA Remic Trust 1991-37, Class E
838,752 8.50 04/25/05 839,801
- -------------------------------------------------------------------------------
$ 3,755,534
- -------------------------------------------------------------------------------
Super Floater CMOs/(a)/ --1.1%
FNMA Remic Trust 1992-157, Class FA
$ 6,813,861 2.16% 03/25/04 $ 6,632,817
- -------------------------------------------------------------------------------
$ 6,632,817
- -------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 22,344,009
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $557,420,929) $ 559,896,552
- -------------------------------------------------------------------------------
Repurchase Agreement--6.2%
Joint Repurchase Agreement Account
$ 36,700,000 5.49% 05/01/97/(b)/ $ 36,700,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $36,700,000) $ 36,700,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $594,120,929)/(e)/ $ 596,596,552
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long (Short)(f) Month Gain (Loss)
- ---------------------------- ---------------- ----------------- -------------
<S> <C> <C> <C>
1-Month Libor 110 May 1997 $(20,500)
1-Month Libor 115 June 1997 21,563
Euro Dollars 325 June 1997 (210,188)
Euro Dollars 285 September 1997 (104,813)
Euro Dollars 145 December 1997 (50,000)
Euro Dollars 10 March 1998 (14,500)
Euro Dollars (20) December 1998 (14,000)
Euro Dollars 10 June 1999 (18,000)
Euro Dollars 20 September 1999 (33,000)
5 Year U.S. Treasury Notes 64 June 1997 (5,781)
10 Year U.S. Treasury Notes (281) June 1997 70,063
------------
$(379,156)
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 3,264,098
Gross unrealized loss for investments in which cost
exceeds value (925,961)
- -------------------------------------------------------------------------------
Net unrealized gain $ 2,338,137
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(b)/ Portions of these securities are being segregated for futures margin
requirements and when-issued securities.
/(c)/ When-issued security.
/(d)/ Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(e)/ The aggregate cost for federal income tax purposes is $594,258,415.
/(f)/ Each Euro dollar contract represents $1,000,000 in notional par value.
Each 1-month Libor contract represents $3,000,000 in notional par value.
Each 5-Year and 10-year U.S. Treasury Note contract represents $100,000
in notional par value. The total notional amount and market value are
$1,524,500,000 and $281,048,344 respectively. The determination of
notional amounts and market value and presented here are indicative only
of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Short Duration Government Fund's primary objective is to
provide a high level of current income by investing in a portfolio that consists
of securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including mortgage-backed securities as well as repurchase
agreements collateralized by such instruments. Secondarily, the fund may, in
seeking current income, also consider the potential for capital appreciation.
Under normal interest rate conditions, the fund's duration is expected to be
within one-half year of its benchmark, the two-year U.S. Treasury security.
Special Events
Effective May 1, 1997, the name of the GS Short Duration Government Fund
was changed to the Goldman Sachs Short Duration Government Fund. In addition, to
accommodate different clients' needs and preferences, the fund added two new
share classes as of May 1: Class A shares, which have a front-end load but no
contingent deferred sales charge (on amounts less than $1 million), and Class B
shares, which are subject to a contingent deferred sales charge but no up-front
sales charge. The fund's investment focus remains the same.
Performance Review
During the six-month period ended April 30, the fund's Institutional,
Administration and Service shares all outperformed their benchmark, the two-year
U.S. Treasury security. Despite a slight decline in net asset value (NAV) due to
the backup in interest rates, the fund's positions in collateralized mortgage
obligations (CMOs) and adjustable rate mortgage (ARM) securities significantly
contributed to performance.
The fund performed very well relative to its peers. For the 12-month period
ended April 30, 1997, the fund's Institutional and Administration shares ranked
third and fifth, respectively, out of 97 short-intermediate U.S. government
funds based on total return, according to Lipper Analytical Services, Inc. In
addition, the fund's Service shares ranked within the top 20% (14th out of 97)
for the same time period. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.) In addition, the fund's Institutional shares were rated "four stars"
(out of 641 taxable bond funds) by Morningstar, Inc., an independent rating
agency, for the five years ended April 30./1/
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on net 2.67% 2.55% 2.42%
asset value)
- -------------------------------------------------------------------------------
Return From Monthly 3.39% 3.27% 3.14%
Distributions
- -------------------------------------------------------------------------------
Return From Price -0.72% -0.72% -0.72%
Depreciation
- -------------------------------------------------------------------------------
Total Return of Two-Year 2.09% 2.09% 2.09%
U.S. Treasury
- -------------------------------------------------------------------------------
NAV (4/30/97) $9.76 $9.78 $9.75
- -------------------------------------------------------------------------------
NAV Change -$0.07 -$0.07 -$0.07
- -------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received "four
stars" for both the three- and one-year periods and were rated among 1,193 and
1,709 taxable bond funds for the three- and one-year periods, respectively. The
Morningstar ratings apply only to the funds' Institutional shares; the fund's
Administration and Service shares have not been rated. The Administration and
Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates each fund against its peers in the same category. In all,
there are four Morningstar categories (domestic equity, international equity,
taxable bond and municipal). Morningstar ratings range from five stars (highest)
to one star (lowest). Funds with five-star ratings are in the top 10% of their
category, four-star ratings in the next 22.5%, three stars the next 35%, two
stars the next 22.5% and one star the lowest 10% of their categories.
- -------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
Portfolio Composition and Investment Strategies
The most significant changes in the portfolio's sector composition
during the period were a reduction in U.S. Treasuries in favor of CMOs and a new
position in agency debentures.
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
CMOs 61.8%
ARMS 19.0%
Fixed Rate Mortgage Pass-Throughs 9.7%
Agency Debentures 4.8%
U.S. Treasuries 3.6%
Repos/Cash Equivalents 1.1%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. CMOs. CMOs accounted for 61.8% of the portfolio, up from 56.9% six
months ago. The CMO sector performed very well during the period, bolstered by
low volatility and strong investor demand. CMOs were particularly attractive to
investors because they offered substantial yield over similar-duration Treasury
and non-Treasury alternatives. Within the sector, the portfolio's positions
included sequential-pay/support CMOs (24.5%) and planned amortization class
(PAC) CMOs (21.2%). These securities were short duration issues that offered
relatively predictable cash flows.
. ARMs. As of April 30, the fund's allocation to ARMs was 19.0%, unchanged
from last October. We emphasized seasoned, fully indexed one-year Constant
Maturity Treasury (CMT) securities that were issued prior to 1990, which are
attractive because of their lower prepayment risk. (Seasoned issues are less
likely to be impacted by prepayments than newly issued mortgages because
homeowners who did not refinance in earlier periods of lower rates are generally
less likely to refinance in the future.)
. Fixed Rate Mortgage Pass-Throughs. The fixed rate mortgage pass-through
sector accounted for 9.7% of the portfolio, up from 7.2% six months ago. We
continued to favor the sector because of its attractive yield enhancement
potential.
. Agency Debentures. We established a new 4.8% position in agency debentures,
which are bonds issued by agencies of the U.S. government. This sector offered
incremental yield over Treasuries and added to portfolio diversification.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. During the
period, we sold more than three-quarters of the fund's Treasury allocation in
favor of other sectors that offered better relative value. By April 30, the
fund's position in the sector was down to 3.6%, while repurchase agreements/cash
equivalents were 1.1%, unchanged from six months ago.
. Issuer Composition. The portfolio's mortgage-backed security composition by
issuer was 47.6% in Federal National Mortgage Association (FNMA) issues, 37.0%
in Federal Home Loan Mortgage Corporation (FHLMC) issues and 5.8% in Government
National Mortgage Association (GNMA) issues.
. Credit Quality. The fund invests exclusively in securities issued by the
U.S. government and its agencies or instrumentalities.
. Prudent Use of Derivatives. The fund's CMO position included several
securities typically considered to be
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
lower risk derivatives. These included sequential-pay/support CMOs and PAC CMOs
(24.5% and 21.2% of the portfolio, respectively), as noted previously, and a
9.0% allocation in CMO floaters (whose coupons reset upward when interest rates
rise). The fund also held a 2.8% position in super floaters (whose coupons reset
higher than conventional floaters when rates rise), a 2.1% position in inverse
floaters (whose coupons reset in the opposite direction of interest rates), and
small positions in PAC interest-only (IO) and inverse IO securities. We invest
in these higher risk derivatives only when we believe such securities will
enhance returns without incurring undue risk. These positions contributed to the
fund's positive performance along with the other CMO securities. In addition, we
used futures as a tool to help manage the portfolio's duration.
Market Outlook
Our outlook is cautious for CMOs: the sector is now trading at fair spreads
relative to equal-duration Treasuries and does not appear to offer significant
tightening potential. Despite the lack of general value, we continue to look for
issues within the CMO market that offer favorable investment characteristics
that are not fully valued by the market. In the ARM market, seasoned one-year
CMT ARMs remain attractive as a core holding relative to other ARM sectors.
Distribution Policy
During the six-month period under review, the fund's Institutional,
Administration and Service shares paid out distributions of $0.33, $0.32 and
$0.30 per share, respectively. The fund distributes substantially all of its
investment company taxable income, as required by tax law.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Short Duration Government Fund
May 30, 1997
- -------------------------------------------------------------------------------
11
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--90.0%
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a)--13.8%
$ 1,862,421 7.38% 08/01/17/(b)/ $ 1,928,183
1,799,630 7.58 12/01/18/(b)/ 1,871,327
7,952,048 7.77 02/01/22/(b)/ 8,344,720
2,036,342 7.73 08/01/22/(b)/ 2,137,202
- -------------------------------------------------------------------------------
$ 14,281,432
- -------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association (FNMA)(a)--11.6%
$ 306,024 9.00% 12/01/97 $ 307,489
2,894,069 6.50 04/01/03/(b)/ 2,853,696
812,321 6.00 01/01/14 762,436
2,961,367 6.00 03/01/14/(b)/ 2,771,662
2,552,281 7.81 11/01/14/(b)/ 2,679,487
2,569,866 7.58 08/01/22 2,636,117
- -------------------------------------------------------------------------------
$ 12,010,887
- -------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (FNMA)--3.2%
$ 504,862 6.00% 10/01/08 $ 484,981
1,032,431 6.00 06/01/09 991,774
1,949,537 6.00 10/01/09/(b)/ 1,878,671
- -------------------------------------------------------------------------------
$ 3,355,426
- -------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--61.4%
Inverse Floater(a)--3.0%
FHLMC Series 1296, Class J
$ 890,613 12.15% 07/15/99 $ 954,683
FHLMC Series 1325, Class C
944,285 6.83 07/15/97 943,086
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 9.27 05/25/99 1,217,824
- -------------------------------------------------------------------------------
$ 3,115,593
- -------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.2%
FHLMC Series 1684, Class JD
$ 2,524,793/(c)/ 3.72% 08/15/20 $ 170,222
FNMA Remic Trust 1993-110, Class SC
2,010,905/(c)/ 3.52 04/25/19 74,564
- -------------------------------------------------------------------------------
$ 244,786
- -------------------------------------------------------------------------------
Planned Amortization - Accrual Bond--1.2%
FHLMC Series 1560, Class X
$ 1,245,394 6.00% 11/15/16 $ 1,234,885
- -------------------------------------------------------------------------------
Planned Amortization Class (PAC) CMOs--21.9%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,937,180
FHLMC Series 1684, Class F
5,000,000 5.75 08/15/20/(b)/ 4,756,650
FNMA Remic Trust 1992-138, Class C
2,375,000 6.00 12/25/18/(b)/ 2,351,986
FNMA Remic Trust, Series 1997-9, Class B
4,000,000 6.50 10/25/22/(b)/ 3,850,040
FNMA Series 1991-31, Class PJ
3,000,000 6.55 10/25/20 2,920,290
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09/(b)/ 5,982,420
- -------------------------------------------------------------------------------
$ 22,798,566
- -------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--1.3%
FHLMC Series 1552, Class JE
$ 7,308,380/(c)/ 7.00% 02/15/14 $ 313,822
FHLMC Series 1587, Class HA
9,090,222/(c)/ 6.50 10/15/08 1,032,104
- -------------------------------------------------------------------------------
$ 1,345,926
- -------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.4%
FNMA Remic Trust 1992-198, Class K
$ 34,647/(c)/ 12.81% 12/25/15 $ 370,318
- -------------------------------------------------------------------------------
Regular Floater CMOs(a)--8.8%
FHLMC Series 1296, Class I
$ 2,493,715 5.16% 07/15/97/(b)/ $ 2,462,544
FHLMC Series 1325, Class B
2,219,071 6.38 07/15/97/(b)/ 2,219,759
FHLMC Series 1684, Class JC
2,524,793 5.28 08/15/20/(b)/ 2,472,706
FNMA Remic Trust 1993-110, Class FC
2,010,905 5.48 04/25/19/(b)/ 1,987,639
- -------------------------------------------------------------------------------
$ 9,142,648
- -------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--24.6%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,046,860
FHLMC Series 1645, Class B
4,927,677 5.50 01/15/08/(b)/ 4,550,956
FNMA Remic Trust 1988-12, Class A
3,743,398 10.00 02/25/18/(b)/ 3,973,692
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
FNMA Remic Trust 1988-12, Class B
$ 2,955,314 4.74% 02/25/18/(b)/ $ 2,840,796
FNMA Remic Trust 1989-12, Class X
1,588,415 10.00 12/25/14 1,642,024
FNMA Remic Trust 1989-18, Class B
1,051,388 9.50 01/25/04 1,081,279
FNMA Remic Trust 1989-59, Class H
3,840,291 7.75 10/25/18/(b)/ 3,882,265
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,351,960
FNMA Series 1989-34, Class E
2,113,584 9.85 08/25/14/(b)/ 2,176,992
- -------------------------------------------------------------------------------
$ 25,546,824
- -------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 63,799,546
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $93,441,725) $ 93,447,292
- -------------------------------------------------------------------------------
Agency Debentures--4.7%
Sri Lanka Aid/(a)/
$ 5,000,000 6.06% 02/21/16/(b)/ $ 4,928,150
- -------------------------------------------------------------------------------
Total Agency Debentures
(Cost $4,925,000) $ 4,928,150
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--3.6%
United States Treasury Notes
$ 3,800,000 5.63% 11/30/00/(b)/ $ 3,696,678
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $3,672,738) $ 3,696,678
- -------------------------------------------------------------------------------
Repurchase Agreement--0.6%
Joint Repurchase Agreement Account
$ 600,000 5.49% 05/01/97/(b)/ $ 600,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $600,000) $ 600,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $102,639,463)/(d)/ $ 102,672,119
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts
Long Unrealized
Type (Short)/(e)/ Settlement Month Gain (Loss)
- ----------------------------- --------------- ----------------- ---------------
<S> <C> <C> <C>
1-Month Libor 14 June 1997 $2,625
1-Month Libor 15 May 1997 (4,125)
Euro Dollars 56 June 1997 (12,525)
Euro Dollars 53 September 1997 30,525
Euro Dollars 55 December 1997 21,750
Euro Dollars 45 March 1998 (23,125)
Euro Dollars 40 June 1998 (35,500)
Euro Dollars 35 September 1998 (15,250)
5 Year U.S. Treasury Notes (71) June 1997 (1,109)
2 Year U.S. Treasury Notes 71 June 1997 (53,250)
10 Year U.S. Treasury Notes (131) June 1997 101,500
U.S. Long Term Bond (4) June 1997 11,843
---------------
$23,359
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value exceeds
cost $ 554,824
Gross unrealized loss for investments in which cost exceeds
value (522,168)
- -------------------------------------------------------------------------------
Net unrealized gain $ 32,656
- -------------------------------------------------------------------------------
</TABLE>
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(b)/ Portions of these securities are being segregated for futures margin
requirements.
/(c)/ Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/ The amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/ Each Euro Dollar contract represents $1,000,000 in notional par value.
Each 1-Month Libor contract represents $3,000,000 in notional par value.
Each 2-Year U.S. Treasury Note contract represents $200,000 in notional
par value. Each 5-Year and 10-Year U.S. Treasury Note and each U.S. Long
Term Bond contract represents $100,000 in notional par value. The total
notional amount and market value are $405,800,000 and $109,850,675,
respectively. The determination of notional amounts and market value as
presented here are indicative only of volume of activity and not a
measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Short Duration Tax-Free Fund seeks to provide a high
level of current income exempt from regular federal income tax, consistent with
relatively low principal volatility, through investments in investment-grade
municipal securities. Under normal interest rate conditions, the fund's duration
will be within one-half year of its benchmark, the Lehman Brothers Three-Year
Municipal Bond Index. The fund's approximate interest rate sensitivity is
comparable to that of a three-year bond.
Special Event
The fund's name was changed to Goldman Sachs Short Duration Tax-Free Fund
from GS Short Duration Tax-Free Fund on May 1, 1997. In addition, Class A and
Class B shares have been added to the existing Institutional, Administration and
Service shares. The fund's focus and investment objective remain the same.
A Strong, Stable Municipal Bond Market
The municipal market has remained at relatively rich levels compared with
the taxable market since the end of 1996, as light primary and secondary supply
has been consumed easily by stable demand. The average price of a three-year
municipal bond (as calculated from data provided by Municipal Market Data, an
independent municipal market information provider) declined approximately 1.25%,
while yields rose from 4.15% on October 31, 1996 to 4.60% on April 30, 1997.
Supply increased throughout most of the period, though it remained light
compared with historical averages. In November, municipal bond issuance was up
30% versus the prior three-month average. As is typical, increased supply
continued in early December due to the approaching year-end. The 1997 new issue
supply has followed historical early-month patterns, with January and February
supply well below annual averages (slightly more than $10 billion each month)
and March and April supply closer to normal levels ($13 to $14 billion).
Demand from individual investors (who control approximately two-thirds of
municipal bond ownership either through mutual funds or direct investment)
remained stable, but not strong, as long-term municipal yields were below the
psychologically significant 6% level. While yields have not yet cracked that
barrier, President Clinton's reelection and the loss of Republican momentum have
put talk of tax reform and talk of significant changes in the tax-exempt status
of municipal bonds on the back burner, comforting some of the investors
concerned about the market. In addition, the emergence of "nontraditional"
buyers during April has helped support the long end of the market.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
4/30/97 10/31/96
<S> <C> <C>
1998 3.85% 3.90%
1999 4.40% 4.15%
2000 4.60% 4.30%
2001 4.70% 4.40%
2002 4.80% 4.50%
2003 4.85% 4.60%
2004 4.90% 4.70%
2005 4.95% 4.80%
2006 5.00% 4.90%
2007 5.05% 5.00%
2008 5.10% 5.10%
2009 5.20% 5.20%
2010 5.30% 5.25%
2011 5.35% 5.30%
2012 5.40% 5.35%
2013 5.45% 5.40%
2014 5.50% 5.40%
2015 5.50% 5.45%
2016 5.55% 5.45%
2017 5.55% 5.45%
2018 5.55% 5.50%
2019 5.55% 5.50%
2020 5.60% 5.50%
2021 5.60% 5.50%
2022 5.60% 5.50%
2023 5.60% 5.50%
2024 5.60% 5.50%
2025 5.60% 5.50%
2026 5.60% 5.50%
2027 5.60% 5.50%
</TABLE>
The yield curve steepened and shifted upward at the short end, remained nearly
the same in the mid-range, and shifted marginally upward at the longer end, in
contrast to six months ago.
Performance Review
The performance of the fund's Institutional shares exceeded the benchmark,
the Lehman Brothers Three-Year Municipal Bond Index (the "Index"), for the
six-month period ended April 30, 1997. The Administration and Service shares
also performed well, but lagged the benchmark.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on 1.91% 1.79% 1.56%
net asset value)
- -------------------------------------------------------------------------------
Return From 2.11% 1.99% 1.86%
Monthly Distributions
- -------------------------------------------------------------------------------
Return From Price -0.20% -0.20% - 0.30%
Depreciation
- -------------------------------------------------------------------------------
Lehman Brothers 3-Year 1.83% 1.83% 1.83%
Municipal Bond Index
- -------------------------------------------------------------------------------
NAV (as of 4/30/97) $9.94 $9.94 $9.94
- -------------------------------------------------------------------------------
NAV Change -$0.02 -$0.02 -$0.03
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
14
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
The fund's positive performance during the period was primarily due to our
emphasis on higher yielding revenue bonds, as well as successful selection of
specific securities and relative value trades. As always, we did not make any
bets on the direction of interest rates, but rather kept the fund's duration in
line with the Index, occasionally using Treasury futures to actively manage
sector allocation.
In our search for incremental yield, we focused on three types of bonds.
The first category was relatively generic, highly liquid securities; the second
included slightly less liquid issues such as insured hospital bonds and
letter-of-credit-backed debt; and the last area was "story" bonds, such as
uninsured hospital and electric utility issues and multifamily housing revenue
bonds, whose value is often unrecognized by the market because they are unique
or generally not well understood. We identified attractive investment
opportunities for the third category through our extensive credit analysis. One
example of this is our purchase of an A-rated hospital bond that our credit
analysis indicated would likely be defeased with the purchase of Treasury
securities placed in an escrow account, thereby significantly enhancing the
credit quality of the security. Our analysis proved correct and the fund
benefited from the appreciation associated with the higher quality.
We are pleased to report that the fund's Institutional shares ranked third
out of 28 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the one-year period ended April 30, 1997 based on
total return. (Lipper did not rank the fund's Administration and Service shares.
Please note that Lipper rankings do not take sales charges into account and that
past performance is not a guarantee of future results.) In addition, as of April
30, 1997, the fund's Institutional and Administration shares were awarded a
"four-star" rating for the three-year period (out of 1,257 municipal bond funds)
by Morningstar, Inc. For the one-year period, the Institutional shares received
a "five-star" rating (out of 1,746 municipal bond funds)./1/
Portfolio Composition and Investment Strategies:
Emphasis on Revenue Bonds
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Revenue Bonds 56.1%
Insured Revenue Bonds 28.1%
Pre-Refunded Bonds 7.8%
Insured General Obligations 6.8%
Variable Rate Demand Notes 1.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ------------------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. For the one-year period, the Administration
shares received four stars and were rated among 1,746 municipal bond funds. Ten
percent of the funds receive the five-star rating. The Morningstar rating
applies only to the fund's Institutional and Administration shares; the fund's
Service shares have not been rated. Service shares are subject to additional
fees that may have the effect of lowering performance and may affect any future
Morningstar rating. Morningstar rates funds against their peers in the same
category. In all, there are four Morningstar categories (domestic equity,
international equity, taxable bond and municipal bond). Morningstar ratings
range from five stars (highest) to one star (lowest). Funds with five-star
ratings are in the top 10% of their category, four-star ratings in the next
22.5%, three stars the next 35%, two stars the next 22.5% and one star the
lowest 10% of their categories.
- -------------------------------------------------------------------------------
15
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- -------------------------------------------------------------------------------
. Revenue Bonds. As of April 30, the portfolio's combined position in insured
and uninsured revenue bonds was significantly overweighted compared with the
Index, 84.2% versus 31.7%. We increased the portfolio's total revenue bond
allocation from 79.7% six months ago because our emphasis on credit analysis
enabled us to identify attractive revenue bonds that offered higher incremental
yield than was available from general obligation bonds. (Revenue bonds pay
interest and principal out of a specific revenue stream, such as sales taxes,
hospital charges, tolls, electric rates and airport fees.)
. Pre-refunded Bonds. Over the course of the year, we re-established the
fund's holdings in pre-refunded bonds to 7.8% from zero. The Index weighting of
pre-refunded bonds was 18.0%.
. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 6.8% of the
portfolio, down from 15.6% six months ago. The allocation as of April 30 was
significantly underweighted versus the Index's 50.2%. GOs are backed by the
general taxing power of a municipality and are typically higher credit quality
but lower yielding than revenue bonds.
. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash equivalents
that we use to manage the portfolio's excess liquidity. VRDNs represented 1.3%
of the fund, down from 4.7% six months ago.
. Duration. As of April 30, the fund's duration was effectively in line with
that of the Index at 2.7 years.
. Credit Quality. During the year, the fund's credit quality allocations
shifted. We continued the trend from the last reporting period by reducing the
portfolio's allocation in triple-A-rated GOs, shifting in favor of
double-A-rated revenue bonds. This allowed us to maintain the fund's targeted
double-A-rated average credit quality and liquidity while achieving higher
overall yields. We structured the portfolio's credit quality allocation like a
"barbell," emphasizing higher credit quality securities in the four- to
five-year maturity range and lower quality securities in the one- to three-year
maturity range. As of April 30, 42.7% of the portfolio was invested in
triple-A-rated bonds, while double-A- and single-A-rated securities accounted
for 30.2% and 27.1%, respectively.
Market Outlook
Our long-term outlook for municipal bond supply is essentially neutral, as
rates are at high levels compared with one year ago. As a result, the current
rate environment encourages neither supply (low rates bring refinancing) nor
demand (high rates attract buyers). At this point, the municipal market does not
perceive any real threats from the federal budget accord. Without any
fundamental problems in view for tax-exempts, we are left with technical forces
as the key driver in relative market performance.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
six-month period ended April 30, 1997, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.21,
$0.20 and $0.19 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- -------------------------------------------------------------------------------
16
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- -------------------------------------------------------------------------------
We value your continued confidence in the Goldman Sachs Short Duration
Tax-Free Fund and look forward to reporting on the fund's progress in the coming
year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Short Duration Tax-Free Fund
May 30, 1997
- -------------------------------------------------------------------------------
17
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--99.7%
Alabama--2.6%
Selma, AL IDB for International Paper Co. PCRB (A-/A3)
$ 1,000,000 4.15% 07/15/08 $ 1,000,000
- -------------------------------------------------------------------------------
Arizona--2.8%
Mesa, Arizona IDA Health Care Facilities (AAA/Aaa)
$ 1,000,000 7.50% 01/01/04 $ 1,055,940
- -------------------------------------------------------------------------------
Arkansas--3.5%
West Memphis, AK Public Utility System RB (MBIA) (AAA/Aaa)
$ 1,310,000 5.25% 12/01/00 $ 1,333,816
- -------------------------------------------------------------------------------
Connecticut--6.6%
Connecticut State Housing Mortgage Revenue Town Colony Project (NR/Aa3)
$ 1,000,000 5.00% 04/01/08 $ 1,000,260
Connecticut State Residential Recovery Authority, Series A RB (AA-/NR)
1,500,000 5.60 11/15/99 1,542,945
- -------------------------------------------------------------------------------
$ 2,543,205
- -------------------------------------------------------------------------------
District of Columbia--2.7%
DC Ref Series A (Big 1) Tcc (AAA/Aaa)
$ 1,000,000 7.70% 06/01/98 $ 1,032,600
- -------------------------------------------------------------------------------
Georgia--5.1%
Burke County, GA Development Authority Oglethorpe Power Corp. (A/A3)/(a)/
$ 2,000,000 4.35% 01/01/01 $ 1,961,500
- -------------------------------------------------------------------------------
Illinois--9.4%
Chicago, IL GO (MBIA) (AAA/Aaa)
$ 1,500,000 5.40% 10/31/00 $ 1,533,405
Illinois Health Facilities Authority Highland Park Hospital, Series A
(AAA/Aaa)
1,000,000 5.20 10/01/01 1,003,770
Illinois Housing Development Authority, Series 1991 A (A+/A1)
1,000,000 7.90 07/01/99 1,057,620
- -------------------------------------------------------------------------------
$ 3,594,795
- -------------------------------------------------------------------------------
Louisiana--2.7%
Louisiana Offshore Deepwater Port Authority Term B RB (A/Baa1)
$ 1,000,000 5.85% 09/01/00 $ 1,030,880
- -------------------------------------------------------------------------------
Maryland--4.2%
Maryland State Health and Higher Educational Facilities Authority
GO(A-/NR)/(c)/
$ 1,600,000 5.50% 01/01/02 $ 1,600,000
- -------------------------------------------------------------------------------
Michigan--3.6%
Wayne Charter County, MI Airport (AAA/Aaa)
$ 1,250,000 6.75% 12/01/19 $ 1,371,775
- -------------------------------------------------------------------------------
Missouri--7.1%
Kansas City Municipal Assistance Corp. (AAA/Aaa)
$ 1,000,000 5.88% 10/15/00 $ 1,036,930
St. Louis, MO Municipal Finance Corp., Series A (A/Aa3)
1,655,000 5.30 07/15/02 1,677,740
- -------------------------------------------------------------------------------
$ 2,714,670
- -------------------------------------------------------------------------------
New York--11.8%
Clifton Park, NY Water Authority System, Series A (AAA/Aaa)
$ 1,500,000 6.38% 10/01/11 $ 1,630,695
New York City Municipal Assistance Corp., Series 62 (AA-/Aa2)
1,500,000 5.50 07/01/08 1,503,885
Syracuse, NY IDA RB (AA/NR)
1,365,000 4.60 10/15/98 1,371,020
- -------------------------------------------------------------------------------
$ 4,505,600
- -------------------------------------------------------------------------------
Oklahoma--5.3%
Southern Oklahoma Memorial Hospital RB (A/A)/(a)/
$ 2,000,000 5.60% 02/01/00 $ 2,048,159
- -------------------------------------------------------------------------------
Pennsylvania--8.9%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB (FGIC)
(AAA/Aaa)
$ 1,500,000 5.75% 06/15/00 $ 1,545,870
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,859,850
- -------------------------------------------------------------------------------
$ 3,405,720
- -------------------------------------------------------------------------------
Tennessee--3.9%
Clarksville, TN Public Building Authority (AA/NR)
$ 1,500,000 4.75% 12/01/00 $ 1,499,940
- -------------------------------------------------------------------------------
Texas--3.9%
Memorial Villages, TX Water Authority (NR/Aa)
$ 1,435,000 7.00% 09/01/00 $ 1,497,968
- -------------------------------------------------------------------------------
Virginia--4.7%
Petersburg, VA Hospital Authority RB GO (NR/A)
$ 1,760,000 5.50% 07/01/99 $ 1,795,658
- -------------------------------------------------------------------------------
Washington--4.2%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$ 1,500,000 7.20% 07/01/02 $ 1,608,840
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Wisconsin--2.6%
Oshkosh, WI Water Rev., Series C (NR/MIG1)/(b)/
$ 1,000,000 4.88% 01/01/00 $ 998,090
- --------------------------------------------------------------------------------
Wyoming--4.1%
Uinta County, WY School District Series A (FSA) (AAA/Aaa)
$ 1,500,000 6.88% 06/01/00 $ 1,593,570
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $38,115,334) $ 38,192,726
- --------------------------------------------------------------------------------
Short-Term Obligations--3.9%
New York City Municipal Water Finance Authority, Series A (A-1+/VMIG1)
$ 1,300,000 4.25% 05/01/97 $ 1,300,000
- --------------------------------------------------------------------------------
Wisconsin State Health Facilities Authority (A-1+/VMIG1)
200,000 4.50 05/01/97 200,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,500,000) $ 1,500,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $39,615,334)/(d)/ $ 39,692,726
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 140,632
Gross unrealized loss for investments in which cost
exceeds value (63,240)
- --------------------------------------------------------------------------------
Net unrealized gain $ 77,392
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Investment Abbreviations:
<S> <C>
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Board
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
/(a)/ Portions of these securities are being segregated for when-issued
securities.
/(b)/ When-issued securities.
/(c)/ Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next reset interest dates.
/(d)/ The amount stated also represents aggregate cost for federal income tax
purposes.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Core Fixed Income Fund seeks to achieve a total
return consisting of capital appreciation and income that exceeds the total
return of its benchmark, the Lehman Brothers Aggregate Bond Index (the "Index"),
through a diversified portfolio of fixed income securities. The fund may invest
in U.S. Treasury, agency, corporate, mortgage-backed and asset-backed
securities, as well as in a limited amount of non-dollar-denominated fixed
income securities. While the fund's performance will be measured against the
Index, the portfolio is not required to hold the same securities or match the
sector weightings of the Index. Every security in the portfolio must be rated at
least investment grade by an independent rating agency or be considered to be of
equivalent quality by Goldman Sachs Asset Management at the time it is
purchased. The fund's approximate interest rate sensitivity is expected to be
comparable to that of a five-year bond.
Special Events
Effective May 1, 1997, the name of the GS Core Fixed Income Fund was
changed to the Goldman Sachs Core Fixed Income Fund. In addition, to accommodate
different clients' needs and preferences, the fund added two new share classes
as of May 1: Class A shares, which have a front-end load but no contingent
deferred sales charge (on amounts less than $1 million), and Class B shares,
which are subject to a contingent deferred sales charge but no up-front sales
charge. The fund's objective and investment focus remain the same.
Performance Review
We are pleased to report that the fund's Institutional and Administration
shares outperformed the Index during the period under review. The fund's
positive performance was primarily due to its overweighting in non-Treasury
sectors compared with the Index. Specifically, mortgage-backed securities and
corporate bonds were the most significant contributors to performance, and
asset-backed securities and emerging market debt also performed very well. The
fund's Service shares achieved positive results, but slightly lagged the
benchmark.
The fund performed well compared with its peers. For the three-year period
ended April 30, 1997, the fund's Institutional shares were rated "four stars"
(out of 1,193 taxable bond funds) by Morningstar, Inc., an independent rating
agency./1/
During the period, the net asset value (NAV) of the fund's Institutional,
Administration and Service shares each fell $0.14 due to rising interest rates.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on 1.87% 1.75% 1.63%
net asset value)
- --------------------------------------------------------------------------------
Return From Monthly 3.30% 3.18% 3.06%
Distributions
- --------------------------------------------------------------------------------
Return From Price -1.43% -1.43% -1.43%
Depreciation
- --------------------------------------------------------------------------------
Total Return of Lehman 1.70% 1.70% 1.70%
Brothers Aggregate
Bond Index
- --------------------------------------------------------------------------------
NAV (as of 4/30/97) $9.71 $9.70 $9.72
- --------------------------------------------------------------------------------
NAV Change -$0.14 -$0.14 -$0.14
- --------------------------------------------------------------------------------
</TABLE>
- -----------------------------------------
/1/Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received "four
stars" for the one-year period and were rated among 1,709 taxable bond funds.
The Morningstar ratings apply only to the fund's Institutional shares; the
fund's Administration and Service shares have not been rated. The Administration
and Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates each fund against its peers in the same category. In all,
there are four Morningstar categories (domestic equity, international equity,
taxable bond and municipal). Morningstar ratings range from five stars (highest)
to one star (lowest). Funds with five-star ratings are in the top 10% of their
category, four-star ratings in the next 22.5%, three stars the next 35%, two
stars the next 22.5% and one star the lowest 10% of their categories.
- -------------------------------------------------------------------------------
20
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
Portfolio Composition and Investment Strategies
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Corporate Bonds 26.7%
Fixed Rate Mortgage Pass-Throughs 20.5%
U.S. Treasuries 17.1%
ABSs 13.2%
CMOs 13.2%
Emerging Market Debt 4.7%
Repos/Cash Equivalents 2.3%
Other Foreign Debt 2.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Corporate Bonds. Corporate bonds were the largest allocation at 26.7% of the
portfolio, overweighted compared with the Index (18.0%). The sector performed
well during the period as the healthy economy caused spreads to tighten across
subsectors. The fund's best performers were industrials, which included selected
cable issues that benefited from positive earnings trends (e.g., Time Warner,
Inc. and Tele-Communications, Inc.), as well as specific finance issues that
fared well due to continuing industry consolidation. We underweighted utilities
due to the regulatory and competitive pressures affecting that industry.
Fixed Rate Mortgage Pass-Throughs. The fund was underweighted in fixed rate
mortgage pass-throughs relative to the Index, 20.5% versus 29.9%. During the
period, the sector was supported by a combination of favorable trends, including
low volatility, range-bound interest rates, tight yield spreads on alternative
sectors, and light issuance of corporate and asset-backed securities (ABS).
After the sector rallied and became more fully priced, we trimmed the fund's
allocation in favor of securities that offered greater relative value.
During the period, we occasionally used mortgage dollar rolls to benefit
from short-term supply and demand imbalances in the mortgage settlement process.
(Mortgage dollar rolls refer to transactions that involve selling mortgage
securities owned by the fund and simultaneously contracting to buy back similar
mortgage securities with the same coupon on a specified future date -- usually
one month forward.) At all times, we "cover" the mortgage dollar rolls by
keeping cash or liquid assets equal to the dollar amount of the forward
commitment in a segregated account with the fund's custodian.
. U.S. Treasuries. We significantly underweighted U.S. Treasuries relative to
the Index, 17.1% compared with 44.5%, to emphasize sectors that offered greater
return potential.
. Asset-Backed Securities. As of April 30, the fund's ABS position was 13.2%,
approximately the same weighting as six months ago. Though negative credit
events among selected credit card and sub-prime auto lenders raised investor
uncertainty during the period, investor interest remained broad-based, ratings
held firm and, relative to similarly rated spread products, ABSs continued to
offer attractive yield enhancement opportunities.
. CMOs. The fund's collateralized mortgage obligation (CMO) holdings performed
very well and significantly contributed to the fund's performance. During the
period, CMOs enjoyed strong demand from yield-seeking investors who found the
sector particularly compelling relative to other high-quality alternatives. As
of the end of the period, CMOs were a 13.2% allocation, up from 9.8% last
October. This increase was primarily in sequential-pay/support CMOs, which
accounted for 8.8% of the portfolio, while the balance was invested in planned
- -------------------------------------------------------------------------------
21
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
amortization class (PAC) CMOs (3.3%) and floaters (1.1%). Sequential-pay/support
CMOs, PAC CMOs and floaters are typically considered to be lower risk derivative
securities.
. Emerging Market Debt. As of April 30, 4.7% of the portfolio was invested in
emerging market debt. Our strategy in the sector is to control exposure by
stressing high-credit-quality, short-duration bonds. We continued to emphasize
Latin American issuers because structural and economic reforms in this region
are helping improve credit fundamentals. During the period, the fund held bonds
from Chile, Colombia, Mexico and the Andean region development bank, as well as
Indonesia. The sector also benefited from substantial global liquidity, which
has helped support the credit-sensitive areas of the lower grade bond markets.
. Other Foreign Debt. During the period, we initiated a 2.3% position in a
10-year, fully hedged Australian government bond that offered attractive
incremental yield over U.S. Treasuries, as well as potential price appreciation
should Australian interest rates decline as we expect.
. Agency Debentures. We sold the fund's allocation to agency debentures (1.5%
as of October 31, 1996) because their risk/reward profile indicated that we were
not being adequately compensated for holding the position.
. Duration. As always, we seek to add incremental return over the Index
through sector weighting and individual security selection rather than
attempting to predict the direction of interest rates. Therefore, we manage the
fund's duration to approximate that of the Index, partly through the use of
financial futures. As of April 30, the fund's duration was in line with the
Index at 4.6 years.
. Credit Quality. As of April 30, 39.7% of the portfolio was invested in
government and agency securities, 21.3% was invested in triple-A-rated
securities, 3.4% was invested in double-A-rated securities and 12.6% was
invested in single-A-rated securities. Triple-B-rated securities (20.7%) and
repurchase agreements/cash equivalents (2.3%) make up the remainder of the
portfolio.
Market Outlook
Though indications of economic moderation emerged in April, the economy's
fundamental strength remains intact, which leads us to believe that interest
rates will move higher during the balance of the year.
In terms of specific fixed income sectors, we have a neutral view of the
corporate market. While we anticipate no near-term deterioration in the
fundamental state of the economy, we are concerned that a series of Fed
tightenings may cause spreads to widen slightly in the near term. In the
mortgage-backed security market, spreads relative to Treasuries have remained
impressively resilient. Nonetheless, mortgage technicals may come under pressure
due to a potential increase in supply as the housing market accelerates during
the summer. We expect the portfolio's allocation to the ABS market to remain
stable in the near future, as it has become more challenging to identify
unrecognized value within the sector, particularly among the higher quality
issues that we tend to emphasize. Finally, we are optimistic regarding the
performance prospects of the emerging market debt sector, as credit trends
continue to improve and global liquidity remains plentiful. In the near future,
Latin America is likely to remain the fund's geographic focus; however, we will
actively seek attractive investment opportunities in other regions to increase
fund diversification.
- -------------------------------------------------------------------------------
22
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
Distribution Policy
During the six-month period under review, the fund's Institutional,
Administration and Service shares distributed $0.32, $0.31 and $0.30 per share,
respectively. Dividends are declared daily and paid on a monthly basis. As
required by tax law, the fund distributes substantially all of its investment
company taxable income.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Mark A. Van Wyk
Mark A. Van Wyk
Portfolio Managers
Goldman Sachs Core Fixed Income Fund
May 30, 1997
- -------------------------------------------------------------------------------
23
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds--25.4%
Finance Bonds--9.8%
BankAmerica Corp.
$ 200,000 6.03% 05/17/99 /(a)/ $ 205,042
300,000 7.75 07/15/02 305,466
Capital One Bank
600,000 6.66 02/03/00 593,580
400,000 6.88 04/24/00 399,284
800,000 6.58 04/17/01 780,976
500,000 6.60 08/20/01 487,010
Conseco Finance
170,000 8.70 11/15/26 169,252
Conseco Inc.
340,000 10.50 12/15/04 394,101
Continental Bank N.A.
525,000 11.25 07/01/01 551,565
Countrywide Funding Corp.
125,000 6.08 07/14/99 123,531
250,000 8.43 11/16/99 259,772
250,000 7.75 08/10/01 257,025
375,000 8.00 12/15/26 354,994
First U.S.A. Bank
160,000 6.13 10/30/97 159,872
Meditrust, Inc.
390,000 7.82 09/10/26 400,082
Mic Finance Trust
360,000 8.38 02/01/27 353,495
Phoenix RE Capital Trust
165,000 8.85 02/01/27 164,594
Security Pacific Corp.
995,000 11.50 11/15/00 /(a)/ 1,133,693
Signet Banking Corp.
240,000 9.63 06/01/99 252,629
Taubman Realty Group
480,000 8.00 07/30/01 489,811
Washington Real Estate Investment Trust
120,000 7.13 08/13/03 118,458
- -------------------------------------------------------------------------------
$ 7,954,232
- -------------------------------------------------------------------------------
Industrial Bonds--14.4%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 515,949
Continental Airlines, Inc.
339,989 7.75% 07/02/14 348,451
553,994 8.56 07/02/14 590,857
Edison Mission Energy Funding Corp.
170,564 6.77 09/15/03 168,785
Ford Capital Corp.
300,000 9.50 07/01/01 326,253
Ford Motor Corp.
300,000 7.00 09/25/01 300,474
General Motors Acceptance Corp.
275,000 7.63 03/09/98 277,989
200,000 7.13 05/10/00 201,840
375,000 9.63 12/15/01 412,492
H + T Master Trust
550,000 8.18 08/15/02 550,000
Harrahs Operations, Inc.
300,000 8.75 03/15/00 301,500
Hertz Corp.
400,000 7.00 07/15/03 391,260
Mitchell Energy and Dev. Corp.
310,000 9.25 01/15/02 328,758
Northwest Airlines Corp.
163,540 8.26 03/10/06 170,804
567,358 8.97 01/02/15 588,117
NWCG Holding Crp
680,000 7.05 06/15/99 586,786
Panamerican Beverage Co.
130,000 8.13 04/01/03 133,416
RJR Nabisco Inc.
175,000 8.00 07/15/01 172,440
550,000 8.63 12/01/02 548,218
Tele-Communications, Inc.
100,000 7.13 02/02/98 100,396
300,000 8.25 01/15/03 304,011
1,135,000 6.27 09/15/03 1,132,912
50,000 6.82 09/15/10 49,846
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,690,128
350,000 9.63 05/01/02 384,776
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds(continued)
Industrial Bonds(continued)
Time Warner, Inc. (continued)
$ 400,000 7.98% 08/15/04 $ 406,440
U.S. Air Inc.
553,242 6.76 04/15/08 528,761
USI American Holdings Corp.
150,000 7.25 12/01/06 145,070
- -------------------------------------------------------------------------------
$ 11,656,729
- -------------------------------------------------------------------------------
Utility Bonds--1.1%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 326,215
Salton Sea Funding
580,000 7.02 05/30/00 580,922
- -------------------------------------------------------------------------------
$ 907,137
- -------------------------------------------------------------------------------
Total Corporate Bonds
(Cost $20,576,762) $ 20,518,098
- -------------------------------------------------------------------------------
Asset-Backed Securities--14.1%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 /(a)/ $ 157,232
Asset Securitization Corp., Series 1996, Class A1
600,000 6.88 11/13/26 /(a)/ 591,398
Asset Securitization Corp., Series 4, Class A
900,000 7.49 04/14/27 914,800
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
177,654 5.80 06/15/02 176,876
Discover Card Master Trust 1996-4, Class A
1,910,000 6.06 10/16/13 /(a)/ 1,942,222
Discover Card Master Trust 1996-4, Class B
1,100,000 6.24 10/16/13 1,108,250
DVI Equipment Lease Trust Series 1996-1, Class A
1,011,139 6.55 07/10/04 1,006,286
General Motors Acceptance Corp. Series 1995, Class A
69,659 7.15 03/15/00 70,203
Navistar Financial Trust, Series 1995-A, Class A2
214,878 6.55 11/20/01 215,549
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
245,032 6.85 06/15/01 247,048
Premier Auto Trust Series 1995-1, Class A4
123,449 7.85 09/04/98 123,680
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 80,625
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20% 02/16/06 667,250
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 565,983
Sears Credit Account Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 302,718
Standard Credit Card Master Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 714,422
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,120,694
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 910,683
World Financial Tower B Series 1996, Class B
498,093 6.91 09/01/13 483,679
- -------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $11,543,903) $ 11,399,598
- -------------------------------------------------------------------------------
Emerging Market Debt--4.4%
Bancoldex
$ 60,000 8.63% 06/02/00 $ 61,372
BCO De Colombia
110,000 8.63 06/02/00 112,516
Bridas Corp.
110,000 12.50 11/15/99 118,581
Empresa Col Petroleos
900,000 7.25 07/08/98 903,438
Financiera Energy Nacional
50,000 9.38 06/15/06 50,504
90,000 9.38 06/15/06 94,271
Instituto de Fomento Industrial
140,000 8.38 07/29/01 141,558
130,000 8.38 07/29/01 131,447
Republic of Colombia
30,000 7.13 05/11/98 30,139
Republic of Croatia
210,000 7.00 02/27/02 204,091
Sampoerna International
120,000 8.38 06/15/06 120,164
United Mexican States
180,000 7.56 08/06/01 181,940
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Emerging Market Debt(continued)
United Mexican States (continued)
$ 650,000 7.62% 08/06/01 $ 657,007
YPF Sociedad Anonima
633,003 7.50 10/26/02 637,687
118,531 7.00 10/26/02 118,835
- -------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $3,558,558) $ 3,563,550
- -------------------------------------------------------------------------------
Government Bonds--3.0%
Australia Commonwealth
AUD 2,400,000 7.50% 07/15/05 $ 1,845,509
Province of Quebec
$ 520,000 13.25 09/15/14 611,666
- -------------------------------------------------------------------------------
Total Government Bonds
(Cost $2,524,905) $ 2,457,175
- -------------------------------------------------------------------------------
Mortgage Backed Obligations--31.9%
Bear Stearns Mortgage Securities, Inc.
$ 2,045,784 6.50% 03/28/09/(a)/ $ 1,883,062
Federal Home Loan Mortgage Corp. (FHLMC)
1,000,000 7.00 TBA-15 Yr./(b)/ 990,938
1,245,394 6.00 11/15/16 1,234,885
1,000,000 6.35 03/25/18 976,870
Federal National Mortgage Association (FNMA)
1,000,000 6.50 TBA-7 Yr./(b)/ 981,560
1,000,000 7.00 TBA-30 Yr./(b)/ 968,750
4,500,000 7.50 TBA-30 Yr./(b)/ 4,466,250
500,000 6.25 07/25/18 486,875
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24/(a)/ 1,771,240
Government National Mortgage Association (GNMA)
3,000,000 7.50 TBA-30 Yr./(b)/ 2,973,750
3,000,000 8.00 TBA-30 Yr./(b)/ 3,040,290
335,213 8.00 02/15/17 344,240
30,057 7.00 11/15/22 29,296
362,778 7.00 12/15/22 353,592
596,838 7.00 12/15/22 581,726
184,742 7.00 01/15/23 179,892
787,526 7.50 03/15/23 785,313
779,931 7.00 05/15/23 759,457
120,766 7.50 08/15/23 120,427
39,068 7.00 11/15/23 38,042
JP Morgan Commercial Mortgage Finance Corp., Series 1997-C4
1,000,000 7.32% 12/26/28 997,227
Morgan Stanley Capital Commercial Mortgage, Inc. Series 1997-C1
900,000 7.46 05/15/06 912,375
Prudential Home Mortgage Securities Corp. 1992-39 A8
1,000,000 7.11 12/25/07 860,550
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $25,637,886) $ 25,736,607
- -------------------------------------------------------------------------------
Sovereign Credit--0.4%
State of Israel
$ 370,000 6.38% 12/15/05 $ 343,748
- -------------------------------------------------------------------------------
Total Sovereign Credit
(Cost $346,061) $ 343,748
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--17.0%
United States Treasury Bonds
$ 330,000 8.75% 05/15/17 $ 390,070
550,000 8.88 08/15/17/(a)/ 657,938
2,230,000 8.75 05/15/20 2,656,488
120,000 7.88 02/15/21/(a)/ 131,174
2,240,000 7.63 02/15/25 2,402,400
United States Treasury Interest-Only Stripped Securities/(c)/
2,250,000 6.99 08/15/09 966,893
350,000 7.04 11/15/10 136,808
United States Treasury Notes
4,000,000 6.88 08/31/99 4,044,360
280,000 5.63 11/30/00 272,387
590,000 7.88 11/15/04/(a)/ 630,380
United States Treasury Principal-Only Stripped Securities/(d)/
40,000 5.78 11/15/97 38,781
410,000 6.81 11/15/04/(a)/ 247,566
5,730,000 7.22 05/15/20 1,119,356
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,742,043) $ 13,694,601
- -------------------------------------------------------------------------------
Yankee Bonds--0.3%
Korea Electric Power
$ 263,790 7.40% 04/01/16 $ 265,088
- -------------------------------------------------------------------------------
Total Yankee Bonds
(Cost $255,077) $ 265,088
- -------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase Agreement--20.1%
Joint Repurchase Agreement Account/(a)/
$ 16,200,000 5.49% 05/01/97 $ 16,200,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $16,200,000) $ 16,200,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $94,385,195)/(e)/ $ 94,178,465
- -------------------------------------------------------------------------------
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(f) Month Gain (Loss)
- ---------------------------- -------------- ----------------- -------------
Euro Dollars 5 June 1997 $4,250
Euro Dollars 8 September 1997 (2,338)
Euro Dollars 5 December 1997 (1,000)
Euro Dollars 5 June 1998 (2,250)
5 Year U.S. Treasury Notes 10 June 1997 (2,828)
10 Year U.S. Treasury Notes 17 June 1997 (12,750)
U.S. Long Term Bond (14) June 1997 42,682
-------------
$25,766
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $382,996
Gross unrealized loss for investments in which cost
exceeds value (704,905)
- ------------------------------------------------------------------------------
Net unrealized loss $(321,909)
- --------------------------------------------------------------------------------
</TABLE>
/(a)/Portions of these securities are being segregated for open TBA purchases,
mortgage dollar rolls, and futures.
/(b)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally + / -2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(c)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/The interest rate disclosed for these securitites represents effective
yields to maturity.
/(e)/The aggregate cost for federal income tax purposes is $94,500,374.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and each U.S. Long Term Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $27,100,000 and $9,088,344, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Adjustable
Rate Short Duration
Government Government
Fund Fund
--------------------------------------
<S> <C> <C>
Assets:
Investments in securities, at value (cost $594,120,929, $102,639,463, $39,615,334
and $94,385,195, respectively) $ 596,596,552 $ 102,672,119
Cash 57,183 89,184
Receivables:
Investment securities sold 295,632 --
Interest 6,240,961 1,042,023
Forward foreign currency exchange contracts -- --
Fund shares sold 2,978,910 203,746
Variation margin -- --
Deferred organization expenses, net -- --
Other assets 64,048 50,879
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 606,233,286 104,057,951
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,032,523 109,251
Investment securities purchased 1,331,393 --
Fund shares repurchased 10,604,905 1,707
Investment adviser fees 191,592 34,620
Transfer agent fees 42,054 --
Authorized dealer service fees 6,616 --
Variation margin 87,000 46,971
Accrued expenses and other liabilities 59,487 15,162
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 13,355,570 207,711
- ------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 643,684,171 117,737,007
Accumulated undistributed (distributions in excess of) net investment income (2,943,415) 599,277
Accumulated net realized loss on investment and futures transactions (49,959,507) (14,542,059)
Accumulated net realized foreign currency loss -- --
Net unrealized gain (loss) on investments and futures 2,096,467 56,015
Net unrealized gain on translation of assets and liabilities denominated in
foreign currencies -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net assets $ 592,877,716 $ 103,850,240
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:
Institutional shares $9.86 $9.76
Administration shares $9.86 $9.78
Service shares $9.86 $9.75
Class A shares (a) $9.86 --
- ------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Institutional shares 55,732,381 10,231,208
Administration shares 424,079 153,792
Service shares 2,171 258,644
Class A shares 3,960,437 --
- ------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value (unlimited
number of shares authorized) 60,119,068 10,643,644
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
---------------------------------
<S> <C> <C>
Assets:
Investments in securities, at value (cost $594,120,929, $102,639,463, $39,615,334
and $94,385,195, respectively) $ 39,692,726 $ 94,178,465
Cash 91,511 94,989
Receivables:
Investment securities sold 145,393 1,331,207
Interest 554,155 1,045,248
Forward foreign currency exchange contracts -- 34,692
Fund shares sold -- 60,750
Variation margin -- 6,750
Deferred organization expenses, net 10,458 41,206
Other assets 51,608 29,277
- -------------------------------------------------------------------------------------------------------------------------
Total assets 40,545,851 96,822,584
- -------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 18,312 43,289
Investment securities purchased 2,144,574 15,935,315
Fund shares repurchased 10,296 --
Investment adviser fees 11,244 26,250
Transfer agent fees 12,983 2,771
Authorized dealer service fees -- --
Variation margin -- --
Accrued expenses and other liabilities 31,430 30,169
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,228,839 16,037,794
- -------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 42,243,143 81,193,439
Accumulated undistributed (distributions in excess of) net investment income 90,133 36,949
Accumulated net realized loss on investment and futures transactions (4,093,656) (267,089)
Accumulated net realized foreign currency loss -- (32,353)
Net unrealized gain (loss) on investments and futures 77,392 (175,768)
Net unrealized gain on translation of assets and liabilities denominated in
foreign currencies -- 29,612
- -------------------------------------------------------------------------------------------------------------------------
Net assets $ 38,317,012 $ 80,784,790
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:
Institutional shares $9.94 $9.71
Administration shares $9.94 $9.70
Service shares $9.94 $9.72
Class A shares (a) -- --
- -------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Institutional shares 3,738,166 7,565,340
Administration shares 11,363 638,323
Service shares 105,100 114,034
Class A shares -- --
- -------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value (unlimited
number of shares authorized) 3,854,629 8,317,697
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Maximum public offering price per share (NAV per share x 1.0152) for Class A
shares of GS Adjustable Rate Government Fund is $10.01.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Operations
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Adjustable Short
Rate Duration
Government Government
Fund Fund
-----------------------------------
<S> <C> <C>
Investment income:
Interest/(a)/ $ 19,521,515 $ 3,571,901
- -----------------------------------------------------------------------------------------------------------------------------------
Total income 19,521,515 3,571,901
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 1,196,772 259,279
Distribution fees 24,001 --
Authorized dealer service fees 24,001 --
Administration share fees 5,231 1,118
Service share fees 10 5,244
Transfer agent fees 143,729 --
Custodian fees 65,396 32,437
Professional fees 30,592 30,169
Registration fees 31,419 29,736
Amortization of deferred organization expenses -- --
Trustees' fees 5,754 990
Other 64,428 26,459
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,591,333 385,432
Less--Expenses reimbursable and fees waived by Goldman Sachs (215,722) (145,719)
- -----------------------------------------------------------------------------------------------------------------------------------
Net expenses 1,375,611 239,713
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 18,145,904 3,332,188
- -----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (301,736) 77,934
Futures transactions (575,601) (78,182)
Foreign currency related transactions -- --
Net change in unrealized gain (loss) on:
Investments 3,237,459 (594,540)
Futures (523,110) (9,522)
Translation of assets and liabilities denominated in foreign currencies -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 1,837,012 (604,310)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 19,982,916 $ 2,727,878
- -----------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
-----------------------------
<S> <C> <C>
Investment income:
Interest/(a)/ $ 846,820 $ 2,713,928
- --------------------------------------------------------------------------------------------------------------------------
Total income 846,820 2,713,928
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 72,141 152,651
Distribution fees -- --
Authorized dealer service fees -- --
Administration share fees 79 4,929
Service share fees 2,452 1,908
Transfer agent fees 7,214 15,265
Custodian fees 24,930 43,131
Professional fees 30,238 29,501
Registration fees 29,353 29,627
Amortization of deferred organization expenses 10,290 12,146
Trustees' fees 332 775
Other 15,581 8,570
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 192,610 298,503
Less--Expenses reimbursable and fees waived by Goldman Sachs (108,922) (119,934)
- --------------------------------------------------------------------------------------------------------------------------
Net expenses 83,688 178,569
- --------------------------------------------------------------------------------------------------------------------------
Net investment income 763,132 2,535,359
- --------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions 46,213 (11,091)
Futures transactions -- (15,366)
Foreign currency related transactions -- (32,353)
Net change in unrealized gain (loss) on:
Investments (125,032) (1,032,929)
Futures -- (72,450)
Translation of assets and liabilities denominated in foreign currencies -- 29,612
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions (78,819) (1,134,577)
- --------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 684,313 $ 1,400,782
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Net of $4,391 in foreign withholding tax for the Core Fixed Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Adjustable Short
Rate Duration
Government Government
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 18,145,904 $ 3,332,188
Net realized gain (loss) from investment and futures transactions (877,337) (248)
Net realized loss from foreign currency related transactions -- --
Net change in unrealized gain (loss) on investments and futures 2,714,349 (604,062)
Net change in unrealized gain on translation of assets and liabilities
denominated in foreign currencies -- --
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 19,982,916 2,727,878
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (16,997,708) (3,409,055)
Administration shares (118,601) (29,022)
Service shares (107) (65,458)
Class A shares (531,120) --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (17,647,536) (3,503,535)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 224,637,176 17,764,086
Reinvestment of dividends and distributions 10,493,073 2,378,322
Cost of shares repurchased (272,256,791) (17,534,072)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from shares transactions (37,126,542) 2,608,336
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (34,791,162) 1,832,679
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of period $ 627,668,878 $ 102,017,561
- ----------------------------------------------------------------------------------------------------------------
End of period $ 592,877,716 $ 103,850,240
- ----------------------------------------------------------------------------------------------------------------
Accumulated undistributed (distributions in excess of) net investment income $ (2,943,415) $ 599,277
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 22,833,196 1,813,884
Reinvestment of dividends and distributions 1,066,128 243,233
Shares repurchased (27,664,736) (1,793,383)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,765,412) 263,734
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 763,132 $ 2,535,359
Net realized gain (loss) from investment and futures transactions 46,213 (26,457)
Net realized loss from foreign currency related transactions -- (32,353)
Net change in unrealized gain (loss) on investments and futures (125,032) (1,105,379)
Net change in unrealized gain on translation of assets and liabilities
denominated in foreign currencies -- 29,612
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 684,313 1,400,782
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (743,379) (2,380,508)
Administration shares (1,285) (127,789)
Service shares (18,468) (23,664)
Class A shares -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (763,132) (2,531,961)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 15,143,248 8,630,772
Reinvestment of dividends and distributions 633,411 2,308,481
Cost of shares repurchased (12,937,480) (2,167,703)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from shares transactions 2,839,179 8,771,550
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase 2,760,360 7,640,371
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of period $ 35,556,652 $ 73,144,419
- ----------------------------------------------------------------------------------------------------------------
End of period $ 38,317,012 $ 80,784,790
- ----------------------------------------------------------------------------------------------------------------
Accumulated undistributed (distributions in excess of) net investment income $ 90,133 $ 36,949
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 1,519,494 880,108
Reinvestment of dividends and distributions 63,471 235,763
Shares repurchased (1,297,285) (220,518)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding 285,680 895,353
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Adjustable Short
Rate Duration
Government Government
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 37,031,818 $ 6,604,446
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519)
Administration shares (220,450) (2,548)
Service shares -- (14,792)
Class A shares (577,779) --
In excess of net investment income
Institutional shares (1,304,006) --
Administration shares (7,930) --
Class A shares (20,794) --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441
Reinvestment of dividends and distributions 18,181,648 4,153,816
Cost of shares repurchased (477,107,914) (47,993,112)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from shares transactions (52,339,892) (1,819,855)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469)
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of year $ 676,133,018 $ 103,760,030
- ----------------------------------------------------------------------------------------------------------------
End of year $ 627,668,878 $ 102,017,561
- ----------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed net investment income $ (3,441,783) $ 770,624
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467
Reinvestment of dividends and distributions 1,856,783 424,274
Shares repurchased (48,741,470) (4,905,357)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616)
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 1,786,304 $ 4,013,477
Net realized gain (loss) from investment and futures transactions 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures (396,071) (75,350)
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,721,871 3,684,707
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (1,766,892) (4,019,797)
Administration shares (2,032) (19,144)
Service shares (17,380) (5,349)
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- (450,016)
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,786,304) (4,494,306)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 22,248,684 21,976,567
Reinvestment of dividends and distributions 1,401,492 4,315,748
Cost of shares repurchased (46,918,400) (7,840,575)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from shares transactions (23,268,224) 18,451,740
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (23,332,657) 17,642,141
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of year $ 58,889,309 55,502,278
- ----------------------------------------------------------------------------------------------------------------
End of year $ 35,556,652 $ 73,144,419
- ----------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed net investment income $ 90,133 $ 33,551
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 2,233,482 2,244,430
Reinvestment of dividends and distributions 140,950 439,299
Shares repurchased (4,727,959) (811,075)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (2,353,527) 1,872,654
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end, management
investment company. Included in this report are the financial statements for the
Goldman Sachs Adjustable Rate Government Fund (Adjustable Rate Government),
Goldman Sachs Short Duration Government Fund (Short Duration Government),
Goldman Sachs Short Duration Tax-Free Fund (Short Duration Tax-Free) and Goldman
Sachs Core Fixed Income Fund (Core Fixed Income), collectively, ("the Funds") or
individually a ("Fund"). The Funds are diversified portfolios of the Trust
offering three classes of shares - Institutional shares, Administration shares
and Service shares. In addition, the Adjustable Rate Government Fund offers
Class A shares. Effective May 1, 1997, the Trust was reorganized from a
Massachusetts business trust to a Delaware business trust and various
operational changes were approved, including updating certain investment
restrictions and amending the management contracts. In addition, Short Duration
Government, Short Duration Tax-Free, and Core Fixed Income added two new share
classes, Class A and Class B, as of May 1.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations for
which accurate market quotations are readily available are valued on the basis
of quotations furnished by a pricing service or provided by dealers in such
securities. Portfolio securities for which accurate market quotations are not
readily available are valued based on yield equivalents, pricing matrix or other
sources, under valuation procedures established by the Trust's Board of
Trustees. Short-term debt obligations maturing in sixty days or less are valued
at amortized cost.
B. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on trade date. Realized gains and losses on
sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account actual principal
prepayment experience and estimates of future principal prepayments. Certain
mortgage security paydown gains and losses are taxable as ordinary income. Such
paydown gains and losses increase or decrease taxable ordinary income available
for distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
Market premiums resulting from the purchase of long-term debt securities are
amortized to interest income over the life of the security with a corresponding
decrease in the cost basis of that security for Short Duration Tax-Free. Market
discounts and market premiums on debt securities, other than mortgage backed
securities, are amortized to interest income over the life of the security with
a corresponding adjustment in the cost basis of that security for Core Fixed
Income Fund.
C. Foreign Currency Translations
- --------------------------------
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
- --------------------------------------------------------------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on foreign currency transactions
will represent: (i) foreign exchange gains and losses from the sale and holdings
of foreign currencies and investments; (ii) gains and losses between trade date
and settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
interest recorded and the amounts actually received.
D. Forward Foreign Currency Exchange Contracts
- ----------------------------------------------
Core Fixed Income may enter into forward foreign exchange contracts for the
purchase or sale of a specific foreign currency at a fixed price on a future
date as a hedge or cross-hedge against either specific transactions or portfolio
positions. Core Fixed Income may also purchase and sell forward contracts to
seek to increase total return. All commitments are "marked-to-market" daily at
the applicable translation rates and any resulting unrealized gains or losses
are recorded in the Fund's financial statements. The Fund records realized gains
or losses at the time the forward contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
E. Mortgage Dollar Rolls
- ------------------------
The Funds, with the exception of Short Duration Tax-Free, may enter into
mortgage "dollar rolls" in which the Fund sells securities in the current month
for delivery and simultaneously contracts with the same counterparty to
repurchase similar (same type, coupon and maturity) but not identical securities
on a specified future date. The Fund loses the right to receive principal and
interest paid on the securities sold. However, the Fund benefits to the extent
of any price received for the securities sold and the lower forward price for
the future purchase (often referred to as the "drop") or fee income plus the
interest earned on the cash proceeds of the securities sold until the settlement
date of the forward purchase. The Fund will hold and maintain in a segregated
account, until the settlement date, cash or liquid, high-grade debt securities
in an amount equal to the forward purchase price. For financial reporting and
tax reporting purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale.
F. Futures Contracts
- --------------------
The Funds may enter into futures transactions to hedge against changes in
interest rates, securities prices, currency exchange rates (in the case of Core
Fixed Income) or to seek to increase total return.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Payments for futures contracts ("variation margin") are paid or received by the
Funds daily, dependent on the daily fluctuations in the value of the contracts,
and are recorded for financial reporting purposes as unrealized gains or losses.
When contracts are closed, the Funds realize a gain or loss equal to the
difference between the value of the futures contract to sell and the value of
futures contract to buy. Gains and losses are reported in the Statement of
Operations.
The use of futures contracts involve, to varying degrees, elements of
market and counterparty risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities. Changes in the value of the futures
contract may not directly correlate with changes in the value of the underlying
securities. This risk may decrease the effectiveness of the Funds' hedging
strategies and potentially result in a loss.
G. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
H. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are generally allocated to the portfolios based on
each portfolio's relative average net assets for the period.
- --------------------------------------------------------------------------------
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
Shareholders of Administration shares and Service shares bear all expenses
and fees paid to service organizations for their services with respect to such
shares as well as other expenses (subject to expense limitations) which are
directly attributable to such shares. For the Adjustable Rate Government Fund,
shareholders of Class A shares bear all expenses and fees relating to the
distribution and authorized dealer service plans as well as other expenses which
are directly attributable to such shares.
I. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of its investment company taxable and tax-exempt income to its
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial
statement purposes as either from or in excess of net investment income or net
realized gain on investment transactions, or from capital, depends on the type
of book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
The Funds, at their most recent tax year-ends (October 31, 1996 for Core
Fixed Income and December 31, 1996 for Adjustable Rate Government, Short
Duration Government and Short Duration Tax-Free) had approximately the following
amounts of capital loss carryforward for U.S. federal tax purposes:
<TABLE>
<CAPTION>
Years of
Fund Amount Expiration
- ------------------------------------ ------------- -------------
<S> <C> <C>
Adjustable Rate Government $49,069,000 2000-2004
Short Duration Government $14,141,000 2002-2004
Short Duration Tax-Free $4,058,000 2002-2003
Core Fixed Income $77,000 2004
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by applicable laws or regulations.
3. Agreements
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman, Sachs &
Co. ("Goldman Sachs"), serves as the investment adviser for the Adjustable Rate
Government and Short Duration Government Funds pursuant to Investment Advisory
Agreements. Goldman Sachs Asset Management ("GSAM"), a separate operating
division of Goldman Sachs, serves as the investment adviser for the Short
Duration Tax-Free and Core Fixed Income Funds pursuant to Investment Advisory
Agreements. Under the Investment Advisory Agreements, the adviser, subject to
the general supervision of the Trust's Board of Trustees, manages the Funds'
portfolios and provides for the administration of the Funds' other affairs. As
compensation for the services rendered under the Investment Advisory Agreements
and the assumption of the expenses related thereto, the adviser is entitled to a
fee, computed daily and payable monthly at an annual rate equal to .40% of
average daily net assets of Adjustable Rate Government, Short Duration Tax-Free
and Core Fixed Income and .50% of average daily net assets of Short Duration
Government. Until further notice, GSFM has voluntarily agreed not to impose .10%
of its investment advisory fee for Short Duration Government.
The adviser has voluntarily agreed to limit certain of the Funds' expenses
(excluding investment advisory fees, taxes, interest, brokerage, litigation,
Administrative and Service Share fees, indemnification and other extraordinary
expenses and with respect to Adjustable Rate Government Class A shares,
distribution and authorized dealer service fees) to the extent that such
expenses exceed .05% per annum of each Fund's average daily net assets.
Goldman Sachs serves as Distributor of the shares of the Funds pursuant to
a Distribution Agreement and receives no compensation in this capacity with the
exception of Adjustable Rate Government Class A shares. During the period ended
April 30, 1997, Goldman Sachs retained approximately $110,300 of sales load
related to Class A shares. Goldman Sachs also serves as Transfer Agent of the
Funds for a fee.
The Trust, on behalf of Adjustable Rate Government, has adopted a
Distribution Plan (the "Plan") pursuant to Rule 12b-1 for the Class A shares.
Under the Plan, Goldman Sachs
- --------------------------------------------------------------------------------
34
<PAGE>
- --------------------------------------------------------------------------------
is entitled to receive a quarterly distribution fee equal, on an annual basis,
to .25% of the average daily net assets of Class A shares. Currently, Goldman
Sachs has agreed to voluntarily waive this distribution fee.
The Trust, on behalf of Adjustable Rate Government, has adopted a non-Rule
12b-1 Authorized Dealer Service Plan (the "Service Plan") pursuant to which
Goldman Sachs and Authorized Dealers are compensated for providing personal and
account maintenance services. Adjustable Rate Government pays a fee under the
Service Plan equal, on an annual basis, to .25% of its average daily net assets
attributable to Class A shares.
For the period ended April 30, 1997, the advisors and distributor have
voluntarily agreed to waive certain fees and reimburse other expenses as
follows(in thousands):
<TABLE>
<CAPTION>
Waivers
---------------
Reimburse-
Class A Reimburse- ment
Fund Advisor 12b-1 ment Outstanding
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustable Rate
Government -- $24 $192 $22
Short Duration
Government $52 -- 94 14
Short Duration
Tax-Free -- -- 109 28
Core Fixed
Income -- -- 120 28
</TABLE>
For the period ended April 30, 1997, Adjustable Rate Government, Short
Duration Government, and Core Fixed Income incurred commission expenses of
approximately $35,000, $8,500, and $900, respectively, in connection with
futures contracts entered into with Goldman Sachs. At April 30, 1997, Adjustable
Rate Government and Short Duration Government had approximately $87,000 and
$47,000, respectively, payable to Goldman Sachs related to variation margin on
futures contracts. Approximately $7,000 relating to variation margin was due to
Core Fixed Income from Goldman Sachs.
As of May 1, 1997, the Funds advisory agreements were changed to management
agreements encompassing the same services and fee structure.
4. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility to be used solely for temporary or emergency purposes. Under the
most restrictive arrangement, each fund must own securities having a market
value in excess of 300% of the total bank borrowings. The interest rate on the
borrowings is based on the federal funds rate. During the six months ended April
30, 1997, the Funds did not have any borrowings under this facility.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for the
six months ended April 30, 1997, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Short
Adjustable Rate Short Duration Duration Core Fixed
Government Government Tax-Free Income
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases of U.S.
Government and agency
obligations $ 150,343,674 $46,763,342 -- $115,895,051
- -----------------------------------------------------------------------------------------------
Purchases (excluding U.S.
Government and agency
obligations) -- -- $39,438,868 22,633,489
- -----------------------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 198,396,859 44,501,257 -- 118,193,576
- -----------------------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and agency
obligations) -- -- 35,970,076 12,305,124
- -----------------------------------------------------------------------------------------------
</TABLE>
At April 30, 1997, Core Fixed Income had an outstanding forward foreign
currency exchange contract, to sell foreign currency as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Value on
Foreign Currency Settlement Current Unrealized
Sell Contract Date Value Gain
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
Expiring 6/16/97 $ 1,897,856 $ 1,863,164 $ 34,692
- -----------------------------------------------------------------------------------------------
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered.
6. Administration and Service Plans
The Funds have adopted Administration and Service Plans. These plans allow for
Administration shares and Service shares, respectively, to compensate service
organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
7. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Funds' custodian.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSFM and GSAM or their affiliates, transfer uninvested cash
balances into a joint account, the daily aggregate balance of which is invested
in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of April 30, 1997, Adjustable Rate Government, Short Duration Government and
Core Fixed Income had undivided interests in the repurchase agreements in the
following joint account which equaled $36,700,000, $600,000 and $16,200,000,
respectively, in principal amount.
As of April 30, 1997, the repurchase agreement in the joint account along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity data) were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns & Co., dated 4/30/97, repurchase price $680,103,889 (GNMA:
$59,497,211, 7.50%-9.00%, 12/15/21-12/15/26; FNMA: $267,568,394, 5.50%-8.00%,
02/01/09-04/01/27; FHLMC: $373,405,594, 5.50%-7.50%, 2/01/98-4/01/27)
$680,000,000 5.50% 5/01/97 $680,000,000
Nomura Securities International, Inc. dated 4/30/97, repurchase price $300,045,833
(FNMA: $182,812,268, 5.94%-8.01%, 7/22/97-5/11/05; FHLMC: $38,631,543, 6.02%-
6.75%, 1/28/00-12/04/01, FCSB: $49,581,430, 6.05%-6.25%, 5/10/99-12/03/99,
SLMA: $29,222,430, 6.00%, 1/16/01)
300,000,000 5.50 5/01/97 300,000,000
Credit Suisse First Boston, dated 4/30/97, repurchase price $52,307,845 (U.S.
Treasury Bill: $53,475,803, 2/05/98)
52,300,000 5.40 5/01/97 52,300,000
- ---------------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $1,032,300,000
- ---------------------------------------------------------------------------------------
</TABLE>
9. Other Matters
As of April 30, 1997, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 33% of the
outstanding shares of the Short Duration Government Fund.
- --------------------------------------------------------------------------------
36
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10. Summary of Share Transactions
Share activity for the six months ended April 30, 1997 is as follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Short Duration Government
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 18,594,775 $182,930,563 1,584,839 $15,518,375
Reinvestment of dividends
and distributions 1,001,545 9,856,991 234,064 2,288,677
Shares repurchased (26,271,346) (258,542,996) (1,756,576) (17,174,153)
-------------------------------------------------------------
(6,675,026) (65,755,442) 62,327 632,899
-------------------------------------------------------------
Administration shares
Shares sold 105,099 1,034,098 136,265 1,337,724
Reinvestment of dividends
and distributions 5,632 55,427 2,467 24,158
Shares repurchased (72,390) (712,347) (10,477) (102,683)
-------------------------------------------------------------
38,341 377,178 128,255 1,259,199
-------------------------------------------------------------
Service shares
Shares sold 2,161 21,270 92,780 907,987
Reinvestment of dividends
and distributions 11 107 6,702 65,487
Shares repurchased (1) (10) (26,330) (257,236)
-------------------------------------------------------------
2,171 21,367 73,152 716,238
-------------------------------------------------------------
Class A shares
Shares sold 4,131,161 40,651,245 -- --
Reinvestment of dividends
and distributions 58,940 580,548 -- --
Shares repurchased (1,320,999) (13,001,438) -- --
-------------------------------------------------------------
2,869,102 28,230,355 -- --
-------------------------------------------------------------
Net increase (decrease) (3,765,412) $(37,126,542) 263,734 $2,608,336
==============================================================
<CAPTION>
Short Duration Tax-Free Core Fixed Income
-------------------------------------------------------------
Shares Dollars Shares Dollars
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 1,341,295 $13,363,572 212,032 $2,070,524
Reinvestment of dividends
and distributions 61,868 617,418 227,665 2,229,551
Shares repurchased (1,159,405) (11,559,759) (186,679) (1,835,467)
-------------------------------------------------------------
243,758 2,421,231 253,018 2,464,608
-------------------------------------------------------------
Administration shares
Shares sold 6,402 63,690 579,102 5,684,739
Reinvestment of dividends
and distributions 116 1,153 5,675 55,281
Shares repurchased -- -- (17,694) (174,314)
-------------------------------------------------------------
6,518 64,843 567,083 5,565,706
-------------------------------------------------------------
Service shares
Shares sold 171,797 1,715,986 88,974 875,509
Reinvestment of dividends
and distributions 1,487 14,840 2,423 23,649
Shares repurchased (137,880) (1,377,721) (16,145) (157,922)
-------------------------------------------------------------
35,404 353,105 75,252 741,236
-------------------------------------------------------------
Class A shares
Shares sold -- -- -- --
Reinvestment of dividends
and distributions -- -- -- --
Shares repurchased -- -- -- --
-------------------------------------------------------------
-- -- -- --
-------------------------------------------------------------
Net increase (decrease) 285,680 $2,839,179 895,353 $8,771,550
============================================================
</TABLE>
37
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(unaudited)
- -------------------------------------------------------------------------------
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Short Duration Government
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 39,981,299 $391,363,204 4,072,082 $39,855,638
Reinvestment of dividends
and distributions 1,780,288 17,432,484 422,559 4,137,041
Shares repurchased (46,666,343) (456,776,795) (4,893,286) (47,875,174)
- ---------------------------------------------------------------------------------------------
(4,904,756) (47,981,107) (398,645) (3,882,495)
- ---------------------------------------------------------------------------------------------
Administration shares
Shares sold 148,981 1,457,872 33,251 326,101
Reinvestment of dividends
and distributions 9,641 94,420 207 2,032
Shares repurchased (138,609) (1,356,764) (7,921) (77,312)
- ---------------------------------------------------------------------------------------------
20,013 195,528 25,537 250,821
- ---------------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 188,134 1,837,702
Reinvestment of dividends
and distributions -- -- 1,508 14,743
Shares repurchased -- -- (4,150) (40,626)
- ---------------------------------------------------------------------------------------------
-- -- 185,492 1,811,819
- ---------------------------------------------------------------------------------------------
Class A shares
Shares sold 1,404,698 13,765,298 -- --
Reinvestment of dividends
and distributions 66,854 654,744 -- --
Shares repurchased (1,936,518) (18,974,355) -- --
- ---------------------------------------------------------------------------------------------
(464,966) (4,554,313) -- --
- ---------------------------------------------------------------------------------------------
Net increase (decrease) (5,349,709) $(52,339,892) (187,616) $(1,819,855)
=============================================================================================
<CAPTION>
Short Duration Tax-Free Core Fixed Income
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 2,085,253 $20,777,050 2,094,833 $20,524,422
Reinvestment of dividends
and distributions 139,126 1,383,351 436,903 4,292,533
Shares repurchased (4,601,865) (45,664,878) (769,104) (7,431,360)
- ---------------------------------------------------------------------------------------------
(2,377,486) (23,504,477) 1,762,632 17,385,595
- ---------------------------------------------------------------------------------------------
Administration shares
Shares sold 10,672 105,302 106,074 1,029,912
Reinvestment of dividends
and distributions 203 2,017 1,847 17,883
Shares repurchased (10,644) (105,478) (36,681) (358,284)
- ---------------------------------------------------------------------------------------------
231 1,841 71,240 689,511
- ---------------------------------------------------------------------------------------------
Service shares
Shares sold 137,557 1,366,332 43,525 422,233
Reinvestment of dividends
and distributions 1,621 16,124 549 5,332
Shares repurchased (115,450) (1,148,044) (5,292) (50,931)
- ---------------------------------------------------------------------------------------------
23,728 234,412 38,782 376,634
- ---------------------------------------------------------------------------------------------
Class A shares
Shares sold -- -- -- --
Reinvestment of dividends
and distributions -- -- -- --
Shares repurchased -- -- -- --
- ---------------------------------------------------------------------------------------------
-- -- -- --
- ---------------------------------------------------------------------------------------------
Net increase (decrease) (2,353,527) $(23,268,224) 1,872,654 $18,451,740
=============================================================================================
</TABLE>
- -------------------------------------------------------------------------------
38
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
--------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. $9.83 $0.2971/(a)/ $0.0216/(a)/ -- $0.3187 $(0.2887) --
1997-Administration
Shares .............. 9.83 0.2844/(a)/ 0.0221/(a)/ -- 0.3065 (0.2765) --
1997-Service
Shares/(m)/ ......... 9.84 0.0527/(a)/ 0.0200/(a)/ -- 0.0727 (0.0527) --
1997-Class A Shares ...... 9.83 0.2766/(a)/ 0.0300/(a)/ -- 0.3066 (0.2766) --
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 9.77 0.5759/(a)/ 0.0772/(a)/ -- 0.6531 (0.5725) --
1996-Administration
Shares .............. 9.77 0.5489/(a)/ 0.0797/(a)/ -- 0.6286 (0.5489) --
1996-Class A Shares ...... 9.77 0.5481/(a)/ 0.0806/(a)/ -- 0.6287 (0.5489) --
1995-Institutional
Shares .............. 9.74 0.5630/(a)/ 0.0717/(a)/ -- 0.6347 (0.5759) --
1995-Administration
Shares .............. 9.74 0.5366/(a)/ 0.0737/(a)/ -- 0.6103 (0.5528) --
1995-Class A
Shares/(c)/.......... 9.79 0.2721/(a)/ (0.0090)/(a) / -- 0.2631 (0.2697) --
1994-Institutional
Shares .............. 10.00 0.4341/(a)/ (0.2455)/(a) / -- 0.1886 (0.4486) --
1994-Administration
Shares .............. 10.00 0.4211/(a)/ (0.2572)/(a) / -- 0.1639 (0.4239) --
1993-Institutional
Shares .............. 10.04 0.4397 (0.0376)/(d) / -- 0.4021 (0.4397) --
1993-Administration
Shares/(e)/.......... 10.02 0.2146 (0.0173)/(d) / -- 0.1973 (0.2146) --
1992-Institutional
Shares .............. 10.03 0.5599 (0.0029)/(d) / -- 0.5570 (0.5470) --
For the Period July 17, 1991/(g)/through October 31,
- ------------------------------------------------------
1991-Institutional
Shares .............. 10.00 0.1531 0.0322/(d)/ -- 0.1853 (0.1553) --
<CAPTION>
Distributions to shareholders
----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. -- -- -- $(0.2887) $0.0300 $9.86 3.28%/(f)/
1997-Administration
Shares .............. -- -- -- (0.2765) 0.0300 9.86 3.16/(f)/
1997-Service
Shares/(m)/ ......... -- -- -- (0.0527) 0.0200 9.86 0.74/(f)/
1997-Class A Shares ...... -- -- -- (0.2766) 0.0300 9.86 3.16/(f)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. (0.0206) -- -- (0.5931) 0.0600 9.83 6.86
1996-Administration
Shares .............. (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1996-Class A Shares ...... (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1995-Institutional
Shares .............. (0.0287) -- -- (0.6046) 0.0301 9.77 6.75
1995-Administration
Shares .............. (0.0275) -- -- (0.5803) 0.0300 9.77 6.48
1995-Class A
Shares/(c)/.......... (0.0134) -- -- (0.2831) (0.0200) 9.77 2.74/(f)/
1994-Institutional
Shares .............. -- -- -- (0.4486) (0.2600) 9.74 1.88
1994-Administration
Shares .............. -- -- -- (0.4239) (0.2600) 9.74 1.63
1993-Institutional
Shares .............. (0.0024) -- -- (0.4421) (0.0400) 10.00 4.13
1993-Administration
Shares/(e)/.......... (0.0027) -- -- (0.2173) (0.0200) 10.00 2.01/(f)/
1992-Institutional
Shares .............. -- -- -- (0.5470) 0.0100 10.04 6.12
For the Period July 17, 1991/(g)/through October 31
- ------------------------------------------------------
1991-Institutional Shares. -- -- -- (0.1553) 0.0300 10.03 2.14/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
---------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. 0.45%/(b)/ 6.08%/(b)/ 25.64% $549,611 0.51%/(b)/ 6.02%/(b)/
1997-Administration
Shares .............. 0.70/(b)/ 5.83/(b)/ 25.64 4,182 0.76/(b)/ 5.77/(b)/
1997-Service
Shares/(m)/ ......... 0.95/(b)/ 5.64/(b)/ 25.64 22 1.01/(b)/ 5.58/(b)/
1997-Class A Shares ...... 0.70/(b)/ 5.61/(b)/ 25.64 39,063 1.01/(b)/ 5.30/(b)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 0.45 5.85 52.36 613,149 0.51 5.79
1996-Administration
Shares .............. 0.70 5.59 52.36 3,792 0.76 5.53
1996-Class A Shares ...... 0.70 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares .............. 0.46 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares .............. 0.71 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares/(c)/.......... 0.69/(b)/ 5.87/(b)/ 24.12 15,203 1.01/(b)/ 5.55/(b)/
1994-Institutional
Shares .............. 0.46 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares .............. 0.71 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares .............. 0.45 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares/(e)/.......... 0.70/(b)/ 3.81/(b)/ 103.74 5,326 0.73/(b)/ 3.78/(b)/
1992-Institutional
Shares .............. 0.42 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g)through October 31,
- ------------------------------------------------------
1991-Institutional
Shares .............. 0.20/(b)/ 7.31/(b)/ 145.67/(b)/ 239,642 1.02/(b)/ 6.49/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. $9.83 $0.3287/(a)/ $(0.0700)/(a)/ -- $0.2587 $(0.3287) --
1997-Administration
Shares .............. 9.85 0.3175/(a)/ (0.0700)/(a)/ -- 0.2475 (0.3175) --
1997-Service Shares ...... 9.82 0.3043/(a)/ (0.0700)/(a)/ -- 0.2343 (0.3043) --
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. 9.82 0.6290/(a)/ 0.0136/(a)/ -- 0.6426 (0.6326) --
1996-Administration
Shares/(h)/.......... 9.86 0.3837/(a)/ 0.0003/(a)/ -- 0.3840 (0.3940) --
1996-Service
Shares/(i)/.......... 9.72 0.3134/(a)/ 0.1018/(a)/ -- 0.4152 (0.3152) --
1995-Institutional Shares. 9.64 0.6652/(a)/ 0.1666/(a)/ -- 0.8318 (0.6518) --
1995-Administration
Shares .............. 9.64 0.2384/(a)/ (0.0433)/(a)/ -- 0.1951 (0.2051) --
1994-Institutional Shares. 10.14 0.5628/(a)/ (0.4592)/(a)/ -- 0.1036 (0.5598) (0.0438)
1994-Administration
Shares .............. 10.14 0.5329/(a)/ (0.4539)/(a)/ -- 0.0790 (0.5352) (0.0438)
1993-Institutional Shares. 10.16 0.5627 (0.0135)/(d)/ -- 0.5492 (0.5627) --
1993-Administration
Shares/(e)/.......... 10.23 0.2725 (0.0900)/(d)/ -- 0.1825 (0.2725) --
1992-Institutional Shares. 10.22 0.6703 (0.0600)/(d)/ -- 0.6103 (0.6703) --
1991-Institutional Shares. 10.00 0.8020 0.2200/(d)/ -- 1.0220 (0.8020) --
1990-Institutional Shares. 10.07 0.8300 (0.0700)/(d)/ -- 0.7600 (0.8300) --
1989-Institutional Shares. 10.10 0.8800 -- -- 0.8800 (0.8800) --
For the Period August 15, 1988/(g)/through October 31,
- ---------------------------------------------------------------
1988-Institutional Shares. 10.00 0.1800 0.1000/(d)/ -- 0.2800 (0.1800) --
<CAPTION>
Distributions to shareholders
-----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. -- -- -- $(0.3287) $(0.0700) $9.76 2.67%/(f)/
1997-Administration
Shares .............. -- -- -- (0.3175) (0.0700) 9.78 2.55/(f)/
1997-Service Shares ...... -- -- -- (0.3043) (0.0700) 9.75 2.42/(f)/
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. -- -- -- (0.6326) 0.0100 9.83 6.75
1996-Administration
Shares/(h)/.......... -- -- -- (0.3940) (0.0100) 9.85 4.00/(f)/
1996-Service
Shares/(i)/.......... -- -- -- (0.3152) 0.1000 9.82 4.35/(f)/
1995-Institutional Shares. -- -- -- (0.6518) 0.1800 9.82 8.97
1995-Administration
Shares .............. -- -- -- (0.2051) (0.0100) 9.63/(h)/ 2.10
1994-Institutional Shares. -- -- -- (0.6036) (0.5000) 9.64 0.99
1994-Administration
Shares .............. -- -- -- (0.5790) (0.5000) 9.64 0.73
1993-Institutional Shares. (0.0065) -- -- (0.5692) (0.0200) 10.14 5.55
1993-Administration
Shares/(e)/.......... -- -- -- (0.2725) (0.0900) 10.14 1.74
1992-Institutional Shares. -- -- -- (0.6703) (0.0600) 10.16 6.24
1991-Institutional Shares. -- -- -- (0.8020) 0.2200 10.22 10.93
1990-Institutional Shares. -- -- -- (0.8300) (0.0700) 10.00 8.23
1989-Institutional Shares. -- -- (0.0300) (0.9100) (0.0300) 10.07 9.08
For the Period August 15, 1988/(g)/through October 31
- ---------------------------------------------------------------
1988-Institutional Shares. -- -- -- (0.1800) 0.1000 10.10 3.30/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
-----------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. 0.45%/(b)/ 6.44%/(b)/ 43.72% $99,824 0.73%/(b)/ 6.16%/(b)/
1997-Administration
Shares .............. 0.70/(b)/ 6.22/(b)/ 43.72 1,504 0.98/(b)/ 5.94/(b)/
1997-Service Shares ...... 0.95/(b)/ 5.94/(b)/ 43.72 2,522 1.23/(b)/ 5.66/(b)/
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. 0.45 6.44 115.45 99,944 0.71 6.18
1996-Administration
Shares/(h)/.......... 0.70/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/.......... 0.95/(b)/ 6.05/(b)/ 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional Shares. 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares .............. 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional Shares. 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares .............. 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional Shares. 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/.......... 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional Shares. 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional Shares. 0.45 8.25 155.44 158,848 0.79 7.91
1990-Institutional Shares. 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional Shares. 0.46 8.71 137.37 31,015 1.39 7.78+
For the Period August 15, 1988/(g)/through October 31
- ---------------------------------------------------------------
1988-Institutional Shares. 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. $9.96 $0.2097/(a)/ $(0.0200)/(a)/ -- $0.1897 $(0.2097) --
1997-Administration
Shares ................ 9.96 0.1976/(a)/ (0.0200)/(a)/ -- 0.1776 (0.1976) --
1997-Service Shares....... 9.97 0.1852/(a)/ (0.0300)/(a)/ -- 0.1552 (0.1852) --
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. 9.94 0.4192/(a)/ 0.0200/(a)/ -- 0.4392 (0.4192) --
1996-Administration
Shares ................ 9.94 0.3944/(a)/ 0.0200/(a)/ -- 0.4144 (0.3944) --
1996-Service Shares....... 9.95 0.3697/(a)/ 0.0200/(a)/ -- 0.3897 (0.3697) --
1995-Institutional Shares. 9.79 0.4235/(a)/ 0.1500/(a)/ -- 0.5735 (0.4235) --
1995-Administration
Shares ................ 9.79 0.3989/(a)/ 0.1500/(a)/ -- 0.5489 (0.3989) --
1995-Service Shares ...... 9.79 0.3744/(a)/ 0.1600/(a)/ -- 0.5344 (0.3744) --
1994-Institutional Shares. 10.23 0.3787/(a)/ (0.3575)/(a)/ -- 0.0212 (0.3787) (0.0825)
1994-Administration
Shares ................ 10.23 0.3537/(a)/ (0.3575)/(a)/ -- (0.0038) (0.3537) (0.0825)
1994-Service Shares/(j)/.. 9.86 0.0475/(a)/ (0.0700)/(a)/ -- (0.0225) (0.0475) --
1993-Institutional Shares. 9.93 0.3834 0.3000/(d)/ -- 0.6834 (0.3834) --
1993-Administration
Shares/(j)/............ 10.16 0.1555 0.0720/(d)/ -- 0.2275 (0.1555) --
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. 10.00 0.0341 (0.0700)/(d)/ -- (0.0359) (0.0341) --
<CAPTION>
Distributions to shareholders
---------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------------------
1997-Institutional Shares. -- -- -- $(0.2097) $(0.0200) $9.94 1.91%/(f)/
1997-Administration
Shares ................ -- -- -- (0.1976) (0.0200) 9.94 1.79/(f)/
1997-Service Shares....... -- -- -- (0.1852) (0.0300) 9.94 1.56/(f)/
For the Year Ended October 31,
- -------------------------------------------------------------------
1996-Institutional Shares. -- -- -- (0.4192) 0.0300 9.96 4.50
1996-Administration
Shares ................ -- -- -- (0.3944) 0.0300 9.96 4.24
1996-Service Shares....... -- -- -- (0.3697) 0.0200 9.97 3.98
1995-Institutional Shares. -- -- -- (0.4235) 0.1500 9.94 5.98
1995-Administration
Shares ................ -- -- -- (0.3989) 0.1500 9.94 5.76
1995-Service Shares ...... -- -- -- (0.3744) 0.1600 9.95 5.59
1994-Institutional Shares. -- -- -- (0.4612) (0.4400) 9.79 0.17
1994-Administration
Shares ................ -- -- -- (0.4362) (0.4400) 9.79 (0.11)
1994-Service Shares/(j)/.. -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/
1993-Institutional Shares. -- -- -- (0.3834) 0.3000 10.23 7.03
1993-Administration
Shares/(j)/............ -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
-----------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------------------
1997-Institutional Shares. 0.45%/(b)/ 4.24%/(b)/ 99.59% $37,159 1.05%/(b)/ 3.64%/(b)/
1997-Administration
Shares ................ 0.70/(b)/ 4.03/(b)/ 99.59 113 1.30/(b)/ 3.43/(b)/
1997-Service Shares....... 0.95/(b)/ 3.77/(b)/ 99.59 1,045 1.55/(b)/ 3.17/(b)/
For the Year Ended October 31,
- -------------------------------------------------------------------
1996-Institutional Shares. 0.45 4.21 231.65 34,814 1.01 3.65
1996-Administration
Shares ................ 0.70 3.96 231.65 48 1.26 3.40
1996-Service Shares....... 0.95 3.74 231.65 695 1.51 3.18
1995-Institutional Shares. 0.45 4.31 259.52 58,389 0.77 3.99
1995-Administration
Shares ................ 0.70 4.14 259.52 46 1.02 3.82
1995-Service Shares ...... 0.95 3.87 259.52 454 1.27 3.55
1994-Institutional Shares. 0.45 3.74 354.00 83,704 0.61 3.58
1994-Administration
Shares ................ 0.70 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/.. 0.95/(b)/ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares. 0.41 3.70 404.60 115,803 1.06 3.05
1993-Administration
Shares/(j)/............ 0.70/(b)/ 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. 0.05/(b)/ 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. $9.85 $0.3236 $(0.1403) $(0.0003) $0.1830 $(0.3230) --
1997-Administrative
Shares .............. 9.84 0.3108 (0.1398) (0.0003) 0.1707 (0.3107) --
1997-Service Shares ..... 9.86 0.2991 (0.1399) (0.0003) 0.1589 (0.2989) --
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 10.00 0.6448 (0.0704) -- 0.5744 (0.6438) (0.0806)
1996-Administrative
Shares/(l)/ ......... 9.91 0.4083 (0.0703) -- 0.3380 (0.4080) --
1996-Service
Shares/(l)/ ......... 9.77 0.3756 0.0898 -- 0.4654 (0.3754) --
1995-Institutional
Shares .............. 9.24 0.6423 0.7610 -- 1.4033 (0.6433) --
For the Period January 5, 1994/(g)/through October 31,
- ------------------------------------------------------
1994-Institutional Shares. 10.00 0.4648 (0.7617) -- (0.2969) (0.4648) --
<CAPTION>
Distributions to shareholders
-----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(k)/
------------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------
1997-Institutional
Shares .............. -- -- -- $(0.3230) $(0.1400) $9.71 1.87%/(f)/
1997-Administrative
Shares .............. -- -- -- (0.3107) (0.1400) 9.70 1.75/(f)/
1997-Service Shares ..... -- -- -- (0.2989) (0.1400) 9.72 1.63/(f)/
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares .............. -- -- -- (0.7244) (0.1500) 9.85 5.98
1996-Administrative
Shares/(l)/ ......... -- -- -- (0.4080) (0.0700) 9.84 3.56/(f)/
1996-Service
Shares/(l)/ ......... -- -- -- (0.3754) 0.0900 9.86 4.90/(f)/
1995-Institutional
Shares .............. -- -- -- (0.6433) 0.7600 10.00 15.72
For the Period January 5, 1994/(g)/through October 31,
- -------------------------------------------------------
1994-Institutional Shares. -- -- -- (0.4648) (0.7617) 9.24 (3.00)
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. 0.45%/(b)/ 6.66%/(b)/ 174.52% $73,483 0.76%/(b)/ 6.35%/(b)/
1997-Administrative
Shares .............. 0.70/(b)/ 6.49/(b)/ 174.52 6,194 1.01/(b)/ 6.18/(b)/
1997-Service Shares ..... 0.95/(b)/ 6.22/(b)/ 174.52 1,108 1.26/(b)/ 5.91/(b)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 0.45 6.51 414.20 72,061 0.83 6.13
1996-Administrative
Shares/(l)/ ......... 0.70/(b)/ 6.41/(b)/ 414.20 702 1.08/(b)/ 6.03/(b)/
1996-Service
Shares/(l)/ ......... 0.95/(b)/ 6.37/(b)/ 414.20 381 1.33/(b)/ 5.99/(b)/
1995-Institutional
Shares .............. 0.45 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994/(g)/through October 31,
- ------------------------------------------------------
1994-Institutional
Shares .............. 0.45/(b)/ 6.48/(b)/ 288.25 24,508 1.46/(b)/ 5.47/(b)/
</TABLE>
/(a)/ Calculated based on the average shares outstanding methodology.
/(b)/ Annualized.
/(c)/ Class A share activity commenced on May 15, 1995.
/(d)/ Includes the effect of mortgage dollar roll transactions.
/(e)/ Administration share activity commenced on April 15, 1993.
/(f)/ Not annualized.
/(g)/ Commencement of operations.
/(h)/ Short Duration Government Fund Administration shares were redeemed in full
on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
/(i)/ Service share activity commenced on April 10, 1996.
/(j)/ Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
/(k)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. For Class A shares only, total return would be reduced if a
sales charge were taken into account.
/(l)/ Administration and Service share activity commenced on February 28, 1996
and March 13, 1996 respectively.
/(m)/ Service share activity commenced on March 27, 1997.
/(n)/ Includes the balancing effect of calculating per share amounts.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
- -------------------------------------------------------------------------------
This Semiannual Report is authorized for distribution to prospective investors
only when preceded or accompanied by a Goldman Sachs Trust Prospectus which
contains facts concerning each Fund's objectives and policies, management,
expenses and other information.
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
John P. McNulty
Mary P. McPherson
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser,
Distributor and Transfer Agent
FISARINST
- ------------------------------------------------------------------------------
The Goldman Sachs
Fixed Income Funds
- ------------------------------------------------------------------------------
Semiannual Report
April 30, 1997
Goldman Sachs Adjustable Rate Government Fund
Goldman Sachs Short Duration Government Fund
Goldman Sachs Short Duration Tax-Free Fund
Goldman Sachs Core Fixed Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
- ------------------------------------------------------------------------------
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/1/
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
- ------------------------
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of a Fund's fiscal
year end.
1-A
<PAGE>
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-1
have a superior capacity for repayment. Notes bearing the designation P-2 have
a strong capacity for repayment.
2-A
<PAGE>
Description of Ratings of State and Municipal
Commercial Paper
---------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an original
maturity in excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
3-A
<PAGE>
AA: Bonds and debt rated AA have a very strong capacity to pay interest
and repay principal and differ from the higher rated issues only in small
degree.
A: Bonds and debt rated A have a very strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB: Bonds and debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB-rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
4-A
<PAGE>
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC-debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A plus sign (+) is added for those issues determined to possess
overwhelming safety characteristics. An SP-2 designation indicates a
satisfactory capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by Standard & Poor's is described as having a strong
degree of safety regarding timely payment.
5-A
<PAGE>
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issued carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable t the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity for
timely payment.
C: This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
FITCH INVESTORS SERVICE, L.P.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories
6-A
<PAGE>
are not significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated F-1+.
A: Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
PLUS (+) AND MINUS (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA, DDD, DD, or D Categories.
7-A
<PAGE>
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
8-A
<PAGE>
DUFF & PHELPS
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
BBB+, BBB, BBB-: Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
9-A
<PAGE>
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
DUFF 3: Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
DUFF 4: Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DUFF 5: Issuer failed to meet scheduled principal and/or interest
payments.
Notes: Bonds which are unrated may expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to
the risks of lower-rated bonds. The Fund is dependent on the
Investment Adviser's judgment, analysis and experience in the
evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
10-A
<PAGE>
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- - Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- - Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
11-A
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of
the interests of the firm and its clients.
INTEGRITY AND HONESTY ARE THE HEART OF OUR BUSINESS. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms, with
partners' capital of approximately $5.3 billion as of November 29, 1996.
. Thirty-four offices worldwide where professionals focus on identifying
financial opportunities.
. The number one underwriter of all international equity issues from (1993-
1996).*
. Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
. The number one lead manager of U.S. common stock offerings from (1989-
1996).*
. The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1996).
* Source: Securities Data Corporation. Ranking excludes REITS, Trusts and
-----------------------------------
Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Goldman Sachs takes Sears public (longest-standing client
relationship)
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 Goldman Sachs opens London office
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Goldman Sachs provides advisory services for the largest privatization
in the region of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
Goldman Sachs increases assets under management by 100% over 1996
3-B
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
GOLDMAN SACHS MUNICIPAL INCOME FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS HIGH YIELD FUND
(EACH A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is
not a prospectus. This Additional Statement should be read in conjunction with
the prospectuses for the Service Shares of each of Goldman Sachs Adjustable Rate
Government Fund, Goldman Sachs Short Duration Government Fund, Goldman Sachs
Short Duration Tax-Free Fund, Goldman Sachs Government Income Fund, Goldman
Sachs Municipal Income Fund, Goldman Sachs Core Fixed Income Fund, Goldman Sachs
Global Income Fund and Goldman Sachs High Yield Fund, each dated August 15,
1997, as amended and/or supplemented from time to time (each a "Prospectus"),
which may be obtained without charge from institutions ("Service Organizations")
that hold Service Shares for the benefit of their customers, or by calling
Goldman, Sachs & Co. at the telephone number, or writing to one of the
addresses, listed below.
TABLE OF CONTENTS
Introduction B-3
Other Investments and Practices B-11
Investment Restrictions B-58
Management B-61
Portfolio Transactions B-77
Shares of the Trust B-80
Net Asset Value B-86
Taxation B-88
Performance Information B-100
Other Information B-112
Financial Statements B-113
Service Plan B-114
Appendix A 1-A
Appendix B 1-B
The date of this Additional Statement is August 15, 1997.
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN SACHS ASSET MANAGEMENT
ADVISER TO GOLDMAN SACHS SHORT INTERNATIONAL
DURATION TAX-FREE FUND, ADVISER TO GOLDMAN SACHS
GOLDMAN SACHS GOVERNMENT GLOBAL INCOME FUND
INCOME FUND, GOLDMAN SACHS 133 PETERBOROUGH COURT
MUNICIPAL INCOME FUND, LONDON EC4A 2BB, ENGLAND
GOLDMAN SACHS CORE FIXED
INCOME FUND AND GOLDMAN GOLDMAN, SACHS & CO.
SACHS HIGH YIELD FUND DISTRIBUTOR
ONE NEW YORK PLAZA 85 BROAD STREET
NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN, SACHS & CO.
MANAGEMENT, L.P. TRANSFER AGENT
ADVISER TO GOLDMAN SACHS 4900 SEARS TOWER
ADJUSTABLE RATE GOVERNMENT CHICAGO, ILLINOIS 60606
FUND AND GOLDMAN SACHS SHORT
DURATION GOVERNMENT FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
TOLL FREE (IN U.S.) .......800-621-2550
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") was formed under the laws of the
state of Delaware on January 28, 1997. The Trust is a successor to a
Massachusetts business trust that was merged with the Trust on April 30, 1997.
The Trust assumed its current name on March 22, 1991. The Trustees of the Trust
have authority under the Declaration of Trust to create and classify shares into
separate series and to classify and reclassify any series of shares into one or
more classes without further action by shareholders. Pursuant thereto, the
Trustees have created the following series, among others: Goldman Sachs
Adjustable Rate Government Fund ("Adjustable Rate Fund"), Goldman Sachs Core
Fixed Income Fund ("Core Fund"), Goldman Sachs Global Income Fund ("Global
Income Fund"), Goldman Sachs Government Income Fund ("Government Income Fund"),
Goldman Sachs Municipal Income Fund ("Municipal Income Fund"), Goldman Sachs
Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund"), Goldman Sachs
Short Duration Government Fund ("Short Duration Government Fund") and Goldman
Sachs High Yield Fund ("High Yield Fund") and 27 other series of shares.
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund, Short Duration Government
Fund and High Yield Fund are each sometimes referred to herein as a "Fund" and
collectively as the "Funds." Short Duration Government Fund, Short Duration
Tax-Free Fund and Core Fund are each authorized to issue six classes of shares:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares. Adjustable Rate Fund is authorized to issue
four classes of shares: Institutional Shares, Administration Shares, Service
Shares and Class A Shares. Government Income Fund, Municipal Income Fund,
Global Income Fund and High Yield Fund are authorized to issue five classes of
shares: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. Additional series may be added in the future from time to time.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Government Income Fund, Municipal Income Fund, Short Duration Tax-
Free Fund and High Yield Fund. Goldman Sachs Asset Management International
("GSAMI"), an affiliate of Goldman Sachs, serves as investment adviser to the
Global Income Fund. Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate
of Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI and GSFM are each sometimes
referred to herein as the "Adviser" and collectively herein as the "Advisers."
In addition, Goldman Sachs serves as each Fund's distributor and transfer agent.
Each Fund's custodian is State Street Bank and Trust Company.
Because each Fund's shares may be redeemed upon request of a
shareholder on any business day at net asset value, the Funds offer greater
liquidity than many competing investments, such as certificates of deposit and
direct investments in certain securities in which the respective Fund may
invest. However,
B-3
<PAGE>
unlike certificates of deposits, shares of the Funds are not insured by the
Federal Deposit Insurance Corporation.
The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of each Fund's investment objective and policies.
Investing in the Funds entails certain risks and there is no assurance that a
Fund will achieve its objective.
EXPERIENCED MANAGEMENT. Successfully creating and managing a
----------------------
diversified portfolio of securities requires professionals with extensive
experience. Goldman Sachs' highly skilled portfolio management team brings
together many years of experience in the analysis, valuation and trading of U.S.
and foreign fixed-income securities.
ADJUSTABLE RATE FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Fund and Short Duration Government Fund are both
designed for investors who seek a high level of high current income, relative
stability of principal and the high credit quality of securities issued or
guaranteed by the U.S. government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and accounting
burdens involved in direct investment.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short Duration Government Fund differently than the investments
normally purchased by such investors. Relative to U.S. Treasury and non-
fluctuating money market instruments, the market value of adjustable rate
mortgage securities in which Adjustable Rate and Short Duration Government Funds
may invest may be adversely affected by increases in market interest rates.
Conversely, decreases in market interest rates may result in less capital
appreciation for adjustable rate mortgage securities in relation to U.S.
Treasury and money market investments.
HIGH CURRENT INCOME. Adjustable Rate and Short Duration Government
-------------------
Funds seek a higher current yield than a money market fund or than that offered
by bank certificates of deposit and money market accounts. However, the
Adjustable Rate and Short Duration Government Funds do not maintain a constant
net asset value per share and are subject to greater fluctuations in the value
of their shares than a money market fund. Unlike bank certificates of deposit
and money market accounts, investments in shares of the Funds are not insured or
guaranteed by any government agency. Each of the Adjustable Rate and Short
Duration Government Funds seeks to provide such high current income without
sacrificing credit quality.
RELATIVE LOW VOLATILITY OF PRINCIPAL. Adjustable Rate Fund seeks to
-------------------------------------
minimize net asset value fluctuations by investing primarily in adjustable rate
mortgage pass-through securities and
B-4
<PAGE>
other mortgage securities with periodic interest rate resets, maintaining a
maximum duration of two years and a target duration equal to that of a six-month
to one-year U.S. Treasury security, and utilizing certain active management
techniques to seek to hedge interest rate risk. Short Duration Government Fund
seeks to minimize net asset value fluctuations by utilizing certain interest
rate hedging techniques and by maintaining a maximum duration of not more than
three years. The duration target of the Short Duration Government Fund is that
of the 2-year U.S. Treasury Security plus or minus .5 years. There is no
assurance that these strategies for the Adjustable Rate Fund and Short Duration
Government Fund will always be successful.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
-------------------------------------------
securities of the Government National Mortgage Association ("Ginnie Mae") and
other mortgage-backed securities may prefer professional management and
administration of their mortgage-backed securities portfolios. A well-
diversified portfolio of such securities emphasizing minimal fluctuation of net
asset value requires significant active management as well as significant
accounting and administrative resources. Members of Goldman Sachs' highly
skilled portfolio management team bring together many years of experience in the
analysis, valuation and trading of U.S. fixed-income securities.
GOVERNMENT INCOME FUND
Government Income Fund is designed for investors who seek the
relatively high current income, relative safety of principal and the high credit
quality of securities issued by the U.S. government or its agencies,
instrumentalities or sponsored enterprises, without incurring the administrative
and account burdens involved in direct investment.
Government Income Fund's overall returns are generally likely to move
in the same direction as interest rates. Therefore, when interest rates
decline, Government Income Fund's return is also likely to decline. In exchange
for accepting a higher degree of share price fluctuation, investors have the
potential to achieve a higher return from the Government Income Fund than from
shorter-term investments.
High Current Income. Government Income Fund is designed to have a
-------------------
higher current yield than a money market fund, since it can invest in longer-
term, higher yielding securities, and may utilize certain investment techniques
not available to a money market fund. Similarly, Government Income Fund's yield
is expected to exceed that offered by bank certificates of deposit and money
market accounts. However, Government Income Fund does not maintain a constant
net asset value per share and is subject to greater fluctuation in the value of
its shares than a money market fund. Unlike bank certificates of deposit and
money market accounts, investments in shares of Government Income Fund are not
insured or guaranteed by any government agency. Government Income Fund seeks
B-5
<PAGE>
to provide high current income without, however, sacrificing credit quality.
Liquidity. Because Government Income Fund's shares may be redeemed upon
---------
request of a shareholder on any business day at net asset value, Government
Income Fund offers greater liquidity than many competing investments such as
certificates of deposit and direct investments in certain securities in which
Government Income Fund may invest.
A Sophisticated Investment Process. Government Income Fund's
----------------------------------
investment process starts with a review of trends for the overall economy as
well as for different sectors of the U.S. government and mortgage-backed
securities markets. Goldman Sachs' portfolio managers then analyze yield
spreads, implied volatility and the shape of the yield curve. In planning the
Government Income Fund's portfolio investment strategies, the Adviser is able to
draw upon the economic and fixed-income research resources of Goldman Sachs.
The Adviser will use a sophisticated analytical process involving Goldman Sachs'
proprietary mortgage prepayment model and option-adjusted spread model to
structure and maintain the Government Income Fund's investment portfolio. In
determining the Government Income Fund's investment strategy and making market
timing decisions, the Adviser will have access to information from Goldman
Sachs' economists, fixed-income analysts and mortgage specialists.
Convenience of a Fund Structure. Government Income Fund eliminates
-------------------------------
many of the complications that direct ownership of U.S. government and mortgage-
backed securities entails. Government Income Fund automatically reinvests all
principal payments within the Fund and distributes only current income each
month, thereby conserving principal and eliminating the investor's need to
segregate and reinvest the principal portion of each payment on his own.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS
Short Duration Tax-Free Fund and Municipal Income Fund (the "Tax Exempt
Funds") are not money market funds. Each is designed for investors who seek the
tax benefits associated with investing in municipal securities and who are able
to accept greater risk with the possibility of higher returns than investors in
municipal money market funds. While municipal money market funds almost always
maintain a constant net asset value, they must meet stringent high quality
credit standards, their portfolios must be broadly diversified and their
portfolio securities must have remaining maturities of 397 days or less. An
example of an "eligible" investment for the Tax Exempt Funds is auction rate
municipal securities, which generally have higher yields than money market
municipal securities, but which typically are not eligible investments for
municipal money market funds.
In addition, unlike a municipal money market fund, the Tax Exempt
Funds' increased investment flexibility permits their portfolios to be more
easily adjusted to reflect the shape of the
B-6
<PAGE>
current yield curve as well as to respond to anticipated developments that might
affect the shape of the yield curve.
Investors who wish to invest in municipal securities may find that a
mutual fund structure offers some important advantages when compared to
investing in individual municipal securities, including:
. The ratings given to municipal securities by the rating
organizations are difficult to evaluate. For example, some
municipal securities with relatively low credit ratings have yields
comparable to municipal securities with much higher ratings. The
credit research professionals at Goldman Sachs closely follow
market events and are well positioned to judge current and expected
credit conditions of municipal issuers;
. Because of the relative inefficiency of the secondary market in
municipal securities, the value of an individual municipal security
is often difficult to determine. As such, investors may obtain a
wide range of different prices when asking for quotes from
different dealers. In addition, a dealer may have a large
inventory of a particular issue that it wants to reduce.
Obtaining the best overall prices can require extensive
negotiation, which is a function performed by the portfolio
manager;
. Market expertise is also an important consideration for municipal
investors, and because the Tax Exempt Funds take relatively large
positions in different securities, the Tax Exempt Funds may be able
to obtain more favorable prices in the municipal securities market
than investors with relatively small positions; and
. Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
designed to provide this diversification.
CORE FUND
Core Fund is designed for investors seeking a total return consisting
of both income and capital appreciation that exceeds the total return of the
Lehman Brothers Aggregate Bond Index, without incurring the administrative and
accounting burdens involved in direct investment. Such investors also prefer
liquidity, experienced professional management and administration, a
sophisticated investment process, and the convenience of a mutual fund
structure. Core Fund may be appropriate as part of a balanced investment
strategy consisting of stocks, bonds and cash or as a complement to positions in
other types of fixed-income investments.
B-7
<PAGE>
Core Fund's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fund's return is likely to increase. Conversely, when interest rates
increase, Core Fund's return is likely to decline. However, the Adviser
believes that, given the flexibility of managers to invest in a diversified
portfolio of securities, Core Fund's return is not likely to decline as quickly
as that of other fixed-income funds with a comparable average portfolio
duration. In exchange for accepting a higher degree of potential share price
fluctuation, investors have the opportunity to achieve a higher return from Core
Fund than from shorter-term investments.
A number of investment strategies will be used to achieve the Core
Fund's investment objective, including market sector selection, determination of
yield curve exposure, and issuer selection. In addition, the Adviser will
attempt to take advantage of pricing inefficiencies in the fixed-income markets.
Market sector selection is the underweighting or overweighting of one or more of
the five market sectors (i.e., U.S. Treasuries, U.S. government agencies,
corporate securities, mortgage-backed securities and asset-backed securities) in
which the Fund primarily invests. The decision to overweight or underweight a
given market sector is based on expectations of future yield spreads between
different sectors. Yield curve exposure strategy consists of overweighting or
underweighting different maturity sectors to take advantage of the shape of the
yield curve. Issuer selection is the purchase and sale of corporate securities
based on a corporation's current and expected credit standing. To take
advantage of price discrepancies between securities resulting from supply and
demand imbalances or other technical factors, the Fund may simultaneously
purchase and sell comparable, but not identical, securities. The Adviser will
have access to the research of, and proprietary technical models developed by,
Goldman Sachs and will apply quantitative and qualitative analysis in
determining the appropriate allocations among the categories of issuers and
types of securities.
A SOPHISTICATED INVESTMENT PROCESS. Core Fund will attempt to control
----------------------------------
its exposure to interest rate risk, including overall market exposure and the
spread risk of particular sectors and securities, through active portfolio
management techniques. Core Fund's investment process starts with a review of
trends for the overall economy as well as for different sectors of the fixed-
income securities markets. Goldman Sachs' portfolio managers then analyze
yield spreads, implied volatility and the shape of the yield curve. In planning
Core Fund's portfolio investment strategies, the Adviser is able to draw upon
the economic and fixed-income research resources of Goldman Sachs. The Adviser
will use a sophisticated analytical process including Goldman Sachs' proprietary
mortgage prepayment model and option-adjusted spread model to assist in
structuring and maintaining Core Fund's investment portfolio. In determining
Core Fund's investment strategy and making market timing decisions, the Adviser
will have
B-8
<PAGE>
access to input from Goldman Sachs' economists, fixed-income analysts and
mortgage specialists.
GLOBAL INCOME FUND
Global Income Fund is designed for investors seeking a combination of
high income, capital appreciation, stability of principal, experienced
professional management, flexibility and liquidity. However, investing in the
Fund involves certain risks and there is no assurance that the Fund will achieve
its investment objective.
In selecting securities for the Fund, portfolio managers consider such
factors as the security's duration, sector and credit quality rating as well as
the security's yield and prospects for capital appreciation. In determining the
countries and currencies in which the Fund will invest, the Fund's portfolio
mangers form opinions based primarily on the views of Goldman Sachs' economists
as well as information provided by securities dealers, including information
relating to factors such as interest rates, inflation, monetary and fiscal
policies, taxation, and political climate. The portfolio managers apply the
Black-Litterman Model (the "Model") to their views to develop a portfolio that
produces, in the view of the Adviser, the optimal expected return for a given
level of risk. The Model factors in the opinions of the portfolio managers,
adjusting for their level of confidence in such opinions, with the views implied
by an international capital asset pricing formula. The Model is also used to
maintain the level of portfolio risk within the guidelines established by the
Adviser.
High Income. Global Income Fund's portfolio managers will seek out
-----------
the highest yielding bonds in the global fixed-income market that meet the
Global Income Fund's credit quality standards and certain other criteria.
Capital Appreciation. Investing in the foreign bond markets offers
--------------------
the potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic strength.
However, there is a risk of capital depreciation as a result of unanticipated
interest rate and currency fluctuations.
Portfolio Management Flexibility. Global Income Fund is actively
--------------------------------
managed. The Fund's portfolio managers invest in countries that, in their
judgment, meet the Fund's investment guidelines and often have strong currencies
and stable economies and in securities that they believe offer favorable
performance prospects.
Relative Stability of Principal. Global Income Fund may be able to
-------------------------------
reduce principal fluctuation by investing in foreign countries with economic
policies or business cycles different from
B-9
<PAGE>
those of the United States and in foreign securities markets that do not
necessarily move in the same direction or magnitude as the U.S. market.
Investing in a broad range of U.S. and foreign fixed-income securities and
currencies reduces the dependence of the Fund's performance on developments in
any particular market to the extent that adverse events in one market are offset
by favorable events in other markets. The Fund's policy of investing primarily
in high quality securities may also reduce principal fluctuation. However,
there is no assurance that these strategies will always be successful.
Professional Management. Individual U.S. investors may prefer
-----------------------
professional management of their global bond and currency portfolios because a
well-diversified portfolio requires a large amount of capital and because the
size of the global market requires access to extensive resources and a
substantial commitment of time.
HIGH YIELD FUND
High Yield Fund's Investment Process. GSAM starts the investment
-------------------------------------
process with economic analysis based on research generated by the Goldman Sachs
Global Economic Research Group and others to determine broad growth trends,
industry-specific events and market forecasts. The market value of non-
investment grade fixed income securities tends to reflect individual
developments within a company to a greater extent than higher rated corporate
debt or Treasury bonds that react primarily to fluctuations in interest rates.
Therefore, determining the creditworthiness of issuers is critical. To that
end, the High Yield Fund's portfolio managers have access to Goldman, Sachs &
Co.'s highly regarded Credit Research and Global Investment Research
Departments, as well as analysis from the firm's High Yield Research Group, a
dedicated group of 14 professionals in the high yield and emerging market
corporate bond research area, consisting of industry and regional market
specialists. In addition, the Fund's portfolio managers may review the opinions
of the two largest independent credit rating agencies, Standard & Poor's Ratings
Group and Moody's Investors Services, Inc. High Yield Fund's portfolio managers
and credit analysts also conduct their own in-depth analysis of each issue
considered for inclusion in the Fund's portfolio. The portfolio managers and
credit analysts evaluate such factors as a company's competitive position, the
strength of its balance sheet, its ability to withstand economic downturns and
its potential to generate ample cash flow to service its debt. The ability to
accurately analyze a company's future cash flow by correctly anticipating the
impact of economic, industry-wide and specific events are critical to successful
high yield investing. GSAM's goal is to identify companies with the potential
to strengthen their balance sheets by increasing their earnings, reducing their
debt or effecting a turnaround. GSAM analyzes trends in a company's debt
picture (i.e., the level of its interest coverage) as well as new developments
in its capital structure on an ongoing basis. GSAM believes that this constant
reassessment is more
B-10
<PAGE>
valuable than relying on a "snapshot" view of a company's ability to service
debt at one or two points in time.
High Yield Fund's portfolio is diversified among different sectors and
industries on a global basis in an effort to reduce overall risk. While GSAM
will avoid excessive concentration in any one industry, the Fund's specific
industry weightings are the result of individual security selection. Emerging
market debt considered for the High Yield Fund's portfolio will be selected by
specialists knowledgeable about the political and economic structure of those
economies.
Return on and Risks of High Yield Securities. Over the past decade,
---------------------------------------------
high yield bonds have delivered consistently higher yields and total return (and
higher volatility) than either investment grade corporate bonds or U.S. Treasury
bonds. However, because these non-investment grade securities involve higher
risks in return for higher income, they are best suited to long-term investors
who are financially secure enough to withstand volatility and the risks
associated with such investments. See "Other Investments and Practices."
Different types of fixed income securities may react differently to changes in
the economy. High yield bonds, like stocks, tend to perform best when the
economy is strong, inflation is low and companies experience healthy profits,
which can lead to higher stock prices and higher credit ratings. Government
bonds are likely to appreciate more in a weaker economy when interest rates are
declining. In certain types of markets, adding some diversification in the high
yield asset class may help to increase returns and decrease overall portfolio
risk.
For high yield, non-investment grade securities, as for most
investments, there is a direct relationship between risk and return. Along with
their potential to deliver higher yields and greater capital appreciation than
most other types of fixed income securities, high yield securities are subject
to higher risk of loss, greater volatility and are considered speculative by
traditional investment standards. The most significant risk associated with
high yield securities is credit risk: the risk that the company issuing a high
yield security may have difficulty in meeting its principal and/or interest
payments on a timely basis. As a result, extensive credit research and
diversification are essential factors in managing risk in the high yield arena.
To a lesser extent, high yield bonds are also subject to interest rate risk:
when interest rates increase, the value of fixed income securities tends to
decline.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. government securities ("U.S. Government
Securities"), which are obligations issued or guaranteed by the U.S. government
and its agencies, instrumentalities or sponsored enterprises. Some U.S.
Government Securities (such as
B-11
<PAGE>
Treasury bills, notes and bonds, which differ only in their interest rates,
maturities and times of issuance) are supported by the full faith and credit of
the United States of America. Others, such as obligations issued or guaranteed
by U.S. government agencies, instrumentalities or sponsored enterprises, are
supported either by (a) the full faith and credit of the U.S. government (such
as securities of the Small Business Administration), (b) the right of the issuer
to borrow from the Treasury (such as securities of Federal Home Loan Banks), (c)
the discretionary authority of the U.S. government to purchase the agency's
obligations (such as securities of Federal National Mortgage Association
("Fannie Mae")) or (d) only the credit of the issuer (such as securities of the
Financing Corporation). The U.S. government is under no legal obligation, in
general, to purchase the obligations of its agencies, instrumentalities or
sponsored enterprises. No assurance can be given that the U.S. government will
provide financial support to the U.S. government agencies, instrumentalities or
sponsored enterprises in the future.
U.S. Government Securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, or its agencies, instrumentalities or sponsored
enterprises. U.S. Government Securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a substantial secondary market, such participations are regarded as illiquid.
Each Fund may also purchase U.S. Government Securities in private placements,
subject to the Fund's limitation on investment in illiquid securities.
The Funds may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the separate trading of registered
interest and principal of securities program ("STRIPS").
CUSTODIAL RECEIPTS
Each Fund may acquire custodial receipts in respect of U.S. Government
Securities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). For certain securities law purposes, custodial receipts
are not considered U.S. Government Securities.
B-12
<PAGE>
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
Adjustable Rate, Short Duration Government, Core, Global Income, High
Yield and Government Income Funds (collectively, the "Taxable Funds") may each
invest in mortgage loans and mortgage pass-through securities and other
securities representing an interest in or collateralized by adjustable and
fixed-rate mortgage loans ("Mortgage-Backed Securities").
GENERAL CHARACTERISTICS. Each mortgage pool underlying Mortgage-
-----------------------
Backed Securities consists of mortgage loans evidenced by promissory notes
secured by first mortgages or first deeds of trust or other similar security
instruments creating a first lien on owner occupied and non-owner occupied one-
unit to four-unit residential properties, multi-family (i.e., five or more)
properties, agriculture properties, commercial properties and mixed use
properties (the "Mortgaged Properties"). The Mortgaged Properties may consist
of detached individual dwelling units, multi-family dwelling units, individual
condominiums, townhouses, duplexes, triplexes, fourplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
The Mortgaged Properties may also include residential investment properties and
second homes.
The investment characteristics of adjustable and fixed rate Mortgage-
Backed Securities differ from those of traditional fixed-income securities. The
major differences include the payment of interest and principal on Mortgage-
Backed Securities on a more frequent (usually monthly) schedule, and the
possibility that principal may be prepaid at any time due to prepayments on the
underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed-income securities. As a result, a faster than expected
prepayment rate will reduce both the market value and the yield to maturity from
those which were anticipated. A prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity and market value.
To the extent that the Funds invest in Mortgage-Backed Securities, the Advisers
will seek to manage these potential risks by investing in a variety of Mortgage-
Backed Securities and by using certain hedging techniques.
ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). ARMs generally provide for a
---------------------------------------
fixed initial mortgage interest rate for a specified period of time.
Thereafter, the interest rates (the "Mortgage Interest Rates") may be subject to
periodic adjustment based on changes in the applicable index rate (the "Index
Rate"). The adjusted rate would be equal to the Index Rate plus a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some
mortgagors may find difficult to make. However, certain ARMs may provide that
the Mortgage Interest Rate may not be adjusted to a rate above an applicable
lifetime maximum rate or below an
B-13
<PAGE>
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-month or one-year
London Interbank Offered Rate, the prime rate of a specific bank or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury
rate, closely mirror changes in market interest rate levels. Others, such as
the 11th District Federal Home Loan Bank Cost of Funds index, tend to lag behind
changes in market rate levels and tend to be somewhat less volatile. The degree
of volatility in the market value of each Taxable Fund's portfolio and therefore
in the net asset value of each Taxable Fund's shares will be a function of the
length of the interest rate reset periods and the degree of volatility in the
applicable indices.
FIXED-RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans
-------------------------
included in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple
interest at fixed annual rates and have original terms to maturity ranging from
5 to 40 years. Fixed-Rate
B-14
<PAGE>
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
Taxable Funds may invest. These regulations may impair the ability of a
mortgage lender to enforce its rights under the mortgage documents. These
regulations may adversely affect the Funds' investments in Mortgage-Backed
Securities (including those issued or guaranteed by the U.S. government, its
agencies or instrumentalities) by delaying the Funds' receipt of payments
derived from principal or interest on mortgage loans affected by such
regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
-----------
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate proceeds of the sale of foreclosed property may not equal the
amounts owed on the Mortgage-Backed Securities.
Furthermore, courts in some cases have imposed general equitable principles
upon foreclosure generally designed to relieve the borrower from the legal
effect of default and have required lenders to undertake affirmative and
expensive actions to determine the causes for the default and the
likelihood of loan reinstatement.
2. Rights of Redemption. In some states, after foreclosure of a mortgage
--------------------
loan, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property, which right may diminish the
mortgagee's ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may
also reduce the monthly payments due under such mortgage loan, change the
rate of interest, reduce the principal balance of the loan to the then-
current appraised value of the related mortgaged property, alter the
mortgage loan repayment schedule and grant priority of certain liens over
the lien of the mortgage loan. If a court relieves a borrower's obligation
to repay amounts otherwise due on a mortgage loan, the mortgage loan
servicer will not be required to advance such amounts, and any loss may be
borne by the
B-15
<PAGE>
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 Taxable Funds are permitted to invest in other
types of Mortgage-Backed Securities that may be available in the future to the
extent consistent with their respective investment policies and objectives.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States authorized to guarantee the timely payment
of the principal of and interest on certificates that are based on and backed
by a pool of mortgage loans insured by the Federal Housing Administration ("FHA
Loans"), or guaranteed by the Veterans Administration ("VA Loans"), or by pools
of other eligible mortgage loans. In order to meet its obligations, Ginnie Mae
is authorized to borrow from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the U.S. Congress. Each Fannie Mae Certificate is
issued and guaranteed by Fannie Mae and represents an undivided interest in a
pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool consists of
residential mortgage loans ("Mortgage Loans") either previously owned by Fannie
Mae or purchased by it in connection with the formation of the Pool. The
Mortgage Loans may be either conventional Mortgage Loans (i.e., not insured or
guaranteed by any U.S. government agency) or
B-16
<PAGE>
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.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one- to four-family residential properties
or multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac
Certificate group may include whole loans, participation interests in whole
loans, undivided interests in whole loans and participations comprising another
Freddie Mac Certificate group.
CONVENTIONAL MORTGAGE LOANS. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-
rate mortgage loans with original terms to maturity of between five and thirty
years. Substantially all of these mortgage loans are secured by first liens on
one- to four-family residential properties or multi-family projects. Each
B-17
<PAGE>
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 Taxable Funds may invest in
--------------------------------
government guaranteed mortgage pass-through securities ("Mortgage Pass-
Throughs"), that are fixed or adjustable rate Mortgage-Backed Securities which
provide for monthly payments that are a "pass-through" of the monthly interest
and principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans, net of any fees or other amounts paid to
any guarantor, administrator and/or servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in one
---------------------------
or more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate.
Generally, each certificate will evidence the specified interest of the holder
thereof in the payments of principal or interest or both in respect of the
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of
B-18
<PAGE>
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. Each Taxable Fund may invest in multiple class securities
- -----------
including collateralized mortgage obligations ("CMOs") and REMIC Certificates
issued by U.S. government agencies, instrumentalities (such as Fannie Mae) and
sponsored enterprises (such as Freddie Mac) or, in the case of Core, Global and
Government Income Funds, by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class Mortgage-Backed
Securities represent direct ownership interests in, a pool of mortgage loans or
Mortgage-Backed Securities the payments on which are used to make payments on
the CMOs or multiple class Mortgage-Backed Securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class Mortgage-Backed Securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed Mortgage-Backed Securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a
B-19
<PAGE>
"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
highest priority on each payment date after interest due has been paid to all
classes entitled to receive interest currently. Shortfalls, if any, are added to
the amount payable on the next payment date. The PAC Certificate payment
schedule is taken into account in calculating the final distribution date of
each class of PAC. In order to create PAC tranches, one or more tranches
generally must be created that absorb most of the volatility in the underlying
Mortgage Assets. These tranches tend to have market prices and yields that are
much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The Taxable Funds may invest in
-----------------------------------
Stripped Mortgage-Backed Securities ("SMBS"), which are derivative multi-class
mortgage securities, issued or guaranteed by
B-20
<PAGE>
the U.S. government, its agencies or instrumentalities. Core Fund, Government
Income Fund and Global 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 each
Fund's limitation on investments in illiquid securities. The Adviser may
determine that SMBS which are U.S. Government Securities are liquid for purposes
of each Fund's limitation on investments in illiquid securities in accordance
with procedures adopted by the Board of Trustees. The market value of the class
consisting entirely of principal payments generally is unusually volatile in
response to changes in interest rates. The yields on a class of SMBS that
receives all or most of the interest from Mortgage Assets are generally higher
than prevailing market yields on other Mortgage-Backed Securities because their
cash flow patterns are more volatile and there is a greater risk that the
initial investment will not be fully recouped.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
RATINGS. The ratings assigned by a rating organization to Mortgage Pass-
-------
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things,
payment guarantees, letters of credit, pool insurance, subordination, or any
combination thereof.
B-21
<PAGE>
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due 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
B-22
<PAGE>
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
Core, Government Income, High Yield and Global Income Funds may invest in
asset-backed securities. Such securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During
periods of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, a Fund's ability to
maintain positions in such securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to
B-23
<PAGE>
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.
LOAN PARTICIPATIONS
The High Yield Fund may invest in loan participations. Usually, neither
the co-lender nor any other participant guarantees the participations in any
way. As a result, the principal credit risk associated with acquiring
participation interests is the credit risk associated with the underlying
corporate borrower. The High Yield Fund may incur additional credit risk,
however, when a Fund is in the position of participant rather than a co-lender
because the High Yield Fund must assume the risk of insolvency of the co-lender
from which the participation interest was acquired and that of any person
interpositioned between the Fund and the co-lender.
Typically, the High Yield Fund will look to the agent bank to collect
principal of and interest on a participation interest, to monitor compliance
with loan covenants, to enforce all credit remedies, such as foreclosures on
collateral, and to notify co-lenders of any adverse change in the borrower's
financial condition or declaration of insolvency. The agent bank is compensated
for these services by the borrower pursuant to the terms of the loan agreement.
The High Yield Fund does not believe that price quotations currently
obtainable from banks, dealers or pricing services consistently represent the
market values of participation interests. Therefore, the Adviser will,
following guidelines established by the board of trustees of the Trust (the
"Board of Trustees") value the participation interests held by the High Yield
Fund at fair value, which approximates market value. In valuing a participation
interest, the Adviser may consider the factors it deems appropriate, including:
(i) the characteristics of the participation interest, including the cost, size,
interest rate, period until next interest rate reset, maturity and base lending
rate of the participation interest, the terms and conditions of the loan and any
related agreements and the position of the loan in the borrower's debt
structure; (ii) the nature, adequacy and value of the collateral,including the
High Yield Fund's rights, remedies and interest with respect to the collateral;
(iii) the creditworthiness of the borrower, based on an evaluation of its
financial condition, financial statements and information about the borrower's
business, cash flows, capital structure and future prospects; (iv) the market
for the participation interest, including price quotations for and trading in
the participation interest and similar participation interests or instruments
and the market environment and investor
B-24
<PAGE>
attitudes towards the participation interest or participation interests
generally; (v) the quality and creditworthiness of any intermediate
participants; and (vi) general economic or market conditions.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, deferred interest and capital
appreciation bonds and pay-in-kind ("PIK") securities. Zero coupon, deferred
interest and capital appreciation bonds are debt securities issued or sold at a
discount from their face value and which do not entitle the holder to any
periodic payment of interest prior to maturity or a specified date. The
original issue discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, the liquidity of the security and
the perceived credit quality of the issuer. These securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interests in such stripped debt obligations or coupons. The market prices of
zero coupon, deferred interest, capital appreciation bonds and PIK securities
generally are more volatile than the market prices of interest bearing
securities and are likely to respond to a greater degree to changes in interest
rates than interest bearing securities having similar maturities and credit
quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds and deferred interest bonds, PIK securities are designed to give an
issuer flexibility in managing cash flow. PIK securities that are debt
securities can either be senior or subordinated debt and generally trade flat
(i.e., without accrued interest). The trading price of PIK debt securities
generally reflects the market value of the underlying debt plus an amount
representing accrued interest since the last interest payment.
Zero coupon, deferred interest, capital appreciation and PIK securities
involve the additional risk that, unlike securities that periodically pay
interest to maturity, a Fund will realize no cash until a specified future
payment date unless a portion of such securities is sold and, if the issuer of
such securities defaults, a Fund may obtain no return at all on its investment.
In addition, even though such securities do not provide for the payment of
current interest in cash, the Funds are nonetheless required to accrue income on
such investments for each taxable year and generally are required to distribute
such accrued amounts (net of deductible expenses, if any) to avoid being subject
to tax. Because no cash is generally received at the time of the accrual, a
Fund may be required to liquidate other portfolio securities to obtain
sufficient cash to satisfy federal tax distribution requirements applicable to
the Fund. See "Taxation."
B-25
<PAGE>
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which each Fund may
invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at predesignated
periods in response to changes in the market rate of interest on which the
interest rate is based. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation. The absence of an unconditional
demand feature on variable and floating rate municipal securities exercisable
within seven days would, and the failure of the issuer or a third party to honor
its obligations under a demand or put feature might, require a variable or
floating rate obligation to be treated as illiquid for purposes of the Tax
Exempt Funds' limitation on illiquid investments.
Each Fund may invest in "leveraged" inverse floating rate debt instruments
("inverse floaters"), including "leveraged inverse floaters." The interest rate
on inverse floaters resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse floater, the greater
the volatility of its market value. Accordingly, the duration of an inverse
floater may exceed its stated final maturity. Certain inverse floaters may be
deemed to be illiquid securities for purposes of each Fund's limitation on
illiquid investments.
CORPORATE DEBT OBLIGATIONS
Core, Global Income, Government Income and High Yield Funds may invest in
corporate debt obligations, including obligations of industrial, utility and
financial issuers. Corporate debt obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
HIGH YIELD SECURITIES. Bonds rated BB or below by Standard & Poor's
---------------------
Ratings Group (Standard & Poor's) or Ba or below by Moody's Investor Service,
Inc. ("Moody's") (or comparable rated and unrated securities) are commonly
referred to as "junk bonds" and are considered speculative; the ability of their
issuers to make principal and interest payments may be questionable. In some
cases, such bonds may be highly speculative, have poor prospects 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
B-26
<PAGE>
AAA, AA, A or BBB by Standard and Poor's or Aaa, Aa, A or Baa by Moody's).
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of a
Fund to achieve its investment objective may, to the extent of its investments
in high yield securities, be more dependent upon such creditworthiness analysis
than would be the case if the Fund were investing in higher quality securities.
See Appendix B for a description of the corporate bond and preferred stock
ratings by Standard & Poor's, Moody's, Fitch Investors Service Corp. and Duff &
Phelps.
The amount of high yield, fixed income securities proliferated in the 1980s
and early 1990s as a result of increased merger and acquisition and leveraged
buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tends to reflect
those individual corporate developments to a greater extent than do those of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Issuers of such high yield securities may not be able
to make use of more traditional methods of financing and their ability to
service debt obligations may be more adversely affected than issuers of higher
rated securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These non-
investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the junk bond
market and investor perceptions regarding lower-rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which High Yield Fund
invests, the yields and prices of such securities may tend to fluctuate more
than those for higher-rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income 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
B-27
<PAGE>
such securities but will be reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace such
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if the High Yield Fund experiences unexpected net
redemptions of the High Yield Fund's
B-28
<PAGE>
shares, it may be forced to sell its higher-rated securities, resulting in a
decline in the overall credit quality of the High Yield Fund's portfolio and
increasing the exposure of the High Yield Fund to the risks of high yield
securities. The High Yield Fund may also incur additional expenses to the
extent that it is required to seek recovery upon a default in the payment of
principal or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Funds may each invest
in obligations issued or guaranteed by United States and foreign banks
(Government Income Fund may only invest in U.S. dollar denominated securities).
Bank obligations, including without limitation time deposits, bankers'
acceptances and certificates of deposit, may be general obligations of the
parent bank or may be obligations only of the issuing branch pursuant to the
terms of the specific obligations or government regulation.
Banks are subject to extensive governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. Foreign banks are subject to different regulations and are
generally permitted to engage in a wider variety of activities than U.S. banks.
In addition, the profitability of the banking industry is largely dependent upon
the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
B-29
<PAGE>
MUNICIPAL SECURITIES
Core, Municipal Income, High Yield and Short Duration Tax-Free Funds may
invest in bonds, notes and other instruments issued by or on behalf of states,
territories and possessions of the United States (including the District of
Columbia) and their political subdivisions, agencies or instrumentalities
("Municipal Securities"), the interest on which is exempt from regular federal
income tax (i.e., excluded from gross income for federal income tax purposes but
not necessarily exempt from the federal alternative minimum tax or from the
income taxes of any state or local government). In addition, Municipal
Securities include participation interests in such securities the interest on
which is, in the opinion of bond counsel or counsel selected by the Adviser,
excluded from gross income for federal income tax purposes. The Core, Municipal
Income, High Yield and Short Duration Tax-Free Funds may revise their definition
of Municipal Securities in the future to include other types of securities that
currently exist, the interest on which is or will be, in the opinion of such
counsel, excluded from gross income for federal income tax purposes, provided
that investing in such securities is consistent with each Fund's investment
objective and policies.
Municipal Securities are often issued to obtain funds for various public
purposes including refunding outstanding obligations, obtaining funds for
general operating expenses, and obtaining funds to lend to other public
institutions and facilities. Municipal Securities also include certain
"private activity bonds" or industrial development bonds, which are issued by or
on behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest, although the characteristics and enforcement of general obligations
may vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer, and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer of a
revenue obligation may be backed by a letter of credit, guarantee or insurance.
General obligations and revenue obligations may be issued in a variety of forms,
including commercial paper, fixed, variable and floating rate securities, tender
option bonds, auction rate bonds and zero coupon bonds, deferred interest bonds
and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a
variety of hybrid and special types of Municipal
B-30
<PAGE>
Securities. There are also numerous differences in the security of Municipal
Securities both within and between these two principal classifications.
For the purpose of applying a Fund's investment restrictions, the
identification of the issuer of a Municipal Security which is not a general
obligation is made by the Adviser based on the characteristics of the Municipal
Security, the most important of which is the source of funds for the payment of
principal and interest on such securities.
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as Short Duration Tax-Free, Municipal
Income, High Yield and Core Funds. Thus, the issue may not be said to be
publicly offered. Unlike some securities that are not publicly offered, a
secondary market exists for many Municipal Securities that were not publicly
offered initially and such securities may be readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
MUNICIPAL LEASES, CERTIFICATES OF PARTICIPATION AND OTHER PARTICIPATION
-----------------------------------------------------------------------
INTERESTS. The Core, High Yield, Municipal Income, and Short-Duration Tax-Free
- ---------
Funds may invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Municipal leases
frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject
to the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or
B-31
<PAGE>
utilizing the leased equipment. Although the obligations may be secured by the
leased equipment or facilities, the disposition of the property in the event of
non-appropriation or foreclosure might prove difficult, time consuming and
costly, and result in a delay in recovering or the failure to fully recover a
Fund's original investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation may
be deemed to be illiquid for the purpose of the Funds' limitation on investments
in illiquid securities. Other municipal lease obligations and certificates of
participation acquired by a Fund may be determined by the Adviser, pursuant to
guidelines adopted by the Trustees of the Trust, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades or quotes
for the obligation; and (4) the nature of the marketplace trades. In addition,
the Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance to the issuer of the
property covered by the lease and the likelihood that the marketability of the
obligation will be maintained throughout the time the obligation is held by a
Fund.
The Core, High Yield, Municipal Income and Short Duration Tax-Free Funds
may purchase participations in Municipal Securities held by a commercial bank or
other financial institution. Such participations provide a Fund with the right
to a pro rata undivided interest in the underlying Municipal Securities. In
addition, such participations generally provide a Fund with the right to demand
payment, on not more than seven days' notice, of all or any part of such Fund's
participation interest in the underlying Municipal Security, plus accrued
interest. A Fund will only invest in such participations if, in the opinion of
bond counsel, counsel for the issuers of such participations or counsel selected
by the Adviser, the interest from such participations is exempt from regular
federal income tax.
MUNICIPAL NOTES. Municipal Securities in the form of notes generally are
---------------
used to provide for short-term capital needs, in anticipation of an issuer's
receipt of other revenues or financing, and typically have maturities of up to
three years. Such instruments may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and revenue
B-32
<PAGE>
anticipation notes and construction loan notes. Tax anticipation notes are
issued to finance the working capital needs of governments. Generally, they are
issued in anticipation of various tax revenues, such as income, sales, property,
use and business taxes, and are payable from these specific future taxes.
Revenue anticipation notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under federal revenue sharing
programs. Bond anticipation notes are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the long-term bonds
then provide the funds needed for repayment of the notes. Tax and revenue
anticipation notes combine the funding sources of both tax anticipation notes
and revenue anticipation notes. Construction Loan Notes are sold to provide
construction financing. These notes are secured by mortgage notes insured by
the FHA; however, the proceeds from the insurance may be less than the economic
equivalent of the payment of principal and interest on the mortgage note if
there has been a default. The obligations of an issuer of municipal notes are
generally secured by the anticipated revenues from taxes, grants or bond
financing. An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or that
refinancing will be otherwise unavailable.
TAX-EXEMPT COMMERCIAL PAPER. Issues of commercial paper typically
---------------------------
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by state and local governments and their agencies to finance working
capital needs of municipalities or to provide interim construction financing and
are paid from general revenues of municipalities or are refinanced with long-
term debt. In most cases, tax-exempt commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
PRE-REFUNDED MUNICIPAL SECURITIES. The principal of and interest on pre-
---------------------------------
refunded Municipal Securities are no longer paid from the original revenue
source for the securities. Instead, the source of such payments is typically
an escrow fund consisting of U.S. Government Securities. The assets in the
escrow fund are derived from the proceeds of refunding bonds issued by the same
issuer as the pre-refunded Municipal Securities. Issuers of Municipal
Securities use this advance refunding technique to obtain more favorable terms
with respect to securities that are not yet subject to call or redemption by the
issuer. For example, advance refunding enables an issuer to refinance debt at
lower market interest rates, restructure debt to improve cash flow or eliminate
restrictive covenants in the indenture or other governing instrument for the
pre-refunded Municipal Securities. However, except for a change in the revenue
source from which principal and interest payments are made, the pre-refunded
Municipal Securities remain outstanding on their original terms until they
mature or are redeemed by the issuer. Pre-refunded Municipal Securities are
B-33
<PAGE>
usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free, Municipal Income, High
----------------------
Yield, and Core Funds may each invest in certain types of Municipal Securities,
generally referred to as industrial development bonds (and referred to under
current tax law as private activity bonds), which are issued by or on behalf of
public authorities to obtain funds to provide privately operated housing
facilities, airport, mass transit or port facilities, sewage disposal, solid
waste disposal or hazardous waste treatment or disposal facilities and certain
local facilities for water supply, gas or electricity. Other types of
industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such
issues. A Tax Exempt Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fund's distributions of any tax-exempt interest it receives
from any source will be taxable for regular federal income tax purposes.
TENDER OPTION BONDS. A tender option bond is a Municipal Security
-------------------
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term, tax-exempt rates. The bond is typically issued with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, which grants the security holders the option, at periodic
intervals, to tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the securities,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults or a significant downgrade in the credit
rating assigned to the issuer of the bond. The liquidity of a tender option bond
is a function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Fund's credit quality
requirements, to be inadequate and the bond would not otherwise be readily
marketable. The Tax Exempt Funds intend to invest in tender option bonds the
interest on which will, in the opinion of bond counsel, counsel for the issuer
of interests therein or counsel selected by the Adviser, be exempt from regular
federal income tax. However, because there can be no assurance that the
Internal Revenue Service (the "Service") will agree with such counsel's
B-34
<PAGE>
opinion in any particular case, there is a risk that a Tax Exempt Fund will not
be considered the owner of such tender option bonds and thus will not be
entitled to treat such interest as exempt from such tax. Additionally, the
federal income tax treatment of certain other aspects of these investments,
including the proper tax treatment of tender option bonds and the associated
fees in relation to various regulated investment company tax provisions is
unclear. The Tax Exempt Funds intend to manage their portfolio in a manner
designed to eliminate or minimize any adverse impact from the tax rules
applicable to these investments.
AUCTION RATE SECURITIES. The Core, High Yield, Municipal Income and Short
-----------------------
Duration Tax-Free Funds may invest in auction rate securities. Auction rate
securities consist of auction rate Municipal Securities and auction rate
preferred securities issued by closed-end investment companies that invest
primarily in Municipal Securities (collectively, "auction rate securities").
Provided that the auction mechanism is successful, auction rate securities
usually permit the holder to sell the securities in an auction at par value at
specified intervals. The dividend is reset by "Dutch" auction in which bids are
made by broker-dealers and other institutions for a certain amount of securities
at a specified minimum yield. The dividend rate set by the auction is the
lowest interest or dividend rate that covers all securities offered for sale.
While this process is designed to permit auction rate securities to be traded at
par value, there is some risk that an auction will fail due to insufficient
demand for the securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Code.
A Fund's investments in auction rate securities of closed-end funds are
subject to the limitations prescribed by the Act and certain state securities
regulations. The Funds will indirectly bear their proportionate share of any
management and other fees paid by such closed-end funds in addition to the
advisory fees payable directly by the Funds.
INSURANCE. The Funds may invest in "insured" tax-exempt Municipal
---------
Securities. Insured Municipal Securities are securities for which scheduled
payments of interest and principal are guaranteed by a private (nongovernmental)
insurance company. The insurance only entitles a Fund to receive the face or
par value of the securities held by the Fund. The insurance does not guarantee
the market value of the Municipal Securities or the value of the shares of a
Fund.
The Funds may utilize new issue or secondary market insurance. A new issue
insurance policy is purchased by a bond issuer who wishes to increase the credit
rating of a security. By paying a
B-35
<PAGE>
premium and meeting the insurer's underwriting standards, the bond issuer is
able to obtain a high credit rating (usually, Aaa from Moody's or AAA from
Standard & Poor's) for the issued security. Such insurance is likely to
increase the purchase price and resale value of the security. New issue
insurance policies are non-cancelable and continue in force as long as the bonds
are outstanding.
A secondary market insurance policy is purchased by an investor (such as a
Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. The Funds may purchase bonds
which have already been insured under a secondary market insurance policy by a
prior investor, or the Funds may directly purchase such a policy from insurers
for bonds which are currently uninsured.
An insured Municipal Security acquired by a Fund will typically be covered
by only one of the above types of policies. All of the insurance policies used
by a Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by Standard & Poor's. The Municipal Securities
invested in by the High Yield Fund will not be subject to this requirement.
STANDBY COMMITMENTS. In order to enhance the liquidity of Municipal
-------------------
Securities, the Tax Exempt Funds may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a "standby commitment" or liquidity put, depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
a Tax Exempt Fund. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by a Tax Exempt Fund. In considering whether a security meets a Tax Exempt
Fund's quality standards, the particular Tax Exempt Fund will look to the
creditworthiness of the party providing the Fund with the right to sell as well
as the quality of the security itself.
The Tax Exempt Funds value Municipal Securities which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining a Tax Exempt
Fund's net asset value. The cost of a standby commitment is carried as
unrealized depreciation from the time of purchase until it is exercised or
expires. Since the value of a standby commitment is dependent on the ability of
the standby commitment writer to meet its obligation to repurchase, a Tax Exempt
Fund's policy is to enter into standby
B-36
<PAGE>
commitment transactions only with banks, brokers or dealers which present a
minimal risk of default.
The Adviser understands that the Service has issued a favorable revenue
ruling to the effect that, under specified circumstances, a registered
investment company will be the owner of tax-exempt municipal obligations
acquired subject to a put option. The Service has subsequently announced that it
will not ordinarily issue advance ruling letters as to the identity of the true
owner of property in cases involving the sale of securities or participation
interests therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax Exempt Funds intend to take the position that they are the owner
of any Municipal Securities acquired subject to a standby commitment or acquired
or held with certain other types of put rights and that tax-exempt interest
earned with respect to such Municipal Securities will be tax-exempt in their
hands. There is no assurance that standby commitments will be available to the
Tax Exempt Funds nor have the Tax Exempt Funds assumed that such commitments
would continue to be available under all market conditions.
CALL RISK AND REINVESTMENT RISK. Municipal Securities may include "call"
-------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in a Fund's portfolio are called prior
to the maturity, the Fund will be required to reinvest the proceeds on such
securities at an earlier date and may be able to do so only at lower yields,
thereby reducing the Fund's return on its portfolio securities.
FOREIGN INVESTMENTS
Core, High Yield and Global Income Funds may invest in securities of
foreign issuers and in fixed-income securities quoted or denominated in a
currency other than U.S. dollars. Investing in the securities of foreign
issuers involves certain special considerations, including those set forth
below, which are not typically associated with investing in U.S. issuers. Since
investments in the securities of foreign issuers may involve currencies of
foreign countries, and since Core, High Yield and Global Income Funds may
temporarily hold funds in bank deposits in foreign currencies during completion
of investment programs, Core, High Yield and Global Income Funds may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations and may incur costs in connection with conversions between various
currencies.
Foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. In addition, there may be less publicly available
information about a foreign company than about a comparable U.S. company.
Volume and
B-37
<PAGE>
liquidity in most foreign bond markets are less than in the United States
markets and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Commissions on foreign
securities exchanges are often fixed and generally are higher than negotiated
commissions or dealer mark-ups in the U.S. markets, although each Fund endeavors
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of securities markets
and exchanges, brokers, dealers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlement of portfolio transactions or loss of certificates for portfolio
securities.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of Core Fund, High Yield Fund or Global
Income Fund is uninvested and no return is earned thereon. The inability of
Core Fund, High Yield Fund or Global Income Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to Core Fund, High Yield Fund
or Global Income Fund due to subsequent declines in value of the portfolio
securities, or, if Core Fund, High Yield Fund or Global Income Fund has entered
into a contract to sell the securities, could result in possible liability to
the purchaser. In addition, with respect to certain foreign countries, there is
the possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could adversely affect Core, High
Yield or Global Income Funds' investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources self-sufficiency and balance of payments
position.
INVESTING IN EMERGING COUNTRIES
MARKET CHARACTERISTICS. Debt securities of most emerging markets issuers
----------------------
may be less liquid and are generally subject to greater price volatility than
securities of issuers in the U.S. and other developed countries. The markets
for securities of emerging markets may have substantially less volume than the
market for similar securities in the U.S. and may not be able to absorb, without
price disruptions, a significant increase in trading volume or trade size.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The less liquid the market, the more
difficult it may be for the Fund to accurately price its portfolio securities or
to
B-38
<PAGE>
dispose of such securities at the times determined to be appropriate. The risks
associated with reduced liquidity may be particularly acute to the extent that a
Fund needs cash to meet redemption requests, to pay dividends and other
distributions or to pay its expenses.
Securities markets of emerging markets may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and settlement
could result in temporary periods when a portion of the Fund's assets is
uninvested and no return is earned thereon. Inability to make intended security
purchases could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in
emerging markets may be higher than in the U.S. and other developed securities
markets. As legal systems in emerging markets develop, foreign investors may be
adversely affected by new or amended laws and regulations. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
ECONOMIC, POLITICAL AND SOCIAL FACTORS. Emerging markets may be subject to
--------------------------------------
a greater degree of economic, political and social instability than the U.S.,
Japan and most Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes or attempted changes
in government through extra-constitutional means; (ii) popular unrest associated
with demands for improved economic, political and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection and conflict. Many emerging
markets have experienced in the past, and continue to experience, high rates of
inflation. In certain countries inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate environment and
sharply eroding the value of outstanding financial assets in those countries.
The economies of many emerging markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging markets may differ unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
RESTRICTIONS ON INVESTMENT AND REPATRIATION. Certain emerging markets
-------------------------------------------
require governmental approval prior to investments by foreign persons or limit
investments by foreign persons to only a
B-39
<PAGE>
specified percentage of an issuer's outstanding securities or a specific class
of securities which may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. Repatriation of
investment income and capital from certain emerging markets is subject to
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect the operation
of a Fund.
SOVEREIGN DEBT OBLIGATIONS
Investments in sovereign debt obligations involves special risks not
present in corporate debt obligations. The issuer of the sovereign debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and a Fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and a Fund's net asset value, may be more
volatile than prices of debt obligations of U.S. issuers. In the past, the
governments of certain emerging markets have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core, High Yield and Global
-------------------------------------------
Income Funds may enter into forward foreign currency exchange contracts for
hedging purposes and to seek to increase total return. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
At the maturity of a forward contract, Global Income Fund, High Yield Fund
and Core Fund may either accept or make delivery of
B-40
<PAGE>
the currency specified in the contract or, at or prior to maturity, enter into a
closing purchase transaction involving the purchase or sale of an offsetting
contract. Closing purchase transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract.
Global Income, High Yield or Core Funds may enter into forward foreign
currency exchange contracts in several circumstances. First, when Global
Income, High Yield or Core Funds enter into a contract for the purchase or sale
of a security quoted or denominated in a foreign currency, or when Global
Income, High Yield or Core Funds anticipate the receipt in a foreign currency of
a dividend or interest payment on such a security which it holds, Global Income,
High Yield or Core Funds may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for the purchase or sale,
for a fixed amount of U.S. dollars, of the amount of foreign currency involved
in the underlying transactions, Global Income, High Yield or Core Funds will
attempt to protect themselves against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of foreign currency approximating the value of some or all of a Fund's
portfolio securities quoted or denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of a Fund's foreign
assets.
Global Income, High Yield and Core Funds may engage in cross-hedging by
using forward contracts in one currency to hedge against fluctuations in the
value of securities denominated or quoted in a different currency if the
Advisers determine that there is a pattern of correlation between the two
currencies. The Global Income, High Yield and Core Funds may also purchase and
sell forward contracts to seek to increase total return when the Advisers
anticipate that the foreign currency will appreciate or
B-41
<PAGE>
depreciate in value, but securities quoted or denominated in that currency do
not present attractive investment opportunities and are not held in a Fund's
portfolio.
Global Income, High Yield and Core Funds' custodian will place cash or
liquid assets, into a segregated account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contracts requiring the Fund to purchase foreign
currencies and forward contracts entered into to seek to increase total return.
If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Fund's commitments
with respect to such contracts. The segregated accounts will be marked-to-
market on a daily basis. Although the contracts are not presently regulated by
the Commodity Trading Futures Commission ("CFTC"), the CFTC may in the future
assert authority to regulate these contracts. In such event, a Fund's ability to
utilize forward foreign currency exchange contracts may be restricted. The
Global Income, Core and High Yield Funds will not enter into a forward contract
with a term of greater than one year.
While Global Income, Core and High Yield Funds may enter into forward
contracts to seek to reduce currency exchange rate risks, transactions in such
contracts involve certain other risks. Thus, while Global Income, Core and
High Yield Funds may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for a Fund than if it
had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by
Global Income, Core and High Yield Funds. Such imperfect correlation may cause
the Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
INTEREST RATE SWAPS, MORTGAGE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS,
FLOORS AND COLLARS
Each Fund may enter into interest rate swaps, caps, floors and collars. In
addition, Core, Adjustable Rate, Government Income, Short Duration Government,
Global Income and High Yield Funds may
B-42
<PAGE>
enter into mortgage swaps and Core, High Yield and Global Income Funds may also
enter into currency swaps. Each Fund may enter into swap transactions for
hedging purposes or to seek to increase total return. Interest rate swaps
involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed-rate
payments for floating rate payments. Mortgage swaps are similar to interest
rate swaps in that they represent commitments to pay and receive interest. The
notional principal amount, however, is tied to a reference pool or pools of
mortgages. Currency swaps involve the exchange of the parties' respective
rights to make or receive payments in specified currencies. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payment of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling the interest
rate floor. An interest rate collar is the combination of a cap and a floor
that preserves a certain return within a predetermined range of interest rates.
Since interest rate, mortgage and currency swaps and interest rate caps, floors
and collars are individually negotiated, each Fund expects to achieve an
acceptable degree of correlation between its portfolio investments and its swap,
cap, floor and collar positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each interest rate or currency swap will
be accrued on a daily basis and an amount of cash or liquid assets, having an
aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by a Fund's custodian. Inasmuch as these
transactions are entered into for hedging purposes or are offset by cash or
liquid assets, as permitted by applicable law, maintained in a segregated
account the Funds and the Advisers believe that swaps do not constitute senior
securities under the Act and, accordingly, will not treat them as being subject
to a Fund's borrowing restriction.
B-43
<PAGE>
The Funds will not enter into any swap transactions unless the unsecured
commercial paper, senior debt or claims-paying ability of the other party is
rated either AA or A-1 or better by Standard & Poor's or Aa or P-1 or better by
Moody's or their equivalent ratings. If there is a default by the other party
to such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
The staff of the Securities and Exchange Commission (the "SEC") currently takes
the position that swaps, caps, floors and collars are illiquid for purposes of
a Fund's limitation on illiquid investments.
The use of interest rate, mortgage and currency swaps, as well as interest
rate caps, floors and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a Fund would be less favorable than it would have been if this
investment technique were not used.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
-----------------------
options on any securities in which it may invest or on any securities index
based on securities in which it may invest. A Fund may purchase and write such
options on securities that are listed on national domestic securities exchanges
or foreign securities exchanges or traded in the over-the-counter market. A
call option written by a Fund obligates the Fund to sell specified securities to
the holder of the option at a specified price if the option is exercised at any
time before the expiration date. All call options written by a Fund are
covered, which means that the Fund will own the securities subject to the option
so long as the option is outstanding or use the other methods described below.
The purpose of a Fund in writing covered call options is to realize greater
income than would be realized in portfolio securities transactions alone.
However, in writing covered call options for additional income, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. The purpose of writing such
options is to generate additional income. However, in return for the option
premium, the Fund accepts the 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.
B-44
<PAGE>
All call and put options written by a Fund are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid assets, as
permitted by applicable law, either of which, in the case of Global Income Fund,
Core Fund or High Yield Fund, may be quoted or denominated in any currency, in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position.
A Fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases
are referred to as "closing purchase transactions."
Each Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
The Funds may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by their respective custodian) upon conversion or exchange of
other securities in its portfolio. The Funds may also cover call and put
options on a securities index by maintaining cash or liquid assets, as permitted
by applicable law, with a value equal to the exercise price in a segregated
account with their custodian or by using the other methods described above.
PURCHASING OPTIONS. Each Fund may also purchase put and call options on
------------------
any securities in which it may invest or on any securities index composed of
securities in which it may invest. A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options it had purchased.
A Fund would normally purchase call options in anticipation of an increase,
or put options in anticipation of a decrease ("protective puts") in the market
value of securities of the type in which it may invest. The purchase of a call
option would entitle a Fund, in return for the premium paid, to purchase
specified securities at a specified price during the option period. A Fund would
ordinarily realize a gain on the purchase of a call
B-45
<PAGE>
option if, during the option period, the value of such securities exceeded the
sum of the exercise price, the premium paid and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the call option.
The purchase of a put option would entitle a Fund, in exchange for the premium
paid, to sell specified securities at a specified price during the option
period. The purchase of protective puts is designed to offset or hedge against a
decline in the market value of a Fund's securities. Put options may also be
purchased by a Fund for the purpose of affirmatively benefiting from a decline
in the price of securities which it does not own. A Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
securities decreased below the exercise price sufficiently to cover the premium
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the put option. Gains and losses on the purchase of put
options may be offset by countervailing changes in the value of the underlying
portfolio securities.
A Fund may purchase put and call options on securities indices for the same
purposes as it may purchase options on securities. Options on securities indices
are similar to options on securities, except that the exercise of securities
index options requires cash payments and does not involve the actual purchase or
sale of securities. In addition, securities index options are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security.
Transactions by a Fund in options on securities and securities indices will
be subject to limitations established by each of the exchanges, boards of trade
or other trading facilities on which such options are traded governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which a
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Advisers. An exchange, board of trade
or other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Core, Global Income
----------------------------------------------------
and High Yield Funds may write covered put and call options and purchase put and
call options on foreign currencies in an attempt to protect against declines in
the dollar value of portfolio securities and against increases in the dollar
cost of securities to be acquired. Global Income, Core and High Yield Funds may
use options on currency to cross-hedge, which involves writing or purchasing
options on one currency to seek to hedge against changes in exchange rates for a
different currency with a pattern of correlation. In addition, Global Income,
Core and High
B-46
<PAGE>
Yield Funds may purchase call options on currency to seek to increase total
return when the Advisers anticipate that the currency will appreciate in value,
but the securities denominated or quoted in that currency do not present
attractive investment opportunities and are not included in the Fund's
portfolios.
A call option written by Core, Global Income and High Yield Funds obligates
the Fund to sell specified currency to the holder of the option at a specified
price if the option is exercised at any time before the expiration date. A put
option written by a Fund obligates the Fund to purchase specified currency from
the option holder at a specified price if the option is exercised at any time
before the expiration date. The writing of currency options involves a risk
that a Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase currency subject to a put at a price that exceeds the
currency's market value.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one written. Such purchases are referred
to as "closing purchase transactions." A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
purchased options.
Core, Global Income and High Yield Funds would normally purchase call
options in anticipation of an increase in the U.S. dollar value of currency in
which securities to be acquired by the Fund are denominated or quoted. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified currency at a specified price during the option period. A
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
Core, Global Income and High Yield Funds would normally purchase put
options in anticipation of a decline in the U.S. dollar value of currency in
which securities in its portfolio are denominated or quoted ("protective puts").
The purchase of a put option would entitle Core, Global Income and High Yield
Funds, in exchange for the premium paid, to sell specified currency at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the U.S. dollar value of
a Fund's portfolio securities due to currency exchange rate fluctuations. A
Fund would ordinarily realize a gain if, during the option period, the value of
the underlying currency decreased below the exercise price sufficiently to more
than cover the premium and transaction costs; otherwise the Fund would realize
either no gain or a loss on the purchase of the put option. Gains and losses on
the purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency.
B-47
<PAGE>
In addition to using options for the hedging purposes described above,
Core, Global Income and High Yield Funds may use options on currency to seek to
increase total return. Global Income Fund, High Yield Fund and Core Fund may
write (sell) covered put and call options on any currency in an attempt to
realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Global Income, High Yield and Core Funds may forego the opportunity to
profit from an increase in the market value of the underlying currency. Also,
when writing put options, Global Income, High Yield and Core Funds accept, in
return for the option premium, the risk that it may be required to purchase the
underlying currency at a price in excess of the currency's market value at the
time of purchase.
Global Income, High Yield and Core Funds would normally purchase call
options to seek to increase total return in anticipation of an increase in the
market value of a currency. Global Income, High Yield and Core Funds would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the call option. Put
options may be purchased by the Global Income, High Yield and Core Funds for
the purpose of benefiting from a decline in the value of currencies which it
does not own. Global Income, High Yield and Core Funds would ordinarily realize
a gain if, during the option period, the value of the underlying currency
decreased below the exercise price sufficiently to more than cover the premium
and transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the put option.
YIELD CURVE OPTIONS. Each Fund may enter into options on the yield
-------------------
"spread," or yield differential between two securities. Such options are
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. For example, a Fund may purchase a call option on the yield spread
between two securities if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. A Fund may also purchase or write
yield curve options for other than hedging purposes (i.e., in an attempt to
increase its current income) if, in the judgment of the Adviser, the Fund will
be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks
B-48
<PAGE>
associated with the trading of other types of options. In addition, however,
such options present a risk of loss even if the yield of one of the underlying
securities remains constant, or if the spread moves in a direction or to an
extent which was not anticipated.
Yield curve options written by a Fund must be "covered." A call (or put)
option is covered if the Fund holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or liquid assets, as permitted by applicable law, sufficient to
cover the Fund's net liability under the two options. Therefore, a Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter, and because they
have been only recently introduced, established trading markets for these
options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
B-49
<PAGE>
A Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the SEC changes its position, the Funds will treat
purchased over-the counter options and all assets used to cover written over-the
counter options as illiquid securities, except that with respect to options
written with primary dealers in U.S. Government Securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to a formula
approved by the SEC.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options for
hedging purposes depends in part on the applicable Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
- --------------------------------------------------
To seek to increase total return or to hedge against changes in interest
rates or securities prices or, in the case of Core, High Yield and Global Income
Funds, currency exchange rates, each Fund may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. Each Fund may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), securities indices, foreign currencies in the case of Global
Income, Core and High Yield Funds and any other financial instruments and
indices. A Fund will engage in futures and related options transactions only
for bona fide hedging purposes as defined below or for purposes of seeking to
increase total return to the extent permitted by regulations of the CFTC. All
futures contracts entered into by a Fund are traded on U.S. exchanges or boards
of trade that are licensed and regulated by the CFTC or on foreign exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
When interest rates are rising or securities prices are falling, a Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a Fund, through the purchase of futures contracts,
can attempt to secure better rates or prices than might later be available in
the market when it effects anticipated purchases. Core, Global Income
B-50
<PAGE>
and High Yield Funds may each seek to offset anticipated changes in the value of
a currency in which its portfolio securities, or securities that it intends to
purchase, are quoted or denominated by purchasing and selling futures contracts
on such currencies.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currency are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
------------------
establish with more certainty than would otherwise be possible the effective
price or rate of return on portfolio securities or securities that a Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are quoted or denominated. A Fund may, for example, take a "short"
position in the futures market by selling futures contracts to seek to hedge
against an anticipated rise in interest rates or a decline in market prices or
foreign currency rates that would adversely affect the U.S. dollar value of the
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by a Fund or securities with
characteristics similar to those of a Fund's portfolio securities. Similarly,
Core Fund, High Yield Fund and Global Income Fund may each sell futures
contracts on any currencies in which its portfolio securities are quoted or
denominated or in one currency to seek to hedge against fluctuations in the
value of securities denominated in a different currency if there is an
established historical pattern of correlation between the two currencies. If,
in the opinion of the Advisers, there is a sufficient degree of correlation
between price trends for a Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Funds may also enter into such futures contracts as part of its hedging
strategy. Although under some circumstances prices of securities in a Fund's
portfolio may be more or less volatile than prices of such futures contracts,
the Advisers will attempt to estimate the extent of this volatility difference
based on historical patterns and compensate for any such differential by having
a Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting a
Fund's portfolio securities. When hedging of this character is successful, any
depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position. On the other hand, any
unanticipated appreciation in the value of a Fund's portfolio securities would
be substantially offset by a decline in the value of the futures position.
B-51
<PAGE>
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium,
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that a Fund intends to
purchase. However, a Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Funds will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Each Fund will engage in futures and related options
--------------------
transactions only for bona fide hedging or to seek to increase total return as
permitted by CFTC regulations which permit principals of an investment company
registered under the Act to engage in such transactions without registering as
commodity pool operators. Each Fund will determine that the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
securities or instruments which it expects to purchase. Except as stated below,
each Fund's futures transactions will be entered into for traditional hedging
purposes -- i.e., futures contracts will be sold to protect against a decline in
the price of securities (or the currency in which they are quoted or
denominated) that a Fund
B-52
<PAGE>
owns or futures contracts will be purchased to protect a Fund against an
increase in the price of securities (or the currency in which they are quoted or
denominated) it intends to purchase. As evidence of this hedging intent, each
Fund expects that on 75% or more of the occasions on which it takes a long
futures or option position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities (or assets denominated in the related currency) in
the cash market at the time when the futures or option position is closed out.
However, in particular cases, when it is economically advantageous for a Fund to
do so, a long futures position may be terminated or an option may expire without
the corresponding purchase of securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation permits the Funds to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish positions
to seek to increase total return in futures contracts and options on futures
will not exceed 5% of the net asset value of a Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Funds will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") for maintaining their
qualifications as regulated investment companies for federal income tax
purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
assets, as permitted by applicable law, in an amount equal to the underlying
value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no
B-53
<PAGE>
futures contracts based upon individual securities, except certain U.S.
Government Securities. The only futures contracts available to hedge a Fund's
portfolio are various futures on U.S. Government Securities, securities indices
and foreign currencies.
MORTGAGE DOLLAR ROLLS
- ---------------------
The Taxable Funds (other than High Yield Fund) may enter into mortgage
"dollar rolls" in which a Fund sells securities for delivery in the current
month and simultaneously contracts with the same counterparty to repurchase
similar (same type, coupon and maturity), but not identical securities on a
specified future date. During the roll period, a Fund loses the right to
receive principal and interest paid on the securities sold. However, a Fund
would benefit to the extent of any difference between the price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. Unless such benefits exceed the income, capital appreciation and gain
or loss due to mortgage prepayments that would have been realized on the
securities sold as part of the mortgage dollar roll, the use of this technique
will diminish the investment performance of a Fund compared with what such
performance would have been without the use of mortgage dollar rolls. All cash
proceeds will be invested in instruments that are permissible investments for
the applicable Fund. Each Fund will hold and maintain in a segregated account
until the settlement date cash or liquid assets, as permitted by applicable law,
in an amount equal to its forward purchase price.
For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions; one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if
the broker-dealer to whom a Fund sells the security becomes insolvent, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
CONVERTIBLE SECURITIES
- ----------------------
Convertible securities include corporate notes or preferred stock but are
ordinarily long-term debt obligation of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline.
B-54
<PAGE>
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price
of the common stock underlying a convertible security exceeds the conversion
price, the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities in which the Core Fund and High Yield Fund invest will be
subject to the same rating criteria as its other investments in fixed-income
securities.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions, such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents, letters of credit or U.S. Government Securities maintained on a
current basis in an amount at least equal to the market value of the securities
loaned. Cash collateral may be invested in cash equivalents. A Fund has the
right to call a loan and obtain the securities loaned at any time on five days'
notice. For the duration of a loan, a Fund continues to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned and
also receives compensation from investment of the collateral. A Fund would not
have the right to vote any securities having voting rights during the existence
of the loan, but a Fund would call the loan in anticipation of an important vote
to be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovering, or even loss of
rights in, the collateral should the borrower of the securities fail
financially. However, the loans are made only to firms deemed by the applicable
Adviser to be of good standing, and when, in the judgment of the applicable
Adviser, the consideration which can be earned currently from securities loans
of this type justifies the attendant risk. If an Adviser determines to make
securities loans, the value of the securities loaned will not exceed one-third
of the value of the total assets of each Fund.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
However, a Fund will not invest more than 15% of its net assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate, currency and mortgage swaps, interest rate caps, floors and
collars, certain SMBS, municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted
B-55
<PAGE>
Securities, unless the Board of Trustees determines, based upon a continuing
review of the trading markets for the specific Restricted Securities, that such
Restricted Securities are liquid. Certain commercial paper issued in reliance
on Section 4(2) of the 1933 Act is treated like Rule 144A Securities. The
Trustees have adopted guidelines and delegated to the Advisers the daily
function of determining and monitoring the liquidity of the Funds' portfolio
securities. The Board of Trustees, however, will retain sufficient oversight and
be ultimately responsible for the determinations. Since it is not possible to
predict with assurance exactly how the market for Restricted Securities sold and
offered under Rule 144A or Section 4(2) will develop, the Trustees will
carefully monitor the Funds' investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these Restricted Securities.
The purchase price and subsequent valuation of Restricted Securities
normally reflect a discount from the price at which such securities trade when
they are not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the Restricted Securities and prevailing
supply and demand conditions.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. The Funds will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, the Funds may dispose of or negotiate a
commitment after entering into it. A Fund also may sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Funds may realize a capital gain or loss in connection
with these transactions. For purposes of determining each Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. Each Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to settlement date,
cash or liquid assets, in an amount sufficient to meet the purchase price.
Alternatively, each Fund may enter into offsetting contracts for the forward
sale
B-56
<PAGE>
of other securities that it owns. Securities purchased or sold on a when-issued
or forward commitment basis involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date or if the value of the
security to be sold increases prior to the settlement date.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets,
calculated at the time of purchase, in the securities of other investment
companies, but may not invest more than 5% of its total assets in the securities
of any one investment company or acquire more than 3% of the voting securities
of any other investment company. Pursuant to an exemptive order obtained from
the SEC, the Funds may invest in money market funds for which the Adviser or any
of its affiliates serves as investment adviser. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that a Fund invests in a money
market fund for which the Adviser acts as adviser, the management fees payable
by the Fund to the Adviser will be reduced by an amount equal to the Fund's
proportionate share of the management fees paid by such money market fund to the
Adviser or any of its affiliates.
The Core, High Yield and Global Income Funds may also purchase shares of
investment companies investing primarily in foreign securities, including
"country funds." Country funds have portfolios consisting primarily of
securities of issuers located in one foreign country or region. The Core, High
Yield and Global Income Funds may invest in World Equity Benchmark Shares
("WEBS") and similar securities that invest in securities included in foreign
securities indices.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected broker-
dealers, banks or other financial institutions. A repurchase agreement is an
arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities will be maintained by each Fund's custodian. The
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the security subject to the repurchase agreement.
For purposes of the Act and, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as
B-57
<PAGE>
being collateral for a loan by a Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and a Fund
has not perfected a security interest in the security, the Fund may be required
to return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Fund would be at risk of
losing some or all of the principal and interest involved in the transaction.
As with any unsecured debt instrument purchased for each Fund, the
applicable Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
security. Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the security subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), each Fund will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price. Certain repurchase agreements which provide for
settlement in more than seven days can be liquidated before the nominal fixed
term on seven days or less notice. Such repurchase agreements will be regarded
as liquid instruments.
In addition, the Funds, together with other registered investment companies
having management agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the affected Fund. The
investment objective of each Fund and all other investment policies or practices
of the Funds, except for Short Duration Tax-Free Fund's and Municipal Income
Fund's policy to invest under normal market conditions 80% of its net assets in
Municipal Securities, are considered by the Trust not to be fundamental and
accordingly may be changed without shareholder approval. See "INVESTMENT
OBJECTIVES AND POLICIES" in the Prospectuses. As defined in the Act, "a
majority of the outstanding voting securities" of a Fund means the vote (a) of
67% or more of the shares of the Fund present at a meeting, if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy or (b) more than 50% of the outstanding shares of the Fund, whichever
is less.
B-58
<PAGE>
For the purposes of the limitations (except for the asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, a Fund. With respect to the Tax
Exempt Funds, the identification of the issuer of a Municipal Security that is
not a general obligation is made by the Adviser based on the characteristics of
the Municipal Security, the most important of which is the source of funds for
the payment of principal and interest on such securities.
AS A MATTER OF FUNDAMENTAL POLICY, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in municipal securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other municipal securities. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations.
B-59
<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% or its total assets (including the amount borrowed), (b)
the Fund may, to the extent permitted by applicable law borrow up to
an additional 5% of its total assets for temporary purposes, (c) the
Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities, (d) the
Fund may purchase securities on margin to the extent permitted by
applicable law and (e) the Fund may engage in transactions in
mortgage dollar rolls which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted by
applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be an
underwriting.
(6)(a) for each Fund other than Core Fund, purchase, hold or deal in real
estate, although a Fund may purchase and sell securities that are
secured by real estate or interests therein, securities of real
estate investment trusts and mortgage-related securities and may
hold and sell real estate acquired by a Fund as a result of the
ownership of securities.
(6)(b) in the case of the Core Fund, purchase, hold or deal in real estate
(including real estate limited partnerships) or oil, gas or mineral
leases, although the Fund may purchase and sell securities that are
secured by real estate or interests therein, may purchase mortgage-
related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts that
are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same fundamental investment
objectives, restrictions and policies as the Fund.
B-60
<PAGE>
In addition, as non-fundamental policies, a Fund may not:
(1) Invest in companies for the purpose of exercising control or
management.
(2) Invest more than 15% of the Fund's net assets in illiquid
investments including repurchase agreements maturing in more than
seven days, securities which are not readily marketable and
restricted securities not eligible for resale pursuant to Rule 144A
under the 1933 Act.
(3) Purchase additional securities if the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
MANAGEMENT
TRUSTEES AND OFFICERS
- ---------------------
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees and Officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
Ashok N. Bakhru, Age 53, 1325 Avenue of the Americas, 34th Floor, New York, New
York 10019. Chairman and Trustee. Executive Vice President-Finance and
--------------------
Administration and Chief Financial Officer, Coty Inc. (since April 1996);
President, ABN Associates, Inc. (June 1994 through March 1996); Senior Vice
President, Scott Paper Company (until June 1994); Director, Arkwright Mutual
Insurance Company; Trustee, International House of Philadelphia; Member of
Cornell University Council; Trustee of Walnut Street Theater.
David B. Ford,* Age 51, One New York Plaza, New York, New York 10004. Trustee.
-------
Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs,
(1986-1996); Co-Head of GSAM since December 1994.
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Vice President, Goldman Sachs since May 1996; President,
- ---------------------
MFS Retirement Services Inc., of Massachusetts Financial Services prior thereto.
John P. McNulty,* Age 44, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
B-61
<PAGE>
Mary P. McPherson, Age 60, Taylor Hall, Bryn Mawr College, Bryn Mawr, PA
19010. Trustee. President of Bryn Mawr College since 1978; Director of Josiah
-------
Macy, Jr. Foundation since 1977; Director of the Philadelphia Contributionship
since 1985; Director of Amherst College since 1986; Director of Dayton Hudson
Corporation since 1988; Director of the Spencer Foundation since 1993; and
member of PNC Advisory Board since 1993.
Alan A. Shuch,* Age 48, One New York Plaza, New York, New York 10004. Trustee.
-------
Limited Partner, Goldman Sachs (since 1994); Director and Vice President,
Goldman Sachs Funds Management, Inc. from April 1990 to November 1994; President
and Chief Operating Officer, GSAM from September 1988 to November 1994; Limited
Partner, Goldman Sachs since December 1994.
Jackson W. Smart, Jr., Age 66, One Northfield Plaza, #218, Northfield, Illinois
60093. Trustee. Chairman, Executive Committee, First Commonwealth, Inc. (a
-------
managed dental care company, since January 1996); Chairman and Chief Executive
Officer, MSP Communications Inc. (a company engaged in radio broadcasting) since
November 1988; Director, Federal Express Corporation since 1976; Evanston
Hospital Corporation (since 1980) and First Commonwealth,Inc. (since 1988) and
North American Private Equity Group (a venture capital fund).
William H. Springer, Age 67, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman and Chief Financial and Administrative Officer,
- -------
Ameritech (a telecommunications holding company) from February 1987 to
retirement in June 1992; Director, Walgreen Co. (a retail drugstore business);
and Baker, Fentress & Co. (a closed-end non-diversified management investment
company) April 1992 to present.
Richard P. Strubel, Age 57, 70 West Madison Street, Suite 1400, Chicago,
Illinois 60602. Trustee. Managing Director, Tandem Partners, Inc. (since
-------
1990); President and Chief Executive Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and connectors) from January 1984 to October
1994.
Nancy L. Mucker,* Age 47, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
Scott M. Gilman,* Age 37, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990.
B-62
<PAGE>
John M. Perlowski,* Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 36, 85 Broad Street, New York, New York 10004.
Secretary. Associate General Counsel of GSAM since February 1994; Vice
- ---------
President and Assistant General Counsel of Goldman Sachs; Counsel to the Funds
Group, GSAM since June 1992; Partner, Hale and Dorr from September 1991 to June
1992.
Howard B. Surloff,* Age 31, 85 Broad Street, New York, New York 10004. Assistant
Secretary. Vice President and Assistant General Counsel, Goldman Sachs since
- ---------
November 1993 and May 1994, respectively; Counsel to the Funds Group, GSAM since
November 1993; Associate of Shereff, Friedman, Hoffman & Goodman, LLP prior
thereto.
Valerie A. Zondorak,* Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Vice President, Goldman Sachs (since March 1997); Counsel
- --------------------
to the Funds Group, GSAM (since March 1997); Associate of Shereff, Friedman,
Hoffman & Goodman, LLP (prior thereto).
Steven E. Hartstein*, Age 33, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs since June 1993;
- -------------------
Funds Compliance Officer, Citibank Global Asset Management from August 1991 to
June 1993); Legal Assistant, Brown & Wood prior thereto.
Deborah A. Farrell*, Age 25, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman Sachs since January
- -------------------
1994. Formerly at Cleary, Gottlieb, Stein and Hamilton.
Kaysie Uniacke*, Age 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Senior Portfolio Manager, GSAM since
- -------------------
1988.
Elizabeth D. Anderson*, Age 27, One New York Plaza, New York, New York 10004.
Assistant Secretary. Portfolio Manager, GSAM since April 1996; Junior Portfolio
- -------------------
Manager, Goldman Sachs 1995-1996. Funds Trading Assistant, GSAM 1993-1995.
Compliance Analyst, Prudential Insurance, from 1991 to 1993.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or GSFM is the
investment adviser, administrator and/or distributor. As of July 24, 1997, the
Trustees and officers as a group owned less than 1% of the outstanding shares of
beneficial interest of each Fund.
B-63
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended October
31, 1996:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Funds
from the as of Part of (including
Funds/1 / Trust's Expenses the Funds)/2 /
------------ ---------------- --------------
<S> <C> <C> <C>
Name of Trustees
Ashok N. Bakhru $4,109 $0 $77,375
Marcia L. Beck/3/ $ 0 $0 $ 0
David B. Ford $ 0 $0 $ 0
Douglas C. Grip $ 0 $0 $ 0
Paul C. Nagel, Jr./4/ $2,525 $0 $50,500
Alan A. Shuch $ 0 $0 $ 0
Jackson W. Smart $3,169 $0 $65,750
William H. Springer $3,169 $0 $65,750
Richard P. Strubel $3,169 $0 $65,750
</TABLE>
/1/ Reflects amount paid by Goldman Sachs Trust, a Massachusetts business
trust, during fiscal year ended October 31, 1996.
/2/ The Goldman Sachs Funds consisted of 29 mutual funds, including the seven
series of the Trust, on October 31, 1996.
/3/ Resigned as of May 1, 1996.
/4/ Retired as of June 30, 1996.
B-64
<PAGE>
INVESTMENT ADVISERS
- -------------------
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Municipal Income
Fund, Government Income Fund, Short Duration Tax-Free Fund, High Yield Fund and
Core Fund pursuant to a management agreement. GSFM, One New York Plaza, New
York, New York 10004, serves as the investment adviser to Adjustable Rate Fund
and Short Duration Government Fund pursuant to a management agreement. GSFM, a
Delaware limited partnership, is an affiliate of Goldman Sachs. GSAMI, 133
Peterborough Court, London EC4A 2BB, England, serves as investment adviser to
Global Income Fund pursuant to a management agreement. As a company with
unlimited liability under the laws of England, GSAMI is regulated by the
Investment Management Regulatory Organization Limited, a United Kingdom self-
regulatory organization, in the conduct of its investment advisory business.
See "MANAGEMENT" in the Funds' Prospectuses for a description of the applicable
Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24 hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico,
Milan, Montreal, Osaka, Paris, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs, whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching
$200 million, Goldman Sachs' Investment Research Department covers approximately
2,000 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers. The Advisers manage money for
some of the world's largest institutional investors.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry
B-65
<PAGE>
surveys conducted in the U.S. and abroad. Goldman Sachs is also among the
leading investment firms using quantitative analytics (now used by a growing
number of investors) to structure and evaluate portfolios. For example, Goldman
Sachs' options evaluation model analyzes each security's term, coupon and call
option, providing an overall analysis of the security's value relative to its
interest risk.
In planning the Tax Exempt Funds' strategies, the portfolio managers also
evaluate and monitor individual issues by using analytical techniques that have
traditionally been applied to corporate bonds and Mortgage-Backed Securities.
In particular, the Adviser's embedded option valuation model provides a picture
of an individual security's relative value and the portfolio's overall interest
rate risk. By constantly reviewing the positions of securities within the
portfolio, the Adviser looks for opportunities to enhance the Tax Exempt Funds'
yields by fine-tuning the portfolio, using quantitative tools designed for
municipal portfolio management. The Adviser, which managed approximately $3
billion in tax-free securities in 1996, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
In structuring Adjustable Rate Fund's and Short Duration Government Fund's
respective securities portfolio, the Adviser will review the existing overall
economic and mortgage market trends. The Adviser will then study yield spreads,
the implied volatility and the shape of the yield curve. The Adviser will then
apply this analysis to a list of eligible securities that meet the respective
Fund's investment guidelines. With respect to Adjustable Rate Fund, this
analysis is used to plan a two-part portfolio, which will consist of a "core"
portfolio of ARMs and a "relative value" portfolio of other mortgage assets that
can enhance portfolio returns and lower risk (such as investments in CMO
floating-rate tranches and interest only stripped Mortgage-Backed Securities).
With respect to Adjustable Rate Fund, Government Income Fund, Short
Duration Government Fund, High Yield Fund and Core Fund, the applicable Adviser
expects to utilize Goldman Sachs' sophisticated option-adjusted analytics to
help make strategic asset allocations within the markets for U.S. government,
Mortgage-Backed and other securities and to employ this technology periodically
to re-evaluate the Funds' investments as market conditions change. Goldman
Sachs has also developed a prepayment model designed to estimate mortgage
prepayments and cash flows under different interest rate scenarios. Because a
Mortgage-Backed Security incorporates the borrower's right to prepay the
mortgage, the Advisers use a sophisticated option-adjusted spread (OAS) model to
measure expected returns. A security's OAS is a function of the level and shape
of the yield curve, volatility and the applicable Adviser's expectation of how a
change in interest rates will affect prepayment levels. Since the OAS model
assumes a relationship between prepayments and interest rates, the Advisers
consider it a better way to measure a security's expected return and absolute
and relative values than yield to maturity. In using OAS
B-66
<PAGE>
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and prepayment
sensitivity. The Advisers will then analyze its value relative to alternative
investments and to its own investments. The Advisers will also measure a
security's interest rate risk by computing an option adjusted duration (OAD).
The Advisers believe a security's OAD is a better measurement of its price
sensitivity than cash flow duration, which systematically misstates portfolio
duration. The Advisers also evaluate returns for different mortgage market
sectors and evaluate the credit risk of individual securities. This
sophisticated technical analysis allows the Advisers to develop portfolio and
trading strategies using Mortgage-Backed Securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility
to meet the respective Fund's duration targets and cash flow pattern
requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to calculate projected
security returns under different, discrete interest rate scenarios, and Goldman
Sachs' proprietary prepayment model to generate yield estimates under these
scenarios. The OAS, scenario returns, expected returns, and yields of
securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The Advisers will use OAS analytics to choose what they believe is an
appropriate portfolio of investments for Adjustable Rate Fund, Government Income
Fund, Short Duration Government Fund and Core Fund from a universe of eligible
investments. In connection with initial portfolio selections, in addition to
using OAS analytics as an aid to meeting each Fund's particular composition and
performance targets, the Advisers will also take into account important market
criteria like the available supply and relative liquidity of various mortgage
securities in structuring the portfolio.
The Advisers also expect to use OAS analytics to evaluate the mortgage
market on an ongoing basis. Changes in the relative value of various Mortgage-
Backed Securities could suggest tactical trading opportunities for the Funds.
The Advisers will have access to both current market analysis as well as
historical information on the relative value relationships among different
Mortgage-Backed Securities. Current market analysis and historical information
is available in the Goldman Sachs database for most actively traded Mortgage-
Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive basis,
use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
B-67
<PAGE>
services to third parties or using such services as a basis for trading for its
own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments
in U.S. and foreign fixed-income markets, assesses the outlooks for various
sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed
Income Research Department is at the forefront in developing and using computer-
based tools for analyzing fixed-income securities and markets, developing new
fixed income products and structuring portfolio strategies for investment policy
and tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed-income research and credit research, the Advisers in
managing Global Income Fund are supported by Goldman Sachs' economics research.
The Economics Research Department, based in London, conducts economic, financial
and currency markets research which analyzes economic trends and interest and
exchange rate movements worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In allocating assets in the Global Income Fund's portfolio among
currencies, the Adviser will have access to the Global Asset Allocation Model.
The model is based on the observation that the prices of all financial assets,
including foreign currencies, will adjust until investors globally are
comfortable holding the pool of outstanding assets. Using the model, the
Adviser will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with Goldman Sachs' research
professionals' expectations to produce an optimal currency and asset allocation
for the level of risk suitable for the Fund's investment objective and criteria.
Each Fund's management agreement, (the "Management Agreements"), was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 23, 1997. The applicable Fund's
B-68
<PAGE>
Management Agreement was approved by the shareholders of Adjustable Rate Fund on
October 30, 1991, the shareholders of Short Duration Government Fund on March
27, 1989, the sole initial shareholder of Short Duration Tax-Free Fund on
September 25, 1992, the sole initial shareholder of Core Fund on October 29,
1993, and the shareholders of each other Fund on April 21, 1997. Each
Management Agreement will remain in effect until June 30, 1998 and will continue
in effect with respect to the applicable Fund from year to year thereafter
provided such continuance is specifically approved at least annually by (a) the
vote of a majority of the outstanding voting securities of such Fund or a
majority of the Trustees of the Trust, and (b) the vote of a majority of the
non-interested Trustees of the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
Each Management Agreement will terminate automatically if assigned (as
defined in the Act). Each Management Agreement is also terminable at any time
without penalty by the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund on 60 days' written notice to the
applicable Adviser or by the Adviser on 60 days' written notice of the Trust.
The Management Agreements provide that GSAM, GSFM and GSAMI, in their
capacity as advisers may each render similar services to others so long as the
services under the Management Agreements are not impaired thereby. Pursuant to
the Management Agreements, the Advisers are entitled to receive the fee set
forth below and the Advisers are currently limiting the fee to the rate set
forth below:
<TABLE>
<CAPTION>
Contractual Current
Fund Rate* Rate
- ---- ----------- -------
<S> <C> <C>
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .55% .40%
Core Fixed Income .55% .40%
High Yield .70% .65%
GSFM
Short Duration Government .65% .40%
Adjustable Rate Government .55% .40%
GSAMI
Global Income .90% .59%
- ----------------------------
</TABLE>
* The Contractual Rate is identical to the aggregate advisory and
administration fee rates payable by each Fund under the previous separate
advisory (including subadvisory in the case of Global Income Fund) and
administration agreements. For the fiscal year ended October 31, 1996, the
annual rate expressed is the combined advisory and administration fees paid
(after fee waivers). Such reduction or limits, if any, are calculated
B-69
<PAGE>
monthly on a cumulative basis and may be discontinued or modified by the
applicable Adviser at its discretion at any time, although they have no
current intention to do so.
For the fiscal years ended October 31, 1996, 1995 and 1994, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Adjustable Rate Fund $2,535,709 $2,947,492 $6,798,185
Short Duration Government 411,360 517,091 1,063,867
Fund/(1)/
Short Duration Tax-Free Fund 169,796 260,970 468,868
Core Fund/(2)/ 246,568 137,158 56,255
Global Income Fund/(3)(6)/ 1,117,226 706,460 1,518,814
Government Income Fund/(4)(6)/ 74,060 44,037 0
Municipal Income Fund/(5)(6)/ 211,283 154,707 35,494
</TABLE>
- -------------------------
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $514,200, $646,364 and $1,329,834,
respectively, for such years.
/(2)/ Core Fund commenced operations January 5, 1994.
/(3)/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of
$837,920, $1,412,921 and $3,037,627, respectively. If expense limitations
had not been in effect, Global Income Fund would have paid advisory and
subadvisory fees of $1,474,204 and $491,401, respectively, for the year
ended October 31, 1996 and $789,127 and $1,578,254, respectively, for the
year ended October 31, 1995.
/(4)/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $148,120, $101,737 and $65,604, respectively,
for such years.
/(5)/ Had expense limitations not been in effect for the years ended October 31,
1995 and 1994, Municipal Income Fund would have paid advisory fees of
$200,207 and $174,161, respectively, for such years.
/(6)/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
The fees and services under the Investment Advisory and Administration
Agreements are identical to the fees and services under the Management
Agreement.
Each Adviser performs administrative services for the applicable Funds
under the Management Agreement. Such
B-70
<PAGE>
administrative services include, subject to the general supervision of the
Trustees of the Trust, (a) providing supervision of all aspects of the Funds'
non-investment operations (other than certain operations performed by others
pursuant to agreements with the Funds), (b) providing the Funds, to the extent
not provided pursuant to the agreement with the Trust's custodian, transfer and
dividend disbursing agent or agreements with other institutions, with personnel
to perform such executive, administrative and clerical services as are
reasonably necessary to provide effective administration of the Funds, (c)
arranging, to the extent not provided pursuant to such agreements, for the
preparation, at the Funds' expense, of each Fund's tax returns, reports to
shareholders, periodic updating of the Funds' prospectuses and statements of
additional information, and reports filed with the SEC and other regulatory
authorities, (d) providing the Funds, to the extent not provided pursuant to
such agreements, with adequate office space and certain related office equipment
and services, and (e) maintaining all of the Funds' records other than those
maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
- ----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed-income markets, in each case on a proprietary basis and
for the accounts of customers. As such, Goldman Sachs and its affiliates are
actively engaged in transactions in the same securities, currencies, and
instruments in which the Funds invest. Such activities could affect the prices
and availability of the securities, currencies, and instruments in which the
Funds invest, which could have an adverse impact on each Fund's performance.
Such transactions, particularly in respect of proprietary accounts or customer
accounts other than those included in the Advisers' and their advisory
affiliates' asset management activities, will be executed independently of the
Funds' transactions and thus at prices or rates that may be more or less
favorable. When the Advisers and their advisory affiliates seek to purchase or
sell the same assets for their managed accounts, including the Funds, the assets
actually purchased or sold may be allocated among the accounts on a basis
determined in its good faith discretion of such entitles to be equitable. In
some cases, this system may adversely affect the size or the price of the assets
purchased or sold for the Funds.
B-71
<PAGE>
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which, or in securities of issuers for
which, the Advisers and/or their affiliates are performing services or when
position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs
B-72
<PAGE>
or their affiliated entities. As a result, the performance by these principals
and employees of their obligations to such other entities may be a consideration
of which investors in the Funds should be aware.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income, High Yield and Core Funds, currencies on behalf of
the applicable Funds in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Funds, and such party may
have no incentive to assure that the Funds obtain the best possible prices or
terms in connection with the transactions. Goldman Sachs and its affiliates may
also create, write or issue derivative instruments for customers of Goldman
Sachs or its affiliates, the underlying securities currencies or instruments of
which may be those in which the Funds invest or which may be based on the
performance of a Fund. The Funds may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter into transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the Funds. At times, these activities may cause
departments of the Firm to give advice to clients that may cause these clients
to take actions adverse to the interest of the client. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on a Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
B-73
<PAGE>
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust. Pursuant to the distribution agreement, after the Funds'
Prospectuses and periodic reports have been prepared, set in type and mailed to
shareholders, Goldman Sachs will pay for the printing and distribution of copies
thereof used in connection with the offering to prospective investors. Goldman
Sachs will also pay for other supplementary sales literature and advertising
costs. Goldman Sachs has entered into sales agreements with certain investment
dealers and financial service firms (the "Authorized Dealers") to solicit
subscriptions for Class A, Class B and Class C Shares of each of the Funds that
offer such classes of shares. Goldman Sachs receives a portion of the sales
load imposed on the sale, in the case of Class A Shares, or redemption in the
case of Class B and Class C Shares, of such Fund shares. No Class B Shares were
outstanding during the fiscal years ended October 31, 1994 and 1995. No Class C
Shares were outstanding during the fiscal years ended October 31, 1994, 1995 and
1996. Goldman Sachs retained approximately the following combined commissions
on sales of Class A and B shares during the following periods:
<TABLE>
<CAPTION>
1996** 1995* 1994
------- -------- --------
<S> <C> <C> <C>
Adjustable Rate Fund* $79,000 $40,000 N/A
Municipal Income Fund $24,900 $48,000 $ 76,000
Government Income Fund $17,300 $22,000 $ 5,000
Global Income Fund $52,600 $15,000 $350,000
- ---------------------
</TABLE>
* Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
** Prior to May 1, 1997, the Municipal, Government Income and Global Income
Funds did not offer Class B shares.
Goldman Sachs serves as the Trust's transfer and dividend disbursing agent.
Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken
with the Trust with respect to each Fund to (i) record the issuance, transfer
and redemption of shares, (ii) provide confirmations of purchases and
redemptions, and quarterly statements, as well as certain other statements,
(iii) provide certain information to the Trust's custodian and the relevant
subcustodian in connection with redemptions, (iv) provide dividend crediting and
certain disbursing agent services, (v) maintain shareholder accounts, (vi)
provide certain state Blue Sky and other information, (vii) provide shareholders
and certain regulatory authorities with tax-related information, (viii) respond
to shareholder inquiries, and (ix) render certain other miscellaneous services.
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer and dividend disbursing agent and the
B-74
<PAGE>
assumption by Goldman Sachs of the expenses related thereto, Goldman Sachs
received fees for the fiscal years ended October 31, 1996, 1995 and 1994 by each
Fund then in existence as follows:
<TABLE>
<CAPTION>
Fund 1996 1995 1994
- ---- ------- ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund 278,337 306,662 679,819
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 16,980 26,098 46,887
Core Fund/(1)/ 24,657 13,716 5,637
Global Income Fund 121,212 106,764 132,123
Municipal Income Fund 90,284 63,695 70,811
Government Income Fund 72,237 94,095 57,960
- ------------------------
</TABLE>
/(1)/ Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide that
Goldman Sachs may render similar services to others so long as the services each
provides thereunder to the Funds are not impaired thereby. Each such agreement
also provides that the Trust will indemnify Goldman Sachs against certain
liabilities.
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser, the fees and expenses of
the Trust's custodian, transfer agent fees, brokerage fees and commissions,
filing fees for the registration or qualification of the Trust's shares under
federal or state securities laws, expenses of the organization of the Trust,
fees and expenses incurred by the Trust in connection with membership in
investment company organizations, taxes, interest, costs of liability insurance,
fidelity bonds or indemnification, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal, tax and auditing fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
B-75
<PAGE>
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees (in the
case of Global Income Fund and High Yield Fund) and other extraordinary
expenses) to the following percentage of each Fund's average daily net assets:
Short Duration Government Fund 0.05%
Adjustable Rate Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fund 0.05%
Global Income Fund 0.06%
High Yield Fund 0.01%
Such reductions or limits are calculated monthly on a cumulative
basis. Although the Advisers have no current intention of modifying or
discontinuing such expense limitations or the limitations on the management
fees, described above under "Management -- Investment Advisers," each may do so
in the future at its discretion. For the fiscal year ended October 31, 1996,
October 31, 1995 and October 31, 1994, Other Expenses of each Fund were reduced
by the Advisers in the following amounts:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund 386,863 551,405 442,880
Short Duration
Government Fund 169,069 219,994 115,389
Short Duration
Tax-Free Fund 238,097 213,139 192,696
Core Fund* 233,065 176,469 141,815
Municipal Income Fund 238,203 196,265 198,806
Government Income Fund 219,091 242,036 224,285
Global Income Fund** 337,079 70,195 0
</TABLE>
- ----------------------
* Core Fund commenced operations on January 5, 1994.
** For the fiscal year ended October 31, 1994, there was no expense
limitation.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by the
Advisers in performing certain accounting services not being provided by the
Trust's custodian.
B-76
<PAGE>
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, 225 Franklin Street,
Boston, Massachusetts 02110, have been selected as auditors of the Trust. In
addition to audit services, Arthur Andersen LLP prepares the Trust's federal and
state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a dealer is dealing with a Fund as
principal and receives compensation equal to the spread between the dealer's
cost for a given security and the resale price of such security). In certain
foreign countries, debt securities in which the Global Income Fund, Core Fund
and High Yield Fund may invest are traded on exchanges at fixed commission
rates. In connection with portfolio transactions, the Management Agreement
provides that the Advisers shall attempt to obtain the best net price and the
most favorable execution. The Management Agreement provides that, on occasions
when an Adviser deems the purchase or sale of a security to be in the best
interests of a Fund as well as its other customers (including any other fund or
other investment company or advisory account for which the Advisers or an
affiliate act as investment adviser), a Fund, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution. In
such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the applicable Adviser in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to the applicable Fund and such other customers. In some instances,
this procedure may adversely affect the size and price of the position
obtainable for a Fund. The Management Agreement permits each Adviser, in its
discretion, to purchase and sell portfolio securities to and from dealers who
provide the Trust with brokerage or research services in which dealers may
execute brokerage transactions at a higher cost to the Fund. Brokerage and
research services furnished by firms through which the Fund's effect their
securities transactions may be used by the Advisers in servicing other accounts
and not all of these services may be used by the
B-77
<PAGE>
Adviser in connection with the specific Fund generating the brokerage credits.
The fees received under the Management Agreement are not reduced by reason of
the Adviser receiving such brokerage and research services. In addition, in
selecting brokers and dealers, the Advisers may take into account sales of
shares of the Funds and other funds in the Goldman Sachs Group of Funds by such
brokers and dealers.
For the fiscal years ended October 31, 1995 and 1994, the Funds then in
existence paid no brokerage commissions.
B-78
<PAGE>
For the fiscal year ended October 31, 1996, the Funds then in existence paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid/3/ Research
=========== ================= ======================= ==========
<S> <C> <C> <C> <C>
Fiscal Year Ended
October 31, 1996:
Adjustable Rate Fund $108,000 $108,000(100%)/1/ $2,121,317,579(100%)/2/ N/A$
Short Duration Government Fund 24,000 24,000(100%)/1/ 447,205,928(100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000(100%)/1/ 8,559,280(100%)/2/ N/A
Core Fixed Income Fund 4,000 4,000(100%)/1/ 43,548,299(100%)/2/ N/A
Government Income Fund 1,200 1,200(100%)/1/ 24,437,288(100%)/2/ N/A
Municipal Income Fund 2,750 2,750(100%)/1/ 51,101,625(100%)/2/ N/A
</TABLE>
_______________________________
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Refers to Market Value of Futures Contracts.
B-79
<PAGE>
During the fiscal year ended October 31, 1996, the Funds acquired and
sold securities of their regular broker-dealers: Chase Securities, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1996, Short Duration Tax-Free Fund, Global Income Fund
and Municipal Income Fund held no securities of their regular broker-dealers.
As of the same date, Short Duration Government Fund, Adjustable Rate Fund,
Government Income Fund and Core Fund held the following amounts of securities of
their regular broker-dealers, as defined in Rule 10b-1 under the 1940 Act, or
their parents ($ in thousands): Short Duration Government Fund: Lehman
Brothers, Inc. ($370), Nomura Securities ($280) and Bear Stearns ($280);
Adjustable Rate Fund: Lehman Brothers, Inc. ($4,531), Bear Stearns ($3,430) and
Nomura Securities ($3,430); Government Income Fund: Lehman Brothers, Inc.
($2,774), Nomura Securities (2,774) and Bear Stearns ($2,100); Nomura Securities
(2,774); Core Fund: Lehman Brothers, Inc. ($4,808), Nomura Securities ($3,640)
and Bear Stearns ($3,640).
SHARES OF THE TRUST
The Funds were reorganized from series of a Massachusetts business
trust as part of Goldman Sachs Trust, a Delaware business trust, by a
Declaration of Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees have authority to classify and reclassify any series of shares into one
or more classes of shares. As of the date of this Additional Statement, the
Trustees have authorized: (i) the issuance of six classes of shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund:
Institutional Shares, Administration Shares, Service Shares, Class A Shares,
Class B Shares and Class C Shares; (ii) the issuance of four classes of shares
of Adjustable Rate Fund: Institutional Shares, Administration Shares, Service
Shares and Class A Shares; and (iii) the issuance of five classes of shares of
Global Income Fund, Government Income Fund, Municipal Income Fund and High Yield
Fund: Institutional Shares, Service Shares, Class A Shares, Class B Shares and
Class C Shares. As of October 31, 1996, no Service Shares of the Adjustable
Rate Fund were outstanding; no Class A, Class B or Class C Shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund were
outstanding; no Class C Shares of Government Income Fund and Municipal Income
Fund were outstanding; and no shares of High Yield Fund were outstanding.
B-80
<PAGE>
Each Institutional Share, Administration Share, Service Share, Class A
Share, Class B Share and Class C Share of a Fund represents a proportionate
interest in the assets belonging to the applicable class of the Fund. All
expenses of a Fund are borne at the same rate by each class of shares, except
that fees under Administration and Service Plans are borne exclusively by
Administration and Service Shares, fees under Distribution and Authorized Dealer
Service Plans are borne exclusively by Class A, Class B or Class C Shares and
transfer agency fees are borne at different rates by Class A, Class B or Class C
Shares than Institutional, Administration and Service Shares. The Trustees may
determine in the future that it is appropriate to allocate other expenses
differently between classes of shares and may do so to the extent consistent
with the rules of the SEC and positions of the Internal Revenue Service. Each
class of shares may have different minimum investment requirements and be
entitled to different shareholder services. Currently, shares of a class may
only be exchanged for shares of the same or an equivalent class of another fund.
See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the institution's customers.
Administration Shares may be purchased for accounts held in the name
of an institution that provides certain account administration services to its
customers, including maintenance of account records and processing orders to
purchase, redeem and exchange Administration Shares. Administration Shares bear
the cost of account administration fees at the annual rate of up to 0.25% of the
average daily net assets of such Administration Shares.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge, through brokers
and dealers who are members of the National Association of Securities Dealers,
Inc. and certain other financial service firms that have sales agreements with
Goldman Sachs. Class A Shares of the Funds bear the cost of distribution (Rule
12b-1) fees at the aggregate rate of up to 0.25% of the average daily net assets
of such Class A Shares. Class A Shares also bear the cost of an Authorized
Dealer Service Plan at an annual rate of up to 0.25% of average daily net assets
attributable to Class A Shares.
B-81
<PAGE>
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge through brokers and dealers who are members of the National
Association of Securities Dealers, Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. Class B shares bear the
cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of
the average daily net assets attributable to Class B shares. Class B shares
also bear the cost of an Authorized Dealer Service Plan at an annual rate of up
to 0.25% of the average daily net assets attributable to Class B shares.
Class C Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 1.0% through brokers and dealers who are members of the
National Association of Securities Dealers Inc. and certain other financial
services firms that have sales arrangements with Goldman Sachs. Class C Shares
bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to
0.75% of the average daily net assets attributable to Class C Shares. Class C
Shares also bear the cost of an Authorized Dealer Service Plan at an annual rate
of up to 0.25% of the average daily net assets attributable to Class C Shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A, Class B and Class C Shares) to its customers and thus receive different
compensation with respect to different classes of shares of each Fund.
Dividends paid by each Fund, if any, with respect to each class of shares will
be calculated in the same manner, at the same time on the same day and will be
in the same amount, except for differences caused by the fact that the
respective account administration, service, authorized dealer service plan and
distribution fees relating to a particular class will be borne exclusively by
that class. Similarly, the net asset value per share may differ depending upon
the class of shares purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, each Fund's shares are fully paid and non-assessable by
the Trust. In the event of liquidation of a Fund, shareholders of that Fund are
entitled to share pro rata in the net assets of that Fund available for
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of July 24, 1997, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following Funds: Adjustable
Rate Fund -- First Trust of New York, N.A., Mr. Michael Loughlin, 100 Wall
Street, Suite 1600, New York, NY (12.15%); State Treasurer/Nebraska Investment
Council, Attn: Gayle Ducker, 941 "O" Street, Lincoln, NE 68508 (7.03%); Short
Duration Government Fund -- Central Carolina Bank & Trust Co., P.O.
B-82
<PAGE>
Box 30010, Durham, NC 27702 (7.60%); Richfield Bank & Trust Co., Kirchbak Co.,
Attn: Judith A. Ferguson, 6625 Lyndale Avenue South, Richfield, MN 55423
(7.36%); State Street Bank & Trust Co., 1 Enterprise Drive, North Quincy, MA
02171-2126 (31.49%); Short Duration Tax-Free Fund -- Donald R. Gant, Partner,
Goldman, Sachs & Co., 85 Broad Street, 22nd Floor, New York, NY 10004 (17.25%);
G-K-G, Inc., Bernard Gassin, 166 Oak Knoll Terrace, Highland Park, IL 60035
(10.18%); Indiana Trust & Investment Management Co., Attn: Tina Taylor, 3930
Edison Lakes Parkway, Suite 250, Mishawaka, IN 46545 (6.33%); Nelda Start,
Attn: Mr. Walte Riedel, P.O. Box 903, Orange, TX 77631-0909 (7.51%); Westport
Trust -- WEBAT & Co., c/o Westport Bank & Trust, P.O. Box 5177, Westport, CT
06881-5177 (7.82%); Government Income Fund -- Frontier Trust Co., Inc. TR, FBO
Dade County Public School, Attn: Agnes R. McMurray, Fringe Benefits Management
Co., 1720 S. Gadsden Street, Tallahassee, FL 32301-5547 (7.48); Charles Machine
Works, Inc., ESOP & Trust Asset Allocation Account, Mike Stodola, Trustee, P.O.
Box 66, 1959 West Fir Street, Perry, OK 73077-5803 (6.22%); Bob Smith MD
Foundation, 3811 Turtle Creek Centre #2150, Dallas, TX 75219-4454 (5.22%); Core
Fund --Local 234 Electric Workers Retirement Fund, Attn: Ronald D. Carpenter,
10300 Merritt Street, Castroville, CA 95012 (6.60%); Vinson and Elkins Pension
Plan, Attn: Mr. Mike Ross, c/o Banc One, 910 Travis Street, F16, Houston, TX
77002-5802 (9.79%); St. Barnabas, 1 New York Plaza, New York, NY 10004-1902
(19.33%); Vinson and Elkins Lawyers, Retirement Plan, Texas Commerce Bank N.A.,
P.O. Box 2558, Houston, TX (31.67%); Global Income Fund --First National Bank
North Dakota, Attn: Josie Wahl, P.O. Box 6001, Grand Forks, ND 58206-6001
(5.51%); State Street Bank and Trust, GS Profit Sharing Master Trust, Attn:
Louis Pereira, P.O. Box 1992, Boston, MA 02105-1992 (15.63%).
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act, applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company (such as
the Trust) shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of Trustees from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the election of Trustees (this method of voting being
referred to at "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the
B-83
<PAGE>
Trustees, series and classes of the Trust will vote separately from each other.
Shareholders of the Trust do not have cumulative voting rights in the election
of Trustees. Meetings of shareholders of the Trust, or any series or class
thereof, may be called by the Trustees, certain officers or upon the written
request of holders of 10% or more of the shares entitled to vote at such
meetings. The shareholders of the Trust will have voting rights only with
respect to the limited number of matters specified in the Declaration of Trust
and such other matters as the Trustees may determine or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for
any act or obligation of the series and satisfy any judgment thereon from the
assets of the series.
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
B-84
<PAGE>
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have
the right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of the Delaware Trust, all the powers and authorities of
Trustees under the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of a Fund. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
series or the Trustees. The Declaration of Trust provides for indemnification by
the relevant Fund for all loss suffered by a shareholder as a result of a
obligation of the series. The Declaration of Trust also provides that a series
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. In view of the above, the risk of personal liability of shareholders is
remote.
In addition to the requirement under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the series or class to which such action relates, shall join in the request for
the Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of other advisers in considering the merits of the request
and shall require an undertaking by the shareholders making such request to
B-85
<PAGE>
reimburse the Fund for the expense of any such advisers in the event that the
Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason or willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
NET ASSET VALUE
Under the Act, the Trustees of the Trust are responsible for
determining in good faith the fair value of securities of the Funds. In
accordance with procedures adopted by the Trustees of the Trust, the net asset
value per share of each class of each Fund is calculated by determining the
value of the net assets attributable to each class of that Fund (assets,
including securities at value, minus liabilities) and dividing by the number of
outstanding shares of that class. All securities are valued as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time) on each Business Day (as defined in each Fund's Prospectus).
For the purpose of calculating the net asset value of the Funds,
investments are valued under valuation procedures established by the Trustees.
Portfolio securities, other than money market instruments and with the exception
of Global Income Fund, for which accurate market quotations are readily
available are valued as follows: (a) via electronic feeds to the custodian bank
containing dealer-supplied bid quotations or bid quotations from a nationally
recognized pricing service; (b) securities for which the custodian bank is
unable to obtain an external price or with respect to which the Adviser believes
an external price does not reflect accurate market values, will be valued by the
Adviser in good faith based on valuation models that take into account daily
spread and yield changes on U.S. Treasury securities (i.e., matrix pricing); (c)
overnight repurchase agreements will be valued by the Adviser at cost; (d) term
repurchase agreements (i.e., those whose maturity exceeds seven days) and
interest rate swaps, caps, collars and floors will be valued at the average of
the bid quotations obtained daily from at least two dealers or, for term
repurchase agreements, recognized counterparties; (e) debt securities with a
remaining maturity of 60 days or less are valued by the Adviser at amortized
cost, which the Trustees have determined to approximate fair value; (f) spot and
forward foreign currency exchange contracts will be valued using a pricing
service such as Reuters then calculating then mean between the last bid and
asked quotations supplied by certain independent dealers in such contracts; (g)
exchange-traded options and futures contracts will be valued by the custodian
bank at the last sale price on the exchange where such contracts and options are
principally traded; and (h) over-the-counter options will be valued by an
independent
B-86
<PAGE>
unaffiliated broker identified by the portfolio manager/trader and contacted by
the custodian bank.
Portfolio securities of the Global Income Fund for which accurate
market quotations are available are valued as follows: (a) securities listed on
any U.S. or foreign stock exchange or on the National Association of Securities
Dealers Automated Quotations System ("NASDAQ") will be valued at the last sale
price on the exchange or system in which they are principally traded, on the
valuation date. If there is no sale on the valuation day, securities traded
principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean between
the closing bid and asked prices, and (ii) on a foreign exchange will be valued
at the official bid price. The last sale price and official bid price for
securities traded principally on a foreign exchange will be determined as of the
close of the London Foreign Exchange; (b) over-the-counter securities not quoted
on NASDAQ will be valued at the last sale price on the valuation day or, if no
sale occurs, at the mean between the last bid and asked prices; (c) options and
futures contracts will be valued at the last sale price in the market where such
contract is principally traded; and (d) forward foreign currency exchange
contracts will be valued at the mean between the last bid and asked quotations
supplied by a dealer in such contracts.
All other securities, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved by the Board of Trustees.
Money market instruments held by a Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which the
Trustees have determined approximates market value.
The value of all assets and liabilities expressed in foreign
currencies will be converted into U.S. dollar values at current exchange rates
of such currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the time the Global Income, Core and High
Yield Funds calculate their net asset value. Occasionally, events affecting the
values of such securities may occur between the times at which they are
determined and the calculation of net asset value which will not be reflected in
the computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value, in which case an adjustment
may be made.
B-87
<PAGE>
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies and financial institutions. Each prospective
shareholder is urged to consult his own tax adviser with respect to the specific
federal, state, local and foreign tax consequences of investing in the Funds.
This summary is based on the laws in effect on the date of this Additional
Statement, which are subject to change.
GENERAL
- -------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect to
be treated and intends to continue to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its gross
income (including tax-exempt interest) for its taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks or securities, or foreign currencies or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"); (b) a Fund derive less than 30% of its
gross income for its taxable year from the sale or other disposition of any of
the following which was held for less than three months: (i) stock or
securities, (ii) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies) and (iii) foreign currencies
and foreign currency options, futures and forward contracts that are not
directly related to the Fund's principal business of investing in stocks or
securities or options and futures with respect to stocks or securities (the
"short-short test"); and (c) a Fund diversify its holdings so that, at the close
of each quarter of its taxable year, (i) at least 50% of the market value of its
total (gross) assets is comprised of cash, cash items, United States Government
Securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (gross) assets is invested in the securities of any
one issuer (other than United States Government Securities and securities of
other regulated investment companies) or two or more issuers controlled by a
Fund and engaged in the same, similar or related trades or businesses. Gains
from the sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that
B-88
<PAGE>
are not directly related to Core Fund's or Global Income Fund's principal
business of investing in stock or securities or options and futures with respect
to stock or securities will be treated as gains from the sale of investments
held for less than three months under the short-short test (even though
characterized as ordinary income for some purposes) if such currencies or
instruments were held for less than three months. In addition, future Treasury
regulations could provide that qualifying income under the 90% gross income test
will not include gains from foreign currency transactions that are not directly
related to Core Fund's or Global Income Fund's principal business of investing
in stock or securities or options and futures with respect to stock or
securities. Using foreign currency positions or entering into foreign currency
options, futures and forward contracts for purposes other than hedging currency
risk with respect to securities in Core Fund's or Global Income Fund's portfolio
or anticipated to be acquired may not qualify as "directly related" under these
tests.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on the portion of its income and capital gains that it
distributes to its shareholders in any taxable year for which it distributes, in
compliance with the Code's timing and other requirements, at least 90% of its
"investment company taxable income" (which includes dividends, taxable interest,
taxable original issue discount income, market discount income, income from
securities lending, net short-term capital gain in excess of net long-term
capital loss, certain net realized foreign exchange gains, and any other taxable
income other than "net capital gain" as defined below and is reduced by
deductible expenses) and at least 90% of the excess of its gross tax-exempt
interest income over certain disallowed deductions ("net tax-exempt interest").
A Fund may retain for investment its "net capital gain" (which consists of the
excess of its net long-term capital gain over its net short-term capital loss).
However, if a Fund retains any investment company taxable income or net capital
gain, it will be subject to tax at regular corporate rates on the amount
retained. If a Fund retains any net capital gain, that Fund may designate the
retained amount as undistributed net capital gain in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by that Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For U.S.
federal income tax purposes, the tax basis of shares owned by a shareholder of
the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute for each taxable year to its
shareholders all or substantially all of its investment company taxable income
(if any), net capital gain and any net tax-exempt interest. Exchange control or
other foreign laws, regulations or practices may restrict repatriation of
investment income, capital or the proceeds
B-89
<PAGE>
of securities sales by foreign investors such as Global Income Fund or Core Fund
and may therefore make it more difficult for Global Income Fund or Core Fund to
satisfy the distribution requirements described above, as well as the excise tax
distribution requirements described below. However, Global Income Fund and Core
Fund generally expect to be able to obtain sufficient cash to satisfy such
requirements from new investors, the sale of securities or other sources. If
for any taxable year a Fund does not qualify as a regulated investment company,
it will be taxed on all of its investment company taxable income and net capital
gain at corporate rates, its net tax-exempt interest (if any) may be subject to
the alternative minimum tax, and its distributions to shareholders will be
taxable as ordinary dividends to the extent of its current and accumulated
earnings and profits.
For federal income tax purposes, each Fund is permitted to carry
forward a net capital loss in any year to offset its own capital gains, if any,
during the eight years following the year of the loss. At October 31, 1996, the
Funds had approximately the following amounts of capital loss carry forwards:
<TABLE>
<CAPTION>
Years of
Amount Expiration
----------- ----------
<S> <C> <C>
Adjustable Rate Fund $47,923,000 2000-2003
Short Duration
Government Fund $13,272,000 2002-2003
Short Duration
Tax-Free Fund $ 4,271,000 2002-2003
Core Fixed Income Fund $ 77,000 2004
Global Income Fund $ 4,472,000 2002
Municipal Income Fund $ 1,535,000 2002
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by the Code and applicable tax regulations.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year) and 100% of any taxable
ordinary income and the excess of capital gains over capital losses for the
prior year that were not distributed during such year and on which the Fund did
not pay federal income tax. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will
B-90
<PAGE>
be treated as if they were received by shareholders on December 31 of the year
declared.
The Tax Exempt Funds may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." The Tax Exempt Funds may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, the Tax
Exempt Funds may purchase beneficial interests in Municipal Securities held by
trusts, custodial arrangements or partnerships and/or combined with third-party
puts and other types of features such as interest rate swaps; those investments
may require the Fund to pay "tender fees" or other fees for the various features
provided.
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that tax-
exempt interest received by a regulated investment company with respect to such
obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax Exempt Funds intends to take
the position that it is the owner of any municipal obligations acquired subject
to a standby commitment or other third party put and that tax-exempt interest
earned with respect to such municipal obligations will be tax-exempt in its
hands. There is no assurance that the Service will agree with such position in
any particular case. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the treatment of tender fees paid
by these Funds, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Tax Exempt
Funds' portfolios in a manner designed to minimize any adverse impact from the
tax rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is,
B-91
<PAGE>
treated as having been sold at their fair market value on the last day of the
Fund's taxable year. These provisions may require a Fund to recognize income or
gains without a concurrent receipt of cash. Any gain or loss recognized on
actual or deemed sales of these futures contracts, forward contracts or options
will (except for certain foreign currency options, forward contracts, and
futures contracts) be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. As a result of certain hedging transactions
entered into by a Fund, that Fund may be required to defer the recognition of
losses on futures or forward contracts and options or underlying securities or
foreign currencies to the extent of any unrecognized gains on related positions
held by the Fund and the characterization of gains or losses as long-term or
short-term may be changed. The short-short test described above may limit each
Fund's ability to use options, futures and forward transactions as well as its
ability to engage in short sales. The tax provisions described above applicable
to options, futures and forward contracts may affect the amount, timing, and
character of a Fund's distributions to shareholders. Certain tax elections may
be available to the Funds to mitigate some of the unfavorable consequences
described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by Core Fund and Global Income
Fund. Under these rules, foreign exchange gain or loss realized by Core Fund or
Global Income Fund with respect to foreign currencies and certain futures and
options thereon, foreign currency-denominated debt instruments, foreign currency
forward contracts, and foreign currency-denominated payables and receivables
will generally be treated as ordinary income or loss, although in some cases
elections may be available that would alter this treatment. If a net foreign
exchange loss treated as ordinary loss under Section 988 of the Code were to
exceed a Fund's investment company taxable income (computed without regard to
such loss) for a taxable year, the resulting loss would not be deductible by
the Fund or its shareholders in future years. Net loss, if any, from certain
foreign currency transactions or instruments could exceed net investment income
otherwise calculated for accounting purposes with the result being either no
dividends being paid or a portion of Core Fund's, High Yield Fund's or Global
Income Fund's dividends being treated as a return of capital for tax purposes,
nontaxable to the extent of a shareholder's tax basis in his shares and, once
such basis is exhausted, generally giving rise to capital gains.
Core and Global Income, and High Yield Funds may be subject to foreign
taxes on income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes in some cases. Because more than 50% of Global Income
Fund's total assets at the close of any taxable year will generally consist of
stock or securities of foreign corporations, Global Income Fund will generally
qualify to file an election with the Internal Revenue Service pursuant to which
shareholders of Global Income Fund would
B-92
<PAGE>
be required to (i) include in ordinary gross income (in addition to taxable
dividends actually received) their pro rata shares of foreign income taxes paid
by Global Income Fund that are treated as income taxes under U.S. tax
regulations (which excludes, for example, stamp taxes, securities transaction
taxes, and similar taxes) even though not actually received by such
shareholders, and (ii) treat such respective pro rata portions as foreign income
taxes paid by them. Global Income Fund may or may not make this election for
any particular taxable year. Core Fund will not satisfy the 50% requirement
described above and, therefore, will not make this election. Core Fund and, if
it does not make the election, Global Income Fund will, however, be entitled to
deduct such taxes in computing the amounts they are required to distribute.
If Global Income Fund makes this election, its shareholders may then deduct
such pro rata portions of qualified foreign taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of qualified foreign taxes paid by
Global Income Fund, although such shareholders will be required to include their
shares of such taxes in gross income if Global Income Fund makes the election
referred to above.
If a shareholder chooses to take a credit for the foreign taxes deemed paid
by such shareholder as a result of any such election by Global Income Fund, the
amount of the credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken which the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. For
this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by Global Income Fund will generally not be treated as
income from foreign sources. This foreign tax credit limitation may also be
applied separately to certain specific categories of foreign-source income and
the related foreign taxes. As a result of these rules, which have different
effects depending upon each shareholder's particular tax situation, certain
shareholders of Global Income Fund may not be able to claim a credit for the
full amount of their proportionate shares of the foreign taxes paid by the Fund.
Shareholders who are not liable for U.S. federal income taxes, including
tax-exempt shareholders, will ordinarily not benefit from this election. Each
year, if any, that Global Income Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of qualified foreign income taxes paid by Global Income Fund and (ii) the
portion of Fund dividends which represents income from each foreign country.
If Core, or Global Income or High Yield Funds acquire stock (including,
under proposed regulations, an option to acquire stock
B-93
<PAGE>
such as is inherent in a convertible bond) in certain foreign corporations that
receive at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies") Core, Global Income or High Yield Funds could be subject
to federal income tax and additional interest charges on "excess distributions"
received from such companies or gain from the sale of such stock in such
companies, even if all income or gain actually received by Core, Global Income
or High Yield Funds is timely distributed to its shareholders. Core, Global
Income or High Yield Funds would not be able to pass through to their
shareholders any credit or deduction for such a tax. Certain elections may, if
available, ameliorate these adverse tax consequences, but any such election
would require Core, Global Income or High Yield Funds to recognize taxable
income or gain without the concurrent receipt of cash. Core, Global Income or
High Yield Funds may limit and/or manage their holdings in passive foreign
investment companies to minimize its tax liability or maximize its return from
these investments.
A Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark-to-market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations
B-94
<PAGE>
concerning the tax-exempt status of such obligations, nor does it guarantee or
represent that bond counsels' opinions are correct. Bond counsels' opinions will
generally be based in part upon covenants by the issuers and related parties
regarding continuing compliance with federal tax requirements. Tax laws not
only limit the purposes for which tax-exempt bonds may be issued and the supply
of such bonds, but also contain numerous and complex requirements that must be
satisfied on a continuing basis in order for bonds to be and remain tax-exempt.
If the issuer of a bond or a user of a bond-financed facility fails to comply
with such requirements at any time, interest on the bond could become taxable,
retroactive to the date the obligation was issued. In that event, a portion of
a Tax Exempt Fund's distributions attributable to interest the Fund received on
such bond for the current year and for prior years could be characterized or
recharacterized as taxable income. The availability of tax-exempt obligations
and the value of a Tax Exempt Fund's portfolio may be affected by restrictive
federal income tax legislation enacted in recent years or by similar, future
legislation. If a Tax Exempt Fund satisfies the applicable requirements,
dividends paid by the Fund which are attributable to tax exempt interest on
Municipal Securities and designated by the Fund as exempt-interest dividends in
a written notice mailed to its shareholders within sixty days after the close
of its taxable year may be treated by shareholders as items of interest
excludable from their gross income under Section 103(a) of the Code. Exempt-
interest dividends a Tax Exempt Fund receives from other regulated investment
companies, including exempt-interest dividends on auction rate preferred
securities of such companies held by a Fund, are treated as interest on
Municipal Securities and may be distributed by a Tax Exempt Fund as exempt-
interest dividends. The recipient of tax-exempt income is required to report
such income on his federal income tax return. However, a shareholder is advised
to consult his tax adviser with respect to whether exempt-interest dividends
retain the exclusion under Section 103(a) if such shareholder would be treated
as a "substantial user" under Section 147(a)(1) with respect to some or all of
the tax-exempt obligations held by a Tax Exempt Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of a
Tax Exempt Fund is not deductible to the extent attributable to exempt-interest
dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
B-95
<PAGE>
ALL FUNDS. Distributions from investment company taxable income, as
defined above, are taxable to shareholders who are subject to tax as ordinary
income whether paid in cash or reinvested in additional shares. Taxable
distributions include distributions from any Fund, including Short Duration Tax-
Free Fund and Municipal Income Fund, that are attributable to (i) taxable
income, including but not limited to dividends, taxable bond interest,
recognized market discount income, original issue discount income accrued with
respect to taxable bonds, income from repurchase agreements, income from
securities lending, income from dollar rolls, income from interest rate or
currency swaps, caps, floors and collars, and a portion of the discount from
certain stripped tax-exempt obligations or their coupons or (ii) capital gains
from the sale of securities or other investments (including from the disposition
of rights to when-issued securities prior to issuance) or from options, futures
or certain forward contracts. Any portion of such taxable distributions that is
attributable to a Fund's net capital gain, as defined above, may be designated
by the Fund as a "capital gain dividend," taxable to shareholders as long-term
capital gain whether received in cash or additional shares and regardless of the
length of time their shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less than a
minimum period, generally 46 days. Receipt of certain distributions qualifying
for the deduction may result in reduction of the tax basis of the corporate
shareholder's shares and may give rise to or increase its liability for federal
corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes,
will first reduce a shareholder's basis in his shares and, after the
shareholder's basis is reduced to zero, will generally constitute capital gains
to a shareholder who holds his shares as capital assets. Amounts that are not
allowable as a deduction in computing taxable income, including expenses
associated with earning tax-exempt interest income, do not reduce a Fund's
current earnings and profits for these purposes. Consequently, the portion, if
any, of Short Duration Tax-Free Fund's or Municipal Income Fund's distributions
from gross tax-exempt interest income that exceeds its net tax-exempt interest
would be taxable as ordinary income to the extent of such disallowed deductions
even
B-96
<PAGE>
though such excess portion may represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash and will have a cost basis in the shares received equal
to such amount.
TAXABLE U.S. SHAREHOLDERS -- SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of in
a transaction that is treated as a sale for tax purposes, the shareholder will
generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale, such gain or loss should be capital in
character, and long-term if the shareholder has a tax holding period for the
shares of more than one year, otherwise short-term, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund Shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. All or a portion
of a sales charge paid in purchasing Class A shares of Adjustable Rate Fund or
Global Income Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of that Fund or another fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment or
exchange privilege. Any disregarded portion of such charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired. If
a shareholder received a capital gain dividend with respect to shares and such
shares have a tax holding period of six months or less at the time of the sale
or redemption, then any loss the shareholder realizes on the sale or redemption
will be treated as a long-term capital loss to the extent of such capital gain
dividend. Also, any losses realized by shareholders who dispose of shares of
Short Duration Tax-Free or Municipal Income Funds with a tax holding period of
six months or less are disallowed to the extent of any exempt-interest dividends
received with respect to such shares. Additionally, any loss realized on a sale
or redemption of shares of a Fund may be disallowed under "wash sale" rules to
the extent the shares disposed of are replaced with other shares of the same
Fund within a period of 61 days beginning 30 days before and ending 30 days
after the shares are disposed of, such as pursuant to a dividend reinvestment in
shares of the Fund. If disallowed, the loss will be reflected in an adjustment
to the basis of the shares acquired.
After the close of each calendar year, each of Short Duration Tax-Free Fund
and Municipal Income Fund will inform shareholders of
B-97
<PAGE>
the federal income tax status of its dividends and distributions for such year,
including the portion of such dividends that qualifies as tax-exempt and the
portion, if any, that should be treated as a tax preference item for purposes of
the federal alternative minimum tax. Shareholders who have not held shares of
Short Duration Tax-Free Fund or Municipal Income Fund for such Fund's full
taxable year may have designated as tax-exempt or as a tax preference item a
percentage of distributions which is not equal to the actual amount of tax-
exempt income or tax preference item income earned by Short Duration Tax-Free
Fund or Municipal Income Fund during the period of their investment in Short
Duration Tax-Free Fund or Municipal Income Fund, as the case may be.
All distributions, whether received in shares or in cash, as well as
redemptions and exchanges, must be reported by each shareholder who is required
to file a U.S. Federal income tax return.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish the Funds with their correct taxpayer identification number and with
certain required certifications or if the Service or a broker notifies the Funds
that the number furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from Short
Duration Tax-Free Fund or Municipal Income Fund will not be subject to backup
withholding if the applicable Fund reasonably estimates that at least 95% of its
distributions will be exempt-interest dividends. A Fund may refuse to accept an
application that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
B-98
<PAGE>
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment company taxable income distributed by a
Fund to a shareholder who is not a U.S. person will be subject to U.S.
withholding tax at the rate of 30% (or a lower rate provided by an applicable
tax treaty) unless the dividends are effectively connected with a U.S. trade or
business of the shareholder, in which case the dividends will be subject to tax
on a net income basis at the graduated rates applicable to U.S. individuals or
domestic corporations. Distributions of net capital gain, including amounts
retained by a Fund which are designated as undistributed capital gains, to a
shareholder who is not a U.S. person will not be subject to U.S. federal income
or withholding tax unless the distributions are effectively connected with the
shareholder's trade or business in the United States or, in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met. Non-U.S. shareholders may also be subject to U.S.
withholding tax on deemed income resulting from any election by Global Income
Fund to treat qualified foreign taxes it pays as passed through to shareholders
(as described above), but they may not be able to claim a U.S. tax credit or
deduction with respect to such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
B-99
<PAGE>
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Thirty-day yield and average annual total return values are computed pursuant to
formulas specified by the SEC. Each Fund may also from time to time quote
distribution rates in reports to shareholders and in sales literature.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price per share on the
last day of such period. Yield is then annualized by assuming that yield is
realized each month for twelve months and is reinvested every six months. Net
investment income per share is equal to the dividends and interest earned during
the period, reduced by accrued expenses for the period. The calculation of net
investment income for these purposes may differ from the net investment income
determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, a Tax Exempt Fund's tax-free yield. Tax equivalent yield is
calculated by dividing a Tax Exempt Fund's tax-exempt yield by one minus a
stated federal and/or state tax rate.
Distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share on the last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price applicable to the relevant
class (i.e., net asset value in the case of each class other than Class A) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption (and in the case
of Class B and Class C Shares payment of any contingent deferred sales charge)
at the end of the period. This calculation assumes a complete redemption of the
investment. It also assumes that all dividends and distributions are reinvested
at net asset value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price per share with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period.
B-100
<PAGE>
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
Thirty-day yield, tax equivalent yield (Short Duration Tax-Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A, Class B or Class C Shares which is based upon a Fund's net asset value per
share would be reduced if a sales charge were taken into account.
B-101
<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- -------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 6.00% 5.94%
Administration Shares 5.75% 5.69%
Service Shares/2/
Class A Shares
- Assumes 1.5% sales charge 5.66% 5.35%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.43% 6.16%
Administration Shares 6.19% 5.93%
Service Shares 5.96% 5.71%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.34% 3.71%
Administration Shares 4.09% 3.42%
Service Shares 3.84% 3.22%
CORE FUND
Institutional Shares 6.60% 6.25%
Administration Shares 6.37% 6.03%
Service Shares 6.12% 5.78%
GLOBAL INCOME FUND
Institutional Shares 5.20% 4.76%
Service Shares/2/
Class A Shares
(Assumes 4.5% sales charge) 4.54% 4.08%
Class B Shares 4.23% 3.80%
MUNICIPAL INCOME FUND
Class A Shares 4.21% 3.56%
(assumes 4.5% sales charge)
Class B Shares 3.68% 3.25%
GOVERNMENT INCOME FUND
Class A Shares 6.04% 4.76%
(assumes 4.5% sales charge)
Class B Shares 5.57% 4.48%
</TABLE>
B-102
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- ---- ------------------ ----------- -------------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 5.87% 5.81%
Administration Shares 5.62% 5.56%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.62% 5.31%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.24% 5.97%
Administration Shares 6.00% 5.72%
Service Shares 5.78% 5.49%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.19% 3.56%
Administration Shares 3.94% 3.28%
Service Shares 3.69% 3.06%
MUNICIPAL INCOME FUND
Class A Shares 4.27% 3.59%
-assumes no sales charge
Class B Shares 3.53% 3.09%
GOVERNMENT INCOME FUND
Class A Shares 6.33% 5.00%
-assumes no sales charge
Class B Shares 5.58% 4.50%
CORE FUND
Institutional Shares 6.46% 6.12%
Administration Shares 6.23% 5.89%
Service Shares 5.98% 5.63%
GLOBAL INCOME FUND
Institutional Fund 5.95% 6.18%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.44% 4.96%
Class B Shares 5.02% 4.59%
</TABLE>
B-103
<PAGE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---- ------------------ -------------- --------------
<S> <C> <C> <C>
30-Days
ended
10/31/96
SHORT DURATION
TAX-FREE FUND/3/
Institutional Shares 6.94% 5.89%
Administration Shares 6.52% 5.43%
Service Shares 6.11% 5.07%
MUNICIPAL INCOME FUND/3/
Class A Shares 7.07% 5.94%
-assumes no sales charge
Class B Shares 5.84% 5.12%
</TABLE>
- ----------------------------------
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to limit its advisory fees and to maintain
expenses at a specified level.
2 There were no Service Shares outstanding during the periods indicated.
3 The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 39.6% federal income tax rate.
The above tables should not be considered a representation of future
performance.
B-104
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- ---------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/96 5.32% 5.19%
11/1/95 one year ended
10/31/96 6.86% 6.80%
11/1/91 five years ended
10/31/96 5.13% 5.05%
Administration Shares 4/15/93/1b/ ended 10/31/96 4.69% 4.64%
11/1/95 one year ended
10/31/96 6.60% 6.53%
Service Shares/1c/ N/A N/A
Class A Shares 5/12/95/1d/ ended 10/31/96
Assumes 1.5% Sales Charge 5.29% 4.96%
Assumes No Sales Charge 6.40% 6.07%
11/1/95 one year ended
Assumes 1.5% Sales Charge 10/31/96 4.99% 4.66%
Assumes No Sales Charge 6.60% 6.27%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/96 7.24% 6.84%
11/1/95 one year ended
10/31/96 6.75% 6.47%
11/1/91 five years
ended 10/31/96 5.67% 5.44%
Administration Shares 2/28/96/2b/ ended 10/31/96 4.00% 3.82%
Service Shares 4/10/96/2b/ ended 10/31/96 4.35% 4.20%
</TABLE>
B-105
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-----------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
Institutional Shares 10/1/92/3a/ ended 10/31/96 4.21% 3.71%
11/1/95 one year ended
10/31/96 4.50% 3.92%
Administration Shares 5/20/93/3b/ ended 10/31/96 3.51% 3.15%
11/1/95 one year ended
10/31/96 4.24% 3.66%
Service Shares 9/20/94/3c/ ended 10/31/96 4.36% 3.92%
11/1/95 one year ended
10/31/96 3.98% 3.40%
CORE FUND
Institutional Shares 1/15/94/4a/ 10/31/96 6.34% 5.70%
11/1/95 one year ended
10/31/96 5.98% 5.58%
Administration Shares 2/28/96/4b/ ended
10/31/96 3.56% 3.29%
Service Shares 3/13/96/4b/ ended
10/31/96 4.90% 4.69%
</TABLE>
B-106
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
------------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- -------------- ------------------- --------------- ------------
<S> <C> <C> <C> <C>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/96
Assumes 4.5% Sales Charge 7.08% 6.76%
Assumes No Sales Charge 8.02% 7.71%
Assumes 4.5% Sales Charge 11/1/95 one year 6.08% 5.57%
Assumes No Sales Charge ended 10/31/96 11.05% 10.53%
Assumes 4.5% Sales Charge 11/1/91 five years 7.02% 6.73%
Assumes No Sales Charge ended 10/31/96 8.01% 7.69%
Class B Shares/5b/ 5/1/96 ended 10/31/96/5d/ 6.24% 6.01%
Institutional Shares 8/1/95/5e/ ended 10/31/96 12.95% 12.45%
11/1/95 one year
ended 10/31/96 11.55% 11.05%
Service Shares/5f/
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/96
Assumes 4.5% Sales Charge 3.80% 2.78%
Assumes No Sales Charge 5.27% 4.23%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.35% 0.65%
Assumes No Sales Charge 6.13% 5.40%
Class B Shares/6b/ 5/1/96 ended 10/31/96 4.40% 4.07%
</TABLE>
B-107
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
--------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/96
Assumes 4.5% Sales Charge 5.41% 2.92%
Assumes No Sales Charge 6.72% 4.21%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.06% -0.33%
Assumes No Sales Charge 5.80% 4.35%
Class B Shares/7b/ 5/1/96 ended 10/31/96 4.85% 4.17%
- ----------------
</TABLE>
1a Institutional Shares of Adjustable Rate Fund commenced operations on
July 17, 1991.
1b Administration Shares of Adjustable Rate Fund commended operations on
April 15, 1993.
1c No Service Shares of Adjustable Rate Fund were outstanding during the
periods indicated.
1d Class A shares of Adjustable Rate Fund commenced operations on May 12,
1995.
2a Institutional Shares of Short Duration Government Fund commenced
operations on August 15, 1988.
2b Administration Shares of Short Duration Government Fund commenced
operations on February 28, 1996. Service Shares of Short Duration
Government Fund commenced operations on April 10, 1996. An aggregate total
return (not annualized) is shown instead of an average annual total return
since Administration and Service Shares have not completed a full 12 months
of operation as of October 31, 1996.
3a Institutional Shares of Short Duration Tax-Free Fund commenced operations
on October 1, 1992.
3b Administration Shares of Short Duration Tax-Free Fund commenced operations
on May 20, 1993.
3c Service Shares of Short Duration Tax-Free Fund commenced operations on
September 20, 1994.
4a Institutional Shares of Core Fund commenced operations on January 5, 1994.
4b Administration Shares of Core Fund commenced operations on February
28, 1996. Service Shares of Core Fund commenced operations on March 13,
1996. An aggregate total return (not annualized) is shown instead of an
average annual total return since Administration and Service Shares have
not completed a full 12 months of operation as of October 31, 1996.
5a Class A Shares of Global Income Fund commenced operations on August 2,
1991.
5b Class B Shares of Global Income Fund commenced operations on May 1, 1996.
5c On November 27, 1992, the maximum sales charge was changed from 3% to
4.5% of the offering price. All performance figures in this table
incorporate the sales charge currently in effect.
5d An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a full
12 months of operation as of October 31, 1996.
5e Institutional Shares of Global Income Fund commenced operations on
August 1, 1995.
5f No Service Shares of Global Income Fund were outstanding during the
periods indicated.
6a Class A shares of Municipal Income Fund commenced operations on July
20, 1993.
6b Class B Shares of Municipal Income Fund commenced operations on May 1,
1996. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a full
12 months of operation as of October 31, 1996.
B-108
<PAGE>
7a Class A Shares of Government Income Fund commenced operations on
February 10, 1993.
7b Class B Shares of Government Income Fund commenced operations on May
1, 1996. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a full
12 months of operation as of October 31, 1996.
The above table should not be considered a representation of future
performance.
B-109
<PAGE>
Occasionally statistics may be used to specify a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare a Fund's net
asset value or performance relative to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market. A beta of more than 1.00 indicates volatility greater than the market,
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average,
over a specified period of time. The premise is that greater volatility
connotes greater risk undertaken in achieving performance.
Each Fund may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to, Lipper
------
Analytical Services, Inc., Donaghues Money Fund Report, Barron's, The Wall
- ------------------------- --------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- ----------------- -------------------------------- -----
In addition, Adjustable Rate, Government Income and Short Duration
Government Funds may from time to time advertise their performance relative to
certain indices and benchmark investments, including: (a) the Shearson Lehman
Government/Corporate (Total) Index, (b) Shearson Lehman Government Index, (c)
Merrill Lynch 1-3 Year Treasury Index, (d) Merrill Lynch 2-Year Treasury Curve
Index, (e) the Salomon Brothers Treasury Yield Curve Rate of Return Index, (f)
the Payden & Rygel 2-Year Treasury Note Index, (g) 1 through 3 year U.S.
Treasury Notes, (h) constant maturity U.S. Treasury yield indices, (i) the
Consumer Price Index, (j) the London Interbank Offered Rate, (k) other taxable
investments such as certificates of deposit, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds, repurchase
agreements, commercial paper and (l) historical data concerning the performance
of adjustable and fixed-rate mortgage loans.
Short Duration Tax-Free and Municipal Income Funds may from time to
time advertise their performance relative to certain indices, any components of
such indices and benchmark investments, including but not limited to: (a) the
Lipper Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed Income
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
Lehman Brothers Municipal Bond Indices; (c) the Merrill Lynch Municipal Bond
Institutional Total Rate of Return Indices; (d) Bond Buyer Indices; (e)
IBC/Donoghue's Money Fund Averages/Institutional Only Tax Free; and constant
maturity U.S. Treasury yield indices.
Core, Global Income and High Yield Funds may each from time to time
advertise its performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income
B-110
<PAGE>
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
CDA Mutual Fund Report published by CDA Investment Technologies, Inc. (which
analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Salomon Brothers' World Bond Index (which measures the total
return in U.S. dollar terms of government bonds, Eurobonds and foreign bonds of
ten countries, with all such bonds having a minimum maturity of five years); (f)
the Lehman Brothers Aggregate Bond Index or its component indices; (g) the
Standard & Poor's Bond Indices (which measure yield and price of corporate,
municipal and U.S. government bonds); (h) the J.P. Morgan Global Government Bond
Index; (i) other taxable investments including certificates of deposit (CDs),
money market deposit accounts (MMDAs), checking accounts, savings accounts,
money market mutual funds and repurchase agreements; (j) historical investment
data supplied by the research departments of Goldman Sachs, Lehman Brothers
Inc., First Boston Corporation, Morgan Stanley & Co. Incorporated, Salomon
Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson
Lufkin and Jenrette Securities Corporation; and (k) Donoghue's Money Fund Report
(which provides industry averages for 7-day annualized and compounded yields of
taxable, tax-free and U.S. government money funds).
The composition of the investments in the above-referenced indices and
the characteristics of a Fund's benchmark investments are not identical to, and
in some cases may be very different from, those of a Fund's portfolio. These
indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by the a Fund to calculate its performance figures.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Goldman Sachs as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
regulated matters believed to be of relevance to a Fund.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. The performance of various types of securities (taxable money market funds,
U.S. Treasury securities, adjustable rate mortgage securities, government
securities, municipal bonds) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
B-111
<PAGE>
. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/ All
Taxable Index) over varying periods of time.
. Credit Ratings of domestic government bonds in various countries
. Price volatility comparisons of types of securities over different periods
of time.
. Price and yield comparisons of a particular security over different periods
of time.
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other material
which highlight or summarize the services provided in support of an asset
allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein.
Performance data is based on historical results and is not intended to
indicate future performance. Total return, thirty-day yield, tax equivalent
yield and distribution rate will vary based on changes in market conditions,
portfolio expenses, portfolio investments and other factors. The value of a
Fund's shares will fluctuate and an investor's shares may be worth more or less
than their original cost upon redemption. The Trust may also, at its
discretion, from time to time make a list of a Fund's holdings available to
investors upon request.
OTHER INFORMATION
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value of each Fund during any 90-day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net
B-112
<PAGE>
asset value of each respective Fund at the time of redemption by a distribution
in kind of securities (instead of cash) from such Fund. The securities
distributed in kind would be readily marketable and would be valued for this
purpose using the same method employed in calculating each Fund's net asset
value per share. See "Net Asset Value." If a shareholder receives redemption
proceeds in kind, the shareholder should expect to incur transaction costs upon
the disposition of the securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such other period as the
SEC may by order permit for the protection of shareholders of a Fund.
The Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen LLP,
independent public accounts, for each Fund contained in each Fund's 1996 Annual
Report are hereby incorporated by reference and attached hereto. A copy of the
annual reports may be obtained without charge by writing Goldman, Sachs & Co.,
4900 Sears Tower, Chicago, Illinois 60606 or by calling Goldman, Sachs & Co., at
the telephone number on the back cover of each Fund's Prospectus. Unaudited
financial statements for each Fund for the six months ended April 30, 1997 are
also attached hereto.
B-113
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with
a robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and
Treasury prices remained in a narrow trading range throughout the summer and
fall. During September and October, however, interest rates retreated and the
bond market strengthened. The rebound was primarily due to evidence of a
slowing U.S. economy and strong demand for Treasury bonds from the central banks
of China, Japan and Germany, which accelerated their purchases dramatically
toward the end of the period. By the end of October, prices of 30-year
Treasuries broke out of the trading range that had persisted for over six
months.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 GS Core Fixed Income Fund 22
GS Adjustable Rate Government Fund 3 Financial Statements 30
GS Short Duration Government Fund 9 Notes to Financial Statements 34
GS Short Duration Tax-Free Fund 15 Financial Highlights 42
- ---------------------------------------------------------------------------------------------------------
</TABLE>
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter,
with annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Tresuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[GRAPH APPEARS HERE]
The yield curve steepened on the short end and shifted upward on the longer end.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significiantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a
Republican-controlled Congress, which points toward continued budgetary
restraint.
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and
we look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Adjustable Rate Government Fund seeks a high level of current income
consistent with low volatility of principal. The portfolio ordinarily invests
substantially all of its assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, with primary emphasis on
adjustable rate mortgage securities (ARMs). Under normal interest rate
conditions, the fund's duration is expected to be in a range approximately equal
to that of a six-month to one-year U.S. Treasury security.
The ARM Market Began Weak but Improved as Prepayments Slowed and Demand
Increased
The key factors affecting ARM performance during the 12 months under review
were the changing direction of interest rates and, consequently, the pace of
mortgage prepayments. From November 1995 through early February 1996, declining
interest rates spurred homeowners to switch from ARMs to fixed rate mortgages to
lock in attractive rates. The high level of refinancing activity depressed the
ARM market and caused yield spreads between ARMs and Treasuries to widen until
the end of January 1996, when long-term interest rates began to rise. Throughout
the spring, the ARM market strengthened as interest rates climbed sharply.
Spreads between ARMs and Treasuries continued to tighten even after rates
stabilized from the end of May through August, partly due to strong demand from
"crossover" investors from other short-duration fixed income sectors. Although
interest rates declined in September and October, mortgage prepayment fears
remained subdued as rates were still relatively high compared with their levels
a year earlier. Investor demand for seasoned one-year Constant Maturity Treasury
(CMT) ARMs, which our fund stresses, remained especially strong due to their
relative prepayment stability in a falling rate environment.
Performance Review
During the period under review, the fund's Institutional, Administration
and Class A shares all significantly outperformed both the six-month U.S.
Treasury bill and the one-year U.S. Treasury bill. (As of October 31, the fund's
duration was 0.7 years, in between that of the six-month and the one-year U.S.
Treasury bill.) The fund's positive performance can be attributed to the
incremental yield its ARM holdings delivered over similar-duration Treasuries
and tightening spreads between ARMs and Treasuries.
- ------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six-
Month One-Year
Institu- Adminis- Class Treasury Treasury
tional tration A Bill Bill
------ ------- - ---- ----
<S> <C> <C> <C> <C> <C>
Total Return (based 6.86% 6.60% 6.60% 5.48% 5.82%
on net asset value)
- ------------------------------------------------------------------------
Return From 6.25% 5.99% 5.99% NA NA
Monthly
Distributions
- ------------------------------------------------------------------------
Return From Price 0.61% 0.61% 0.61% NA NA
Appreciation
- ------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.83 $9.83 NA NA
- ------------------------------------------------------------------------
NAV Change +$0.06 +$0.06 +$0.06 NA NA
- ------------------------------------------------------------------------
</TABLE>
We are also pleased to note that the fund outperformed most of its peers.
For the 12 months ended October 31, 1996, the fund's Institutional shares ranked
fourth out of 53 adjustable rate mortgage funds based on total return, as
tracked by Lipper Analytical Services, Inc. (Lipper does not rank the fund's
Administration and Class A shares. Please note that Lipper rankings do not take
sales charges into account and that past performance is not a guarantee of
future results.) As of October 31, 1996, the
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
fund's Institutional shares were ranked "four stars" by Morningstar, Inc., an
independent rating agency.\1\
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Repos/Cash Equivalents 3.4%
CMOs 3.5%
SBA Floaters 7.8%
ARMs 85.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ---------------------------------------------
/1/ Source (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received five
and four stars for the three- and five-year periods, respectively. The
Institutional shares were rated among 1,054 and 572 fixed income funds for the
three- and five-year periods, respectively. For the one-year period, the
Institutional shares were rated among 1,654 fixed income funds. 22.5% of the
funds receive the four-star rating. The Morningstar rating applies only to the
fund's Institutional shares; the fund's Class A and Administration shares have
not been rated. Class A and Administration shares are subject to additional fees
that may have the effect of lowering performance and may affect and future
Morningstar rating. Morningstar rates funds against their peers in the same
category. In all, there are five Morningstar categories (domestic equity,
international equity, fixed income, municipal and hybrid). Morningstar ratings
range from five stars (highest) to one star (lowest). Funds with five-star
ratings are in the top 10% of their category, four-star ratings in the next
22.5%, three stars the next 35%, two stars the next 22.5% and one star the
lowest 10% of their categories.
Portfolio Composition and Investment Strategies
During the period under review, the portfolio's sector allocation shifted
slightly, with reductions in collateralized mortgage obligations (CMOs) and
Small Business Administration (SBA) loans in favor of ARMs.
. ARMs. As of October 31, 1996, ARMs accounted for 85.3% of the portfolio, up
from 80.2% a year ago. We emphasized seasoned, one-year CMT issues that offered
relative prepayment and duration stability as well as incremental yield over
Treasuries. The position significantly contributed to the fund's performance
during the period.
. SBA Floaters. The portfolio held a 7.8% allocation in securities backed by
Small Business Administration loans, which traded at attractive spreads relative
to Treasuries. We trimmed the portfolio's holdings in the sector slightly from
8.9% a year ago to take profits after the position performed well.
. CMOs. CMOs accounted for 3.5% of the portfolio as of October 31,
approximately half their weighting a year ago (7.7%). This position provided
relatively stable cash flows and a greater number of opportunities to take
advantage of potential mispricing than comparable fixed income sectors. During
December 1995 and January 1996, the sector became expensive versus
similar-duration Treasuries, and we subsequently sold part of the fund's
holdings at a profit. The fund's CMO position included 1.4% in floaters, which
added incremental yield, and 0.4% in sequential-pay CMOs. In addition, the fund
held CMO super floaters, discussed below.
. Prudent Use of Derivatives. We used higher risk derivatives very sparingly to
enhance the fund's performance without taking on additional undue risk. As of
October 31, 1996, the fund held a 1.5% position in super floaters, which
contributed to its performance during the year. (Super floaters are floating
rate securities whose coupons reset higher and more quickly than regular
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
ARMs in a rising interest rate environment.) The portfolio also included minor
positions in interest-only (IO) and inverse IO securities.
. Duration. As of October 31, the duration of the fund was 0.7 years, unchanged
from a year earlier. Rather than attempting to make interest rate predictions,
we seek to provide excess returns over a similar-duration U.S. Treasury security
through sector weightings and security selection. During the period, we used
financial futures as a tool to help manage the portfolio's duration.
. Credit Quality. The fund invests exclusively in securities issued by the U.S.
government and its agencies or instrumentalities, which are considered to be of
the highest credit quality.
ARM Outlook: Seasoned ARMs Are Expected to Perform Well Relative to Other
Sectors
Our outlook for the ARM sector is moderately constructive. Although spreads
have tightened over the course of the year, we expect them to remain stable for
the near term due to strong investor demand and limited supply. In addition, we
believe that our core holding of seasoned ARMs should fare well relative to less
seasoned issues if rates continue to decline and prepayments increase.
Distribution Policy
During the 12-month period ended October 31, 1996, the fund's Institutional,
Administration and Class A shares distributed $0.59, $0.57 and $0.57 per
share, respectively.
The fund distributes substantially all of its investment company taxable
income. The dividend is set at the start of each month, based on the income the
fund is expected to generate. However, because the fund invests primarily in
mortgage securities that are subject to prepayments, we cannot precisely predict
the amount of principal and interest that a portfolio will receive. Therefore,
at times a portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy has not affected the management of
the fund nor significantly affected its net asset value (NAV) per share.
In conclusion, we appreciate your investment in the GS Adjustable Rate
Government Fund and will continue to seek attractive fixed income investments in
the months ahead.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
GS Adjustable Rate Government Fund
November 29, 1996
- --------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Adjustable Rate Government Fund based on a normal minimum
initial investment, for each class, is compared to its benchmarks--the Lehman
Brothers Mutual Fund Short (1-2) U.S. Government Index ("Lehman 1-2 Index") and
the six month and one year U.S. Treasury Bills ("6-Month T-Bill / 1-Year T-
Bill"). All performance data shown represents past performance and should not be
considered indicative of future performance which will fluctuate as market
conditions change. The investment return and principal value of an investment
will fluctuate with changes in market conditions so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
HYPOTHETICAL INVESTMENTS/(a)/
Institutional Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/1/91 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/91 51,047 51,581 51,179 50,870
- --------------------------------------------------------------------------------
10/31/92 54,176 55,506 54,161 53,376
- --------------------------------------------------------------------------------
10/31/93 56,414 58,368 56,198 55,197
- --------------------------------------------------------------------------------
10/31/94 57,475 59,511 57,744 57,257
- --------------------------------------------------------------------------------
10/31/95 61,355 64,343 61,766 60,819
- --------------------------------------------------------------------------------
10/31/96 65,576 68,197 65,373 64,158
- --------------------------------------------------------------------------------
</TABLE>
Administration Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Administration Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/93 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/93 50,917 50,931 50,785 50,780
- --------------------------------------------------------------------------------
10/31/94 51,747 51,931 52,182 52,675
- --------------------------------------------------------------------------------
10/31/95 55,100 56,148 55,835 55,951
- --------------------------------------------------------------------------------
10/31/96 58,742 59,511 59,096 59,023
- --------------------------------------------------------------------------------
</TABLE>
Class A Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Short (1-2) One Year Six Month
(no sales charge) (w/ sales charge) Gov't Index T-Bill T-Bill
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/1/95 10,000 9,850 10,000 10,000 10,000
- ---------------------------------------------------------------------------------------------------
10/31/95 10,222 10,069 10,277 10,260 10,246
- ---------------------------------------------------------------------------------------------------
10/31/96 10,898 10,735 10,893 10,859 10,809
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
Average Annual Total Return
--------------------------------------------------
One Year Five Year Since Inception/(b)/
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Institutional Shares 6.86% 5.13% 5.32%
- --------------------------------------------------------------------------------
Administration Shares 6.60% N/A 4.69%
- --------------------------------------------------------------------------------
Class A Shares
excluding sales charge 6.60% N/A 6.40%
- --------------------------------------------------------------------------------
Class A Shares
including sales charge 4.99% N/A 5.29%
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ For comparative purposes, initial investments are assumed to be made on
the first day of the month following the commencement of operations.
/(b)/ The Institutional, Administration and Class A shares commenced operations
July 17, 1991, April 15, 1993 and May 15, 1995, respectively.
- --------------------------------------------------------------------------------
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations--96.3%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(d)--25.6%
<S> <C> <C> <C>
$ 409,475 7.33% 11/01/17 $ 422,849
1,443,341 7.54 12/01/18 1,482,297
2,695,805 7.40 07/01/18 2,793,527
1,799,007 7.69 01/01/19 1,857,314
10,670,041 7.38 05/01/19 11,021,833
20,341,589 7.58 11/01/19 21,218,921
5,280,731 7.70 05/01/20 5,464,395
19,004,192 7.42 06/01/20 19,698,985
37,238,927 7.73 02/01/22/(a)/ 38,845,042
4,072,603 7.39 08/01/22 4,215,145
2,234,941 7.56 08/01/22 2,331,334
6,804,200 7.53 09/01/22 7,067,182
17,808,242 7.61 11/01/22 18,565,092
10,195,026 7.63 06/01/24 10,506,892
3,045,972 7.31 12/01/24 3,122,121
3,495,056 7.20 02/01/28 3,604,835
4,584,605 7.09 07/01/29 4,671,987
1,815,464 7.62 07/01/30 1,892,059
2,055,859 7.39 05/01/31 2,110,462
- --------------------------------------------------------------------------------
$160,892,272
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)--55.4%
$ 1,138,394 7.80% 11/01/14 $ 1,187,493
6,190,161 6.54 03/01/17 6,277,194
3,662,002 7.56 03/01/17 3,799,511
4,221,326 6.21 03/01/18 4,247,709
6,778,125 7.66 04/01/18 7,046,064
874,932 7.63 05/01/18 901,180
7,405,181 7.34 07/01/18 7,724,566
5,249,737 7.41 07/01/18 5,456,472
6,398,858 7.08 08/01/18 6,609,828
3,972,504 7.64 08/01/18 4,143,838
3,746,795 7.42 10/01/18 3,896,068
6,780,326 7.41 11/01/18 7,009,162
2,068,449 7.29 12/01/18 2,138,591
13,495,001 7.67 12/01/18/(a)/ 14,077,040
3,484,080 7.27 06/01/19 3,597,870
4,440,531 7.31 07/01/19 4,579,297
1,698,502 7.34 07/01/19 1,755,826
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)(continued)
<S> <C> <C> <C>
$ 2,849,462 7.46% 01/01/20 $ 2,942,526
3,037,915 7.70 03/01/20 3,168,940
8,771,533 7.40 07/01/20 9,055,204
4,563,057 7.48 09/01/20 4,746,994
4,953,382 7.53 02/01/21 5,167,022
5,289,644 7.28 04/01/21 5,464,044
74,489,219 7.51 09/01/21/(a)/ 77,678,102
4,088,820 7.95 11/01/21 4,210,095
22,090,964 7.56 02/01/22 23,043,747
14,611,569 7.68 06/01/22 15,112,892
6,682,461 7.47 08/01/22 6,893,894
759,290 7.48 08/01/22 776,511
38,116,807 7.56 09/01/22/(a)/ 39,760,785
1,934,079 7.53 02/01/23 1,968,235
277,701 6.22 12/01/23 276,574
18,079,861 7.48 09/01/25 18,856,752
2,565,500 7.33 10/01/27 2,653,702
1,177,401 7.04 07/01/29 1,205,729
3,288,252 7.59 04/01/30 3,376,640
8,565,310 7.58 01/01/31 8,934,732
28,276,177 6.09 02/01/31 28,161,376
- --------------------------------------------------------------------------------
$ 347,902,205
- --------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association
(GNMA)(d) -- 2.2%
$ 1,527,707 6.50% 03/20/16 $ 1,551,096
1,806,135 7.12 08/20/17 1,839,711
1,026,294 7.12 08/20/18 1,046,984
8,886,125 6.00 11/20/25 9,040,211
- --------------------------------------------------------------------------------
$ 13,478,002
- --------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(d)--7.8%
$ 1,416,469 6.75% 10/25/14 $ 1,449,883
2,562,866 6.75 02/25/15 2,624,144
3,684,715 6.75 03/25/15 3,773,370
2,839,268 6.75 04/25/15 2,907,581
2,057,142 6.75 05/25/15 2,106,637
1,036,764 6.75 08/25/15 1,062,040
1,684,161 6.75 09/25/15 1,725,220
2,069,161 6.75 10/25/15 2,119,917
1,110,382 6.37 09/25/16 1,125,305
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations (continued)
Adjustable Rate Small Business Administration
(SBA)(d)(continued)
$ 4,125,881 6.37% 07/25/17 $ 4,181,333
9,019,837 6.37 08/25/17 9,141,062
4,040,857 6.37 09/25/17 4,095,166
3,577,478 6.37 10/25/17 3,625,559
8,937,943 6.37 02/25/18 9,058,069
- --------------------------------------------------------------------------------
$ 48,995,286
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations-5.3%
Adjustable Rate CMOs(d)-1.8%
FNMA Remic Trust 1990-145, Class A
$ 11,024,778 6.51% 12/25/20 $ 11,025,439
- --------------------------------------------------------------------------------
Inverse Floater(d)-0.0%
FNMA Remic Trust 1991-91, Class S
$ 164,490 17.66% 07/25/98 $ 174,261
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(d)-0.0%
FNMA Remic Trust 1992-157, Class SA
$2,002,645/(b)/ 14.10% 03/25/04 $ 168,743
- --------------------------------------------------------------------------------
Inverse IOette-0.1%
FHLMC Series 1164, Class O
$ 36,128/(b)/ 29.44% 11/15/06 $ 489,372
- --------------------------------------------------------------------------------
IOette-0.1%
FNMA Remic Trust 1990-145, Class B
$ 27,091/(b)/ 10.00% 12/25/20 $ 657,906
- --------------------------------------------------------------------------------
Regular Floater CMOs(d)-1.4%
FHLMC Series 1011, Class F
$ 8,872,813 6.34% 11/15/20 $ 9,069,612
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs-0.4%
FNMA Remic Trust 1990-65, Class U
$ 616,589 9.50% 11/25/06 $ 619,475
FNMA Remic Trust 1991-37, Class E
1,664,339 8.50% 04/25/05 1,679,418
- --------------------------------------------------------------------------------
$ 2,298,893
- --------------------------------------------------------------------------------
Super Floater CMOs(d)-1.5%
FNMA Remic Trust 1992-157, Class FA
$ 9,859,177(b) 1.22% 03/25/04 $ 9,631,134
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 33,515,360
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $605,544,961) $604,783,125
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Repurchase Agreement-2.1%
Joint Repurchase Agreement Account
$ 13,000,000 5.58% 11/01/96/(a)/$ 13,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $13,000,000) $ 13,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $618,544,961/(c)/) $617,783,125
================================================================================
Futures contracts open at October 31, 1996:
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- --------------------------------- ------------- ------------------- ----------------
<S> <C> <C> <C>
1-Month Libor 45 November 1996 $4,500
Euro Dollars 365 December 1996 309,500
Euro Dollars 280 March 1997 95,000
Euro Dollars 55 June 1997 28,000
5-Year U.S. Treasury Notes 67 December 1996 9,766
10-Year U.S. Treasury Notes (270) December 1996 (302,812)
----------------
$143,954
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 2,404,589
Gross unrealized loss for investments in which cost
exceeds value (3,318,600)
- --------------------------------------------------------------------------------------
Net unrealized gain $ (914,011)
======================================================================================
</TABLE>
(a) Portions of these securities are being segregated for futures margin
requirements.
(b) Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
(c) The aggregate costs for federal income tax purposes is $618,697,136.
(d) Variable rate security. Coupon rate disclosed is that which is in effect
at October 31, 1996.
(e) Each Euro Dollar contract represents $1,000,000 in notional par value.
Each Libor contract represents $3,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and U.S. Treasury Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $879,000,000 and $200,909,125, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Government Fund's primary objective is to provide a
high level of current income by investing in a portfolio that consists of
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including mortgage-backed securities as well as repurchase
agreements collateralized by such instruments. Under normal interest rate
conditions, the fund's duration is expected to be within one-half year of its
benchmark, the two-year U.S. Treasury security.
Performance Review
During the period under review, the fund's Institutional, Administration
and Service shares all outperformed the two-year U.S. Treasury security,
primarily due to our emphasis on and the favorable performance of
mortgage-backed security investments, as well as our ability to identify
relative value within the sector. In addition, the portfolio's term structure,
which overweighted one- and three-year maturity securities, also contributed to
performance when the yield curve steepened.
During the period, the net asset values (NAVs) of the fund's Institutional
and Administration shares (which opened February 28, 1996) were nearly unchanged
while the NAV of the fund's Service shares (which opened April 10, 1996) rose
$0.10 as interest rates stabilized and subsequently declined.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (4/10/96-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net 6.75% 4.00% 4.35%
asset value
- --------------------------------------------------------------------------------
Return From Monthly 6.65% 4.10% 3.32%
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.10% -0.10% 1.03%
Depreciation/
Appreciation
- --------------------------------------------------------------------------------
Total Return of Two-Year 5.64% 3.61% 3.71%
U.S. Treasury
- --------------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.85 $9.82
- --------------------------------------------------------------------------------
NAV Change +$0.01 -$0.01 +$0.10
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund performed well compared with its peers. The Institutional shares
ranked in the top 10% of short-intermediate U.S. government funds (fifth out of
88) based on total return for the 12-month period ended October 31, 1996,
according to Lipper Analytical Services, Inc. (The Administration and Service
shares were not ranked for this period because they were in existence less than
12 months. Please note that Lipper rankings do not take sales charges into
account and that past performance is not a guarantee of future results.)
Portfolio Composition and Investment Strategies
The fund significantly reduced its allocation in U.S. Treasuries in favor
of collateralized mortgage obligations (CMOs), which offered more attractive
return potential according to our analysis. This strategy proved successful as
mortgage-backed securities outperformed comparable-duration Treasuries.
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Repos/Cash Equivalents 1.1%
Fixed Rate Mortgage
Pass-Throughs 7.2%
U.S. Treasuries 15.8%
ARMs 19.0%
CMOs 56.9%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- --------------------------------------------------------------------------------
. CMOs. During the period, we more than doubled the portfolio's allocation in
collateralized mortgage obligations, with most of the increase occurring from
February through April. As of October 31, 56.9% of the portfolio was invested in
CMOs, of which 24.7% were sequential-pay CMOs (up from 10.4% last year) and
17.0% were planned amortization class (PAC) CMOs (up from 1.9% last year).
These sectors were favored for their relatively stable cash flows and
incremental yields over Treasuries, and they performed well during the period.
Though the CMO sector was fairly valued relative to equal-duration Treasuries
from January through the end of the period, our extensive research enabled us to
identify specific securities that presented attractive investment opportunities.
. ARMs. Adjustable rate mortgage securities (ARMs) accounted for 19.0% of the
portfolio as of October 31, down from 23.7% last year. We focused on seasoned
securities indexed to the one-year Constant Maturity Treasury (CMT), which
offered attractive income stability and low relative prepayment risk. A high
level of mortgage refinancing adversely impacted the sector in November and
December of 1995 when rates had eased, but ARMs strengthened when rates started
to rise during the first quarter of 1996 and prepayment fears faded.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio's
position in U.S. Treasuries was cut to 15.8%, down from 37.1% a year ago, as we
identified securities in other sectors that offered higher incremental yield. In
addition, repurchase agreements/cash equivalents were reduced to 1.1% from 4.7%
a year ago.
. Fixed Rate Mortgage Pass-Throughs. Fixed rate pass-throughs, a 7.2%
allocation, offered more attractive yield spreads than most of the other
high-credit quality fixed income sectors. During the period under review, the
technical balance of the pass-through market strengthened, with investor demand
improving as prepayments and supply slowed from the high levels experienced last
November. We continued to emphasize seasoned premium mortgages because they
typically have lower prepayment risk than recently issued mortgages.
. Issuer Composition. The breakdown of the portfolio's mortgage-backed security
holdings by issuer was 37.8% in Federal National Mortgage Association (FNMA)
issues, 36.0% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 9.2%
in Government National Mortgage Association (GNMA) issues.
. Credit Quality. The fund invests exclusively in issues of the U.S. government
and its agencies or instrumentalities.
. Prudent Use of Derivatives. Sequential-pay CMOs and PAC CMOs, which are
typically considered to be lower risk derivatives, represented 24.7% and 17.0%
of the portfolio, respectively, as noted earlier. Other derivative investments
included CMO floaters (10.0%), which are securities whose coupons reset upward
as interest rates rise, and inverse floaters (3.2%), which have coupons that
reset in the opposite direction from interest rates. When floaters are held
along with inverse floaters, they can produce a position with a similar risk
profile as a fixed rate pass-through but provide a higher yield. The fund also
held a small position (1.3%) in PAC interest-only securities (IOs). We invest in
such higher risk derivatives very sparingly in an effort to enhance returns
without taking undue risk. In addition, we used futures as a tool to help manage
the portfolio's duration.
Market Outlook
In general, we have a cautiously optimistic view of the mortgage-backed
securities market in the near term. In the ARM sector, we expect spreads to
remain stable due to strong investor demand and limited supply. Given the
environment of declining rates for the past few months, we will continue to
emphasize seasoned one-year CMT
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
ARMs due to the relative prepayment stability that these securities offer.
Though we have a neutral outlook for the CMO market, we continue to find areas
that offer attractive investment opportunities. In the mortgage pass-through
market, we believe the recent widening of yield spreads during September and
October has been somewhat overdone, but we will remain vigilant to an increase
in prepayments that may result from a further decline in interest rates. We will
continue to actively allocate the portfolio's assets among the various fixed
income sectors as their relative value changes throughout the coming year.
Distribution Policy
During the period under review, the fund's Institutional shares paid out
distributions of $0.63 per share. From their inceptions through October 31,
1996, the fund's Administration and Service shares distributed $0.39 per share
and $0.32 per share, respectively. (The Administration shares opened on February
28, 1996 and the Service shares opened on April 10, 1996.) The fund distributes
substantially all of its investment company taxable income, as required by tax
law.
We thank you for your support and look forward to continuing to meet your
investment needs in the future.
Sincerely,
/s/Jonathan A. Beinner
Jonathan A. Beinner
/s/James B. Clark
James B. Clark
Portfolio Managers
GS Short Duration Government Fund
November 29, 1996
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short-Term Government Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmarks, the U.S.
2-Year Treasury Bill ("2-Year T-Bill") and the Lehman Brothers Mutual Fund Short
(1-3) U.S. Government Index ("Lehman Short (1-3) Gov't Index"). All performance
data shown represents past performance and should not be considered indicative
of future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Shares(a)
Institutional Shares 2-Year\r T-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
9/1/88 50,000 50,000 50,000
10/31/88 51,283 51,057 51,091
10/21/89 55,940 55,412 55,919
10/31/90 60,543 59,876 60,861
10/31/91 67,161 66,615 67,699
10/31/92 71,365 72,161 73,208
10/31/93 75,326 76,335 77,446
10/31/94 76,072 77,058 78,339
10/31/95 82,895 84,009 85,256
10/31/96 88,507 88,756 90,346
</TABLE>
Administration Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Administration Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
2/28/96 50,000 50,000 50,000
10/31/96 52,000 51,805 51,760
</TABLE>
Service Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Service Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
4/10/96 50,000 50,000 50,000
10/31/96 52,175 51,855 52,110
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------
Average Annual Total Return
-----------------------------------------------------------
One Year Five Year Since Inception(b)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional shares 6.75% 5.6% 7.24%
- --------------------------------------------------------------------------------
Administrative shares N/A N/A 4.00(c)
- --------------------------------------------------------------------------------
Service shares N/A N/A 4.35(c)
- --------------------------------------------------------------------------------
</TABLE>
/a/ For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
/b/ The Institutional, Administration and Service shares commenced operations
August 15, 1988, February 28, 1996 and April 10, 1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--82.4%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(a)--14.2%
$ 1,208,677 6.00% 11/15/16 $ 1,198,196
1,941,838 7.54 12/01/18/(b)/ 1,994,248
8,544,958 7.73 02/01/22/(b)/ 8,913,502
2,234,941 7.56 08/01/22 2,331,334
- --------------------------------------------------------------------------------
$ 14,437,280
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(a)--6.2%
$ 389,769 9.00% 12/01/97 $ 402,558
2,732,146 7.80 11/01/14/(b)/ 2,849,984
3,025,230 7.48 08/01/22/(b)/ 3,093,842
- --------------------------------------------------------------------------------
$ 6,346,384
- --------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (GNMA)--3.5%
$ 1,093,610 6.00% 06/01/09/(b)/ $ 1,065,244
2,058,384 6.00 10/01/09/(b)/ 2,004,994
540,970 6.00 10/01/08/(b)/ 526,938
- --------------------------------------------------------------------------------
$ 3,597,176
- --------------------------------------------------------------------------------
Fixed Rate Government National Mortgage Association--3.3%
$ 3,040,068 10.00% 12/15/17/(b)/ $ 3,338,359
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--55.3%
Inverse Floater(a)--5.7%
FHLMC Series 1296, Class J
$ 890,613 11.93% 07/15/99/(b)/ $ 948,502
FHLMC Series 1325, Class B
2,416,565 6.06 07/15/97/(b)/ 2,421,833
FHLMC Series 1325, Class C
1,028,325 7.56 07/15/97/(b)/ 1,034,598
FNMA Remic Trust 1991-127, Class S
144,496 12.98 09/25/98 153,084
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 10.00 05/25/99 1,241,097
- --------------------------------------------------------------------------------
$ 5,799,114
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.3%
FHLMC Series 1684, Class JD
$ 2,801,277(c) 3.66% 08/15/20/(b)/ $ 199,759
FNMA Remic Trust 1993-110, Class SC
2,597,458(c) 3.46 04/25/19/(b)/ 126,990
- --------------------------------------------------------------------------------
$ 326,749
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
Mortgage Backed Obligations (continued)
Collateralized Mortgage Obligations (continued)
Planned Amortization Class (PAC CMOs)--11.1%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,954,040
FNMA Remic Trust 1992-138, Class C
2,350,000 6.00 12/25/18/(b)/ 2,325,020
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09 6,038,400
- --------------------------------------------------------------------------------
$ 11,317,460
- --------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--0.6%
FHLMC Series 1552, Class JE
$ 10,552,245/(c)/ 7.00% 02/15/14/(b)/ $ 590,926
- --------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.5%
FNMA Remic Trust 1992-198, Class K
$ 42,908/(c)/ 16.00% 12/25/15 $ 547,555
- --------------------------------------------------------------------------------
Regular Floater (a)--9.9%
FHLMC Series 1684, Class F
$ 5,000,000 5.75% 08/15/20/(b)/ $ 4,818,750
FHLMC Series 1684, Class JC
2,801,277 5.34 08/15/20/(b)/ 2,737,352
FNMA Remic Trust 1993-110, Class FC
2,597,459 5.54 04/25/19/(b)/ 2,565,796
- --------------------------------------------------------------------------------
$ 10,121,898
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--27.1%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,095,620
FHLMC Series 1296, Class I
2,493,715 5.24 07/15/99/(b)/ 2,481,546
FHLMC Series 174, Class Z
3,757,885 10.00 08/15/21 4,189,703
FNMA Remic Trust 1988-12, Class A
4,076,171 10.00 02/25/18/(b)/ 4,350,090
FNMA Remic Trust 1988-12, Class B
3,218,030 4.47 02/25/18/(b)/ 3,081,585
FNMA Remic Trust 1989-12, Class X
1,955,861 10.00 12/25/14/(b)/ 2,021,246
FNMA Remic Trust 1989-18, Class B
1,312,493 9.50 01/25/04 1,359,730
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
$ 4,628,657 7.75% 10/25/18 (b) $ 4,699,707
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,394,800
- --------------------------------------------------------------------------------
$ 27,674,027
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 56,377,729
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $83,545,715) $ 84,096,928
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--15.7%
United States Treasury Notes
$ 5,150,000 5.88% 04/30/98 $ 5,166,068
10,900,000 5.13 06/30/98/(b)/ 10,804,620
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $15,894,705) $ 15,970,688
- --------------------------------------------------------------------------------
Repurchase Agreement--1.0%
Joint Repurchase Agreement Account
$ 1,000,000 5.58% 11/01/96/(b)/ $ 1,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,000,000) $ 1,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $100,440,420(d)) $ 101,067,616
================================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- ------------------------- -------------- ------------------ ----------------
Euro Dollars 40 December 1996 $28,000
Euro Dollars 29 March 1997 34,650
Euro Dollars 37 June 1997 38,950
Euro Dollars 47 September 1997 68,625
Euro Dollars 45 December 1997 80,375
Euro Dollars 35 March 1998 25,250
Euro Dollars 20 June 1998 9,000
2 Year U.S. Treasury Notes 71 December 1996 87,859
5 Year U.S. Treasury Notes (89) December 1996 (173,203)
10 Year U.S. Treasury Notes (44) December 1996 (131,781)
20 Year U.S. Treasury Notes (7) December 1996 (34,844)
--------------
$32,881
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 826,961
Gross unrealized loss for investments in which
cost exceeds value (213,881)
- --------------------------------------------------------------------------------
Net unrealized gain $ 613,080
================================================================================
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for futures margin
requirements.
/(c)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/The aggregate cost for federal income tax purposes is $100,454,536.
/(e)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
2-Year U.S. Treasury Note contract represents $200,000 in notional par
value. Each 5-Year U.S. Treasury Note, 10-Year U.S. Treasury Note, and 20-
Year U.S. Treasury Note contract represents $100,000 in notional par value.
The total notional amount and market value are $253,200,000 and
$89,469,788, respectively. The determination of notional amounts and market
value as presented here are indicative only of volume of activity and not a
measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Tax-Free Fund seeks to provide a high level of
current income exempt from regular federal income tax, consistent with
relatively low principal volatility, through investments in municipal securities
rated single-A or better or deemed to be of comparable quality. Under normal
interest rate conditions, the fund's duration will be within one-half year of
its benchmark, the Lehman Brothers Three-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a three-year
bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a three-year municipal bond
(as calculated from data provided by Municipal Market Data, an independent
municipal market information provider) fell slightly (0.14%), while yields rose
from 4.10% on October 31, 1995 to 4.15% on October 31, 1996.
The municipal bond market began the period under review on a weak note.
Tax reform uncertainty impacted investor demand during November and December
1995, while municipal bond supply was high due to seasonably heavy year-end
issuance. The market environment improved during January and February 1996, when
fading tax reform concerns helped to revive investor interest in the sector and
issuance declined. From March through the end of the period, the market's
technical balance was generally healthy, though occasional spikes in supply
periodically overwhelmed demand and briefly impacted performance. The largest of
these surges occurred in June when supply rose to its highest level since late
1995, but subsequently both new issuance and secondary supply fell dramatically
from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (which control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review
The performance of the fund's Institutional shares was in line with the
benchmark, the Lehman Brothers Three-Year Municipal Bond Index (the "Index"),
for the 12-month period ended October 31, 1996. The Administration and Service
shares also performed well, but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- --------------------------------------------------------------------------------
Lehman Brothers
Institu- Adminis- 3-Year
tional tration Service Municipal Bond Index
-------- -------- ------- ---------------------
<S> <C> <C> <C> <C>
Total Return (based on net 4.50% 4.24% 3.98% 4.51%
asset value)
- --------------------------------------------------------------------------------
Return From 4.30% 4.04% 3.78% NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.20% 0.20% 0.20% NA
Appreciation
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.96 $9.96 $9.97 NA
- --------------------------------------------------------------------------------
NAV Change +$0.02 +$0.02 +$0.02 NA
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period was primarily due to our
emphasis on higher yielding revenue bonds, as well as successful selection of
specific securities and relative value trades. As always, we did not make any
bets on the direction of interest rates, but rather kept the fund's duration in
line with the Index, occasionally using Treasury futures to actively manage
sector allocation.
In our search for incremental yield, we focused on three types of bonds.
The first category was relatively generic, highly liquid securities; the second
included slightly less liquid issues such as insured hospital bonds and
letter-of-credit-backed debt; and the last area was "story" bonds, such as
uninsured hospital and electric utility issues and multifamily housing revenue
bonds, whose value is often unrecognized by the market because they are unique
or generally not well understood. We identified attractive investment
opportunities for the third category through our extensive credit analysis.
We are pleased to report that the fund's Institutional shares ranked first
out of 26 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the 12-month period ended October 31, 1996 based on
total return. (Lipper did not rank the fund's Administration and Service shares.
Please note that Lipper rankings do not take sales charges into account and that
past performance is not a guarantee of future results.) In addition, as of
October 31, 1996, the fund's Institutional shares were rated "five stars" by
Morningstar, Inc., its highest rating./1/
Portfolio Composition and Investment Strategies:
Revenue Bonds Dramatically Increased
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
General Obligations 3.0%
Variable Rate Demand Notes 4.7%
Insured General Obligations 12.6%
Insured Revenue Bonds 24.2%
Revenue Bonds 55.5%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ----------------------------
1 Source: (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and ten-year average annual returns (where applicable) in excess of
90-day Treasury bill returns with appropriate fee and sales charge adjustments
and a risk factor that reflects fund performance below 90-day Treasury bill
returns. The one-year rating is calculated using the same methodology, but is
not a component of the overall rating. The fund's Institutional shares received
five stars and were rated among 1,038 municipal bond funds for the three-year
period. For the one-year period, the Institutional shares received five stars
and were rated among 1,728 municipal bond funds. 10% of the funds receive the
five-star rating. The Morningstar rating applies only to the fund's
Institutional shares; the fund's Administration and Service shares have not been
rated. Administration and Service shares are subject to additional fees that may
have the effect of lowering performance and may affect any future Morningstar
rating. Morningstar rates funds against their peers in the same category. In
all, there are five Morningstar categories (domestic equity, international
equity, fixed income, municipal and hybrid). Morningstar ratings range from five
stars (highest) to one star (lowest). Funds with five-star ratings are in the
top 10% of their category, four-star ratings in the next 22.5%, three stars the
next 35%, two stars the next 22.5% and one star the lowest 10% of their
categories.
- --------------------------------------------------------------------------------
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------
. Revenue Bonds. As of October 31, the portfolio's combined position in
insured and uninsured revenue bonds was significantly overweighted compared with
the Index, 79.7% versus 35.8%. We substantially increased the portfolio's total
revenue bond allocation (from 29.2% a year ago) because our emphasis on credit
analysis enabled us to identify attractive revenue bonds that offered higher
incremental yield than was available from general obligation bonds. (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 15.6% of the
portfolio, down from 51.0% a year ago and significantly underweighted versus the
Index's 55.5%. GOs are backed by the general taxing power of a municipality and
are typically higher credit quality but lower yielding than revenue bonds.
. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash
equivalents that we used to manage the portfolio's excess liquidity. VRDNs
were a 4.7% position, down from 10.0% a year ago.
. Pre-refunded Bonds. Over the course of the year, we trimmed the fund's
holdings in pre-refunded bonds (9.8% as of October 31, 1995). In October, we
sold the fund's remaining position in the sector in favor of revenue bonds that
offered more attractive yields.
. Duration. As of October 31, the fund's duration was in line with that of
the Index at 2.7 years.
. Credit Quality. During the year, the fund's credit quality allocations
shifted. We reduced the portfolio's allocation in triple-A-rated GOs in favor of
single-A-rated revenue bonds, which allowed us to maintain the fund's targeted
double-A-rated average credit quality and liquidity while achieving higher
overall yields. We structured the portfolio's credit-quality allocation like a
"barbell," emphasizing higher credit quality securities in the four- to five-
year maturity range and lower relative credit quality securities in the one- to
three-year maturity range. As of October 31, more than half of the portfolio was
invested in triple-A-rated bonds (52.7%), while double-A- and single-A-rated
securities accounted for 20.1% and 27.2%, respectively.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
12-month period ended October 31, 1996, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.42,
$0.39 and $0.37 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
We value your continued confidence in the GS Short Duration Tax-Free Fund
and look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
GS Short Duration Tax-Free Fund
November 29, 1996
- --------------------------------------------------------------------------------
18
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short Duration Tax-Free Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmark, the Lehman
Brothers 3-Year Municipal Bond Index ("3-Year Bond Index"). All performance data
shown represents past performance and should not be considered indicative of
future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT/(a)/
[GRAPH APPEARS HERE]
Institutional Shares
<TABLE>
<CAPTION>
Institutional Shares 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/92 50000 50000
- --------------------------------------------------------------------------------
10/31/92 49830 49805
- --------------------------------------------------------------------------------
10/31/93 53333 53102
- --------------------------------------------------------------------------------
10/31/94 53424 53825
- --------------------------------------------------------------------------------
10/31/95 56618 58023
- --------------------------------------------------------------------------------
10/31/96 59172 60646
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Administration Shares
<TABLE>
<CAPTION>
Admin 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
6/1/93 50000 50000
- --------------------------------------------------------------------------------
10/31/93 51088 51144
- --------------------------------------------------------------------------------
10/31/94 51031 51840
- --------------------------------------------------------------------------------
10/31/95 53971 55884
- --------------------------------------------------------------------------------
10/31/96 56265 58410
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Service Shares
<TABLE>
<CAPTION>
Service 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/94 50000 50000
- --------------------------------------------------------------------------------
10/31/94 49810 49880
- --------------------------------------------------------------------------------
10/31/95 52594 53771
- --------------------------------------------------------------------------------
10/31/96 54693 56201
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
Average Annual Total Return
------------------------------------
One Year Since Inception/(b)/
-----------------------------------------------------------
<S> <C> <C>
Institutional Shares 4.50% 4.21%
-----------------------------------------------------------
Administration Shares 4.24% 3.51%
-----------------------------------------------------------
Service Shares 3.98% 4.36%
-----------------------------------------------------------
</TABLE>
/(a)/For comparative purposes, initial investments are assumed to be made on the
first day of the month following the commencement of operations of the
Administration and Service share classes.
/(b)/The Institutional, Administration and Service shares commenced operations
October 1, 1992, May 20, 1993 and September 20, 1994, respectively.
- --------------------------------------------------------------------------------
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligation--98.2%
Alabama--2.8%
Selma, AL IDA for International Paper Co. PCRB (A-/A3)
$1,000,000 4.15% 07/15/08 $1,000,000
- --------------------------------------------------------------------------------
Arkansas--3.8%
West Memphis, AR Public Utility System RB (MBIA) (NR/Aaa)
$1,310,000 5.25%(e) 12/01/00 $1,344,388
- --------------------------------------------------------------------------------
Colorado--4.2%
Municipal Sub District of Northern Colorado Water Conservation Co.
RB(AMBAC)(AAA/Aaa)
$1,435,000 5.75% 12/01/01 $1,508,845
- --------------------------------------------------------------------------------
Connecticut--4.3%
Connecticut State Resource Recovery Authority Series A RB (AA-/NR)
$1,500,000 5.60% 11/15/99 $1,546,185
- --------------------------------------------------------------------------------
Illinois--4.4%
Chicago, IL GO (MBIA) (AA/Aaa)
$1,500,000 5.40% 10/31/00 $1,547,670
- --------------------------------------------------------------------------------
Kentucky--7.5%
Jefferson County, KY Trust Certificates (A+/NR)RB
$1,145,000 5.25% 03/01/99 $1,163,904
Pendleton County, KY LOC (Self Insurance)(NR/VMIG1)
1,500,000 4.25 07/01/01 1,503,045
- --------------------------------------------------------------------------------
$2,666,949
- --------------------------------------------------------------------------------
Louisiana--7.4%
Louisiana Offshore Deepwater Part Authority Term B RB (A/Baa1)
$1,000,000 5.85% 09/01/00 $1,040,080
Louisiana State Refunding RB, Series A GO (FGIC) (AAA/Aaa)
1,500,000 6.00 08/01/01 1,583,970
- --------------------------------------------------------------------------------
$2,624,050
- --------------------------------------------------------------------------------
New Jersey--4.0%
West Windsor/Plainsboro, NJ Regional School District (FGIC)
(AAA/Aaa)
$1,400,000 5.25% 12/01/99 $1,436,750
- --------------------------------------------------------------------------------
New York--6.8%
Municipal Assistance Corp. Refunding RB (AMBAC) (AAA/Aaa)
$1,000,000 6.00% 07/01/00 $1,051,690
Syracuse, NY IDA RB (AA/NR)
$1,365,000 4.60% 10/15/98 $1,369,491
- --------------------------------------------------------------------------------
$2,421,181
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Oklahoma--13.5%
Enid, OK Hospital Authority RB (Societe Generale LOC) (NR/Aa2)
$2,700,000 6.63%(a) 10/01/15 $2,747,115
Southern Oklahoma Memorial Hospital RB(b) (A/A)
2,000,000 5.60 02/01/00 2,043,680
- -------------------------------------------------------------------------------
$4,790,795
- -------------------------------------------------------------------------------
Oregon--4.2%
Klamath Falls, OR Salt Caves Hydroelectic RB (SP1+/NR)
$1,500,000 4.50% 05/01/23 $1,507,980
- -------------------------------------------------------------------------------
Pennsylvania--9.7%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB
(FGIC) (AAA/Aaa)
$1,500,000 5.75% 06/15/00 $1,559,730
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,879,146
- --------------------------------------------------------------------------------
$3,438,876
- --------------------------------------------------------------------------------
Texas--11.4%
Bexar County, TX MFH Finance Corp. RB (CFMG) (NR/A3)
$1,500,000 4.88% 11/01/04 $1,502,220
Houston, TX Water & Sewer RB Series B (A/A)
1,430,000 5.25 12/01/99 1,460,802
Port Neches, TX Independent School District GO (AAA/Aaa)
1,000,000 7.00 02/15/01 1,092,480
- -------------------------------------------------------------------------------
$4,055,502
- -------------------------------------------------------------------------------
Virginia--5.0%
Petersburg, VA Hospital Authority RB (NR/A)
$1,760,000 5.50% 07/01/99 $1,798,157
- -------------------------------------------------------------------------------
Washington--4.6%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$1,500,000 7.20% 07/01/02 $1,623,044
- -------------------------------------------------------------------------------
Wyoming--4.6%
Uinta County, WY School District GO, Series A (FSA) (AAA/Aaa)
$1,500,000 6.88% 06/01/00 $1,620,390
- -------------------------------------------------------------------------------
Total Debt Obligations
(Cost $34,727,338) $34,930,762
===============================================================================
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Short-Term Obligations--4.5%
Illinois--0.6%
Illinois Development Finance Authority RB (AA+/A-1)/(c)/
$200,000 3.55% 01/1/96 $200,000
Louisiana--3.9%
East Baton Rouge Parish PCRB (AAA/Aaa)/(c)/
$1,400,000 3.60% 11/1/96 $1,400,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,600,000) $ 1,600,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $36,328,338)/(d)/ $36,530,762
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 204,715
Gross unrealized loss for investments in which
cost exceeds value (2,291)
- --------------------------------------------------------------------------------
Net unrealized gain $ 202,424
================================================================================
</TABLE>
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for when-issued
securities.
/(c)/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next reset interest dates.
/(d)/The amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/When-issued securities.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal Bond Assurance Corp.
CFMG --Credit Lyonnais Line of Credit
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Core Fixed Income Fund seeks to achieve a total return consisting of
capital appreciation and income that exceeds the total return of its benchmark,
the Lehman Brothers Aggregate Bond Index (the "Index"), through a diversified
portfolio of fixed income securities. The fund may invest in U.S. Treasury,
agency, corporate, mortgage-backed and asset-backed securities, as well as in a
limited amount of non-dollar-denominated fixed income securities. While the
fund's performance will be measured against the Index, the portfolio is not
required to hold the same securities or match the sector weightings of the
Index. Every security in the portfolio must be rated at least investment grade
by an independent rating agency or be considered to be of equivalent quality by
Goldman Sachs Asset Management at the time it is purchased. The fund's
approximate interest rate sensitivity is expected to be comparable to that of a
five-year bond.
Performance Review
During the period under review, the fund's Institutional shares outperformed
the Index. The strong performance was primarily due to its investments in
corporate bonds and emerging market debt. In addition, the fund also benefited
from its mortgage-backed and asset-backed holdings when both sectors
strengthened during the period.
The fund fared well relative to its peers. For the 12-month period ended
October 31, 1996, the fund's Institutional shares ranked in the top quartile
(24th out of 96 funds) in Lipper Analytical Services, Inc.'s "corporate debt -
BBB-rated" category based on total return. (Lipper did not rank the fund's
Administration and Service shares for the period because they were in existence
less than 12 months. Please note that Lipper rankings do not take sales charges
into account and that past performance is not a guarantee of future results.)
The fund's Administration and Service shares, which began operations on
February 28, 1996 and March 13, 1996, respectively, achieved positive returns
since their inceptions.
During the period, the net asset value (NAV) of the fund's Institutional
shares fell $0.15 due to the sharp rise in interest rates during the first half
of 1996. Reflecting the fact that rates had already risen significantly, the NAV
of the fund's Administration shares (which opened in February) also declined but
not as significantly, while the NAV of the fund's Service shares (which opened
in March) rose $0.09.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary
- -------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (3/13/96-
10/31/96) 10/31/96) 10/31/96)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Return (based on 5.98% 3.56% 4.90%
net asset value)
- -------------------------------------------------------------------------------
Return From Monthly 7.48% 4.27% 3.98%
Distributions
- -------------------------------------------------------------------------------
Return From Price -1.50% -0.71% 0.92%
Depreciation/
Appreciation
- -------------------------------------------------------------------------------
Total Return of Lehman 5.83% 3.74% 4.94%
Brothers Aggregate
Bond Index
- -------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.85 $9.84 $9.86
- -------------------------------------------------------------------------------
NAV Change -$0.15 -$0.07 +$0.09
- -------------------------------------------------------------------------------
</TABLE>
*New share class opened during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Corporate Bonds 26.6%
Fixed Rate Mortgage Pass-Throughs 23.9%
U.S. Treasuries 19.5%
ABSs 12.5%
CMOs 9.8%
Emerging Market Debt 4.5%
Repos/Cash Equivalents 1.7%
Agency Debentures 1.5%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
. Corporate Bonds. As of October 31, the fund's largest allocation was in
corporate bonds, overweighted relative to the Index (26.6% versus 17.6%),
which significantly benefited performance. Though corporate bonds began the
period on a weak note due to the economic slowdown during November and December,
the sector improved dramatically when companies reported positive earnings
growth from January 1996 through the end of the period. Within the sector, we
stressed industrial and financial issues. Industrials performed well due to the
strengthening economy, while financials benefited from the relatively steep
yield curve, which enabled issuers to borrow at lower, short-term rates and lend
at higher, long-term rates.
. Fixed Rate Mortgage Pass-Throughs. Fixed rate mortgage pass-throughs, a
23.9% position as of October 31, were underweighted compared with the Index
(29.7%), with the remainder of the fund's mortgage-backed security allocation
invested in collateralized mortgage obligations (CMOs). We emphasized seasoned
premium mortgages, which have lower prepayment risk than recently issued
mortgages. The sector suffered from high prepayments during November and
December 1995, but conditions improved when interest rates rose sharply during
the first half of 1996 and prepayments declined. Over the course of the year,
these securities positively contributed to the fund's performance.
During the period, we occasionally used mortgage dollar rolls to benefit from
short-term supply and demand imbalances in the mortgage settlement process.
(Mortgage dollar rolls refer to transactions that involve selling mortgage
securities owned by the fund and simultaneously contracting to buy back similar
mortgage securities with the same coupon on a specified future date -- usually
one month forward.) At all times, we "cover" the mortgage dollar rolls by
keeping cash or high-grade liquid debt securities equal to the dollar amount of
the forward commitment in a segregated account with the fund's custodian.
. CMOs. During the period, we increased the portfolio's CMO allocation to
9.8%, up from 2.0% a year earlier. Within the sector, we initiated a
position in sequential-pay/support CMOs (5.1% as of October 31) and increased
the portfolio's position in planned amortization class (PAC) CMOs to 3.5% from
0.9%. These securities were favored for their relative stability and attractive
spreads compared with Treasuries, and they benefited performance during the
period. The remaining CMO positions were inverse floaters, discussed below.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The fund's
allocation in U.S. Treasuries was reduced to 19.5% from 24.7% a year ago. We
significantly underweighted Treasuries relative to the benchmark (45.2%) to
focus on other sectors that offered more attractive relative value. In addition,
repurchase agreements/cash equivalents accounted for 1.7% of the portfolio, up
from 0.4% a year ago.
. Asset-Backed Securities (ABSs). We increased the fund's allocation in ABSs to
12.5%, up from 9.9% a year ago. The ABS position consisted of short-term,
high-credit-quality issues primarily backed by credit card loans, as well as
smaller positions in automobile loan debt and other receivables, that offered
incremental yield over similar-duration Treasuries. When the period under review
began, the ABS market was weak due to uncertainty regarding credit card
delinquencies, but those concerns waned and the sector strengthened from January
through October. The supply of ABSs was robust during the period, with a wide
variety of innovative new issues across a range of maturities, collateral types
and structures. Despite the increased issuance, the technical balance of the ABS
market remained favorable due to heavy investor demand from foreign banks,
insurance companies and an increasing number of corporate "crossover" accounts.
- --------------------------------------------------------------------------------
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
. Emerging Market Debt. The portfolio's investments in emerging market debt
(4.5%) performed extremely well during the period. We carefully managed the
fund's exposure in the sector by stressing higher credit-quality, short-duration
bonds. Geographically, we emphasized Latin American countries because we believe
this region has the best risk/reward characteristics. During the period, we
focused on bonds from Chile, Colombia and the Andean region development bank. We
also initiated a new position in investment-grade Mexican bonds.
. Agency Debentures. Agency debentures, a small position (1.5%), added to the
portfolio's diversification and contributed incremental yield. However, we
underweighted the sector relative to the Index (6.5%) because our analysis
indicated that it did not adequately compensate us given its level of risk.
. Duration. As of October 31, the fund's duration matched that of the Index at
4.7 years. Rather than attempting to predict the direction of interest rates, we
manage the fund's duration to approximate that of the Index, partly through the
use of financial futures. We seek to add incremental return over the Index
through sector weighting and individual security selection.
. Credit Quality. More than half of the portfolio was invested in government
and agency securities (51 .1%), with another 12.6% invested in triple-A-rated
securities. The remainder of the portfolio was made up of double-A-rated
securities (2.7%), single-A-rated securities (12.5%), triple-B-rated
securities (19.4%) and cash equivalents
(1.7%).
. Prudent Use of Derivatives. As noted, the portfolio held positions in asset-
backed securities (12.5%), sequential-pay/support CMOs (5.1%) and PAC CMOs
(3.5%), which are all typically considered to be lower risk derivatives. In
addition, we held a 1.2% position in inverse floaters, which are securities
whose coupons reset in the opposite direction from interest rate movements.
These securities performed well during the period, offering incremental yield
over Treasuries.
Market Outlook
We are somewhat cautious on the corporate bond sector as it has become
expensive relative to Treasuries, but expect the sector to continue to benefit
from strong technical and fundamental factors. We intend to continue to
overweight industrial and financial issues and underweight utilities due to
their regulatory and competitive pressures. In the mortgage pass-through market,
certain segments are attractively valued, and we believe that our current
seasoned holdings should fare well relative to other sectors if interest rates
were to continue to fall and increase the level of prepayments. We are
cautiously optimistic on the ABS market, where we expect the sector's
significant spread premiums relative to comparably rated corporate securities to
continue to buoy investor demand. In addition, Fed surveys indicate that banks
have been tightening their underwriting standards over the last three quarters,
which should help to allay lingering investor concerns surrounding consumer
credit card delinquencies. Finally, we remain optimistic on the prospects for
the relative performance of emerging market debt, which continues to offer good
value compared with other asset classes. Overall, the economic trends in
emerging markets appear to be headed in the right direction and the
globalization of financial markets is likely to increase investor interest in
the sector. During the coming year, we will continue to actively allocate the
portfolio's assets among the various fixed income sectors as their relative
value changes.
Distribution Policy
During the 12-month period under review, the fund's Institutional shares
distributed $0.72 per share. From their inceptions through October 31, the
fund's Administration and Service shares paid out $0.41 and $0.38 per share,
respectively. (The Administration shares' inception date was on February 28,
1996, and the Service shares' inception date was on March 13, 1996.) Dividends
are
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
declared daily and paid on a monthly basis. As required by tax law, the fund
distributes substantially all of its investment company taxable income.
In closing, we appreciate your investment and look forward to serving you in
the future.
Sincerely,
/s/ Jonathan A Beinner
Jonathan A Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Stephen R. Warren
Stephen R. Warren
Portfolio Managers
GS Core Fixed Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Core Fixed Income Fund based on the Fund's normal minimum
initial investment of $50,000, is compared to its benchmark, the Lehman Brothers
Aggregate Bond Index ("Lehman Aggregate Index"). All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate as market conditions change. The investment
return and principal value of an investment will fluctuate with changes in
market conditions so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
Institutional Shares/(a)/ Administration Shares Service Shares
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 48500 10/31/96 51780 10/31/96 52450
10/31/95 56124
10/31/96 59492
Lehman Aggregate Index Lehman Aggregate Index Lehman Aggregate Index
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 46980 10/31/96 51870 10/31/96 52470
10/31/95 54332
10/31/96 57505
<TABLE>
<CAPTION>
------------------------ -----------------------------------------------------
Average Annual Total Return
------------------------ -----------------------------------------------------
One Year Since Inception/(a)/
<S> <C> <C>
------------------------ ---------------------------- ------------------------
Institutional Shares 5.98% 6.34%
------------------------ ---------------------------- ------------------------
Administration Shares N/A 3.56/(b)/
------------------------ ---------------------------- ------------------------
Service Shares N/A 4.90/(b)/
------------------------ ---------------------------- ------------------------
</TABLE>
(a) The Institutional, Administration and Service shares commenced operations
January 5, 1994, February 28, 1996 and March 13, 1996, respectively
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
26
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
GS Core Fixed Income Fund
October 31, 1996
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds--26.8%
Finance Bonds--12.6%
BankAmerica Corp.
$ 20,000 6.03% 05/17/99 $ 201,724
Bear Stearns Mortgage Securities, Inc.
2,045,784 6.50 03/28/09 1,903,048
Capital One Bank
600,000 8.63 01/15/97 603,000
500,000 8.13 02/27/98 511,610
Comdisco Inc.
950,000 9.75 01/15/97 956,717
200,000 7.33 03/06/97 201,112
Conseco Inc.
340,000 10.50 12/15/04 402,688
Continental Bank N.A.
525,000 11.25 07/01/01 565,971
Countrywide Funding Corp.
125,000 6.08 07/14/99 124,166
250,000 8.43 11/16/99 263,653
250,000 7.75 08/10/01 259,800
Ford Capital Corp.
200,000 9.38 01/01/98 207,584
300,000 9.50 07/01/01 333,960
General Motors Acceptance Corp.
275,000 7.63 03/09/98 281,064
200,000 7.13 05/10/00 204,238
375,000 9.63 12/15/01 422,483
Meditrust, Inc.
240,000 7.82 09/10/26 258,144
Security Pacific Corp.
995,000 11.50 11/15/00 1,268,429
Signet Banking Corp.
240,000 9.63 06/01/99 257,527
Washington Real Estate Corp.
120,000 7.13 08/13/03 120,307
- ---------------------------------------------------------------------
$ 9,247,225
- ---------------------------------------------------------------------
Industrial Bonds--13.7%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 520,312
Auburn Hills Trust
210,000 12.00 05/01/20 316,730
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds (continued)
Industrial Bonds (continued)
Cablevision Industries Corp.
$ 150,000 10.75% 01/30/02 $ 162,534
Continental Airlines, Inc.
349,679 7.75 07/02/14 364,513
569,776 8.56 07/02/14 620,880
Ford Holdings, Inc.
300,000 9.25 03/01/00 325,581
Mitchell Energy & Development Corp.
400,000 8.00 07/15/99 410,020
News America Holdings, Inc.
350,000 9.13 10/15/99 375,340
150,000 7.50 03/01/00 154,083
Northwest Airlines Corp.
167,795 8.26 03/10/06 179,500
575,000 8.97 01/02/15 605,573
RJR Nabisco Inc.
175,000 8.00 07/15/01 175,334
450,000 8.63 12/01/02 456,467
Tele-Communications, Inc.
50,000 6.46 03/06/00 49,465
300,000 8.25 01/15/03 296,652
1,135,000 6.27 09/15/03 1,132,764
Tenneco Inc.
1,175,000 10.00 08/01/98 1,249,178
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,708,410
400,000 7.98 08/15/04 409,452
U.S. Air Inc.
560,072 6.76 04/15/08 547,711
- ---------------------------------------------------------------------
$10,060,499
- ---------------------------------------------------------------------
Utility Bonds--0.5%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 329,248
- ---------------------------------------------------------------------
$ 329,248
- ---------------------------------------------------------------------
Total Corporate Bonds
(Cost $19,435,482) $19,636,972
- ---------------------------------------------------------------------
Asset-Backed Securities--12.2%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 $ 159,816
- ---------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
27
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C> <C>
Asset-Backed Securities (continued)
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
$ 232,121 5.80% 06/15/02 $ 231,466
Discover Card Master Trust, Series 1996-4, Class A
1,910,000 5.76 10/16/13 1,926,101
Discover Card Master Trust, Series 1996-4, Class B
1,100,000 5.93 10/16/13 1,100,000
General Motors Acceptance Corp. Series 1995, Class A
99,367 7.15 03/15/00 100,546
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
291,994 6.55 11/20/01 293,725
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
314,669 6.85 06/15/01 318,757
Premier Auto Trust Series 1995-1, Class A4
360,000 7.85 09/04/98 362,023
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 81,150
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20 02/16/06 675,750
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 577,500
Sears Credit Card Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 306,561
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,140,294
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 924,183
Standard Credit Card Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 726,111
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $8,987,847) $8,923,983
- --------------------------------------------------------------------------------
Emerging Market Debt--3.9%
Bancoldex
$ 160,000 8.63% 06/02/00 $ 164,731
Corp. Andina de Fomento
200,000 7.25 04/30/98 202,294
40,000 8.38 07/29/01 40,698
Empresa Col Petroleos
900,000 7.25 07/08/98 904,563
Financiera Energy Nacional
530,000 6.63 12/13/96 534,400
160,000 9.38 06/15/06 165,234
- --------------------------------------------------------------------------------
Emerging Market Debt (continued)
Instituto de Fomento Industrial
$ 80,000 8.38% 07/29/01 $ 81,397
Korea Electric Power
266,952 7.40 04/01/16 269,197
YPF Sociedad Anonima
456,886 7.50 10/26/02 463,036
- --------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,799,425) $2,825,550
- --------------------------------------------------------------------------------
Government Bonds--0.9%
Province of Quebec
$ 520,000 13.25% 09/15/14 $ 630,058
- --------------------------------------------------------------------------------
Total Government Bonds
(Cost $653,628) $ 630,058
- --------------------------------------------------------------------------------
Mortgage Backed Obligations--31.1%
Federal Home Loan Mortgage Corp. (FHLMC((b)
$4,500,000 7.50% TBA-30 Yr(b) $4,515,435
1,208,677 6.00 TBA-30 Yr(b) 1,198,196
Federal National Mortgage Association (FNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,930
1,000,000 8.00 11/15/16 1,020,000
126,229 8.50 06/01/06 131,790
125,861 8.50 09/01/06 131,406
720,814 8.50 03/01/10 752,213
500,000 6.25 07/25/18 492,810
989,360 7.00 02/01/26 970,493
1,000,001 8.50 07/01/26 1,034,681
FNMA Remic Trust, Series 1993-201G
1,000,000 3.50 05/25/19 871,560
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24 1,842,500
Government National Mortgage Association (GNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,620
1,000,000 7.50 TBA-30 Yr(b) 1,003,120
3,000,000 8.00 TBA-30 Yr(b) 3,067,500
1,000,000 8.50 TBA-30 Yr(b) 1,038,120
342,966 8.00 02/15/17 356,042
850,876 7.50 03/15/23 857,785
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
- ----------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
======================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Government National Mortgage Association (GNMA)--(continued)
$ 512,583 7.00% 08/15/23 $ 505,699
124,369 7.50 08/15/23 125,379
Prudential Home Mortgage Securities Corp., Series 1992-39 A8
1,000,000 7.74 12/25/07 892,270
- ----------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $22,482,170) $22,768,549
- ----------------------------------------------------------------------
Sovereign Credit--1.3%
United Mexican States
$ 650,000 7.69% 08/06/01 $ 658,769
State of Israel
300,000 6.38 12/15/05 286,611
- ----------------------------------------------------------------------
Total Sovereign Credit
(Cost $926,260) $ 945,380
- ----------------------------------------------------------------------
U.S. Government Agency Obligations--1.5%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 300,000 8.20% 01/16/98 $ 301,734
250,000 6.83 09/18/02 249,023
Resolution Funding Corp. Principal-Only Stripped Securities/(c)/
1,790,000 7.08 10/15/20 335,392
1,140,000 7.08 01/15/21 210,136
- ----------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $1,058,170) $ 1,096,285
- ----------------------------------------------------------------------
U.S. Treasury Obligations--19.3%
United States Treasury Bonds
$ 3,900,000 8.75% 05/15/17 $ 4,772,625
30,000 8.88 08/15/17 37,153
150,000 8.75 08/15/20 185,180
120,000 7.88 02/15/21 135,900
United States Treasury Interest-Only Stripped Securities/(d)/
2,250,000 6.69 08/15/09 968,063
350,000 6.75 11/15/10 137,736
United States Treasury Notes
1,200,000 5.88 04/30/98 1,203,744
3,250,000 6.88 08/31/99 3,331,250
100,000 6.13 07/31/00 100,375
2,090,000 7.88 11/15/04 2,293,775
United States Treasury Principal-Only Stripped Securities/(c)/
40,000 5.54 11/15/97 37,792
590,000 6.41 11/15/04 354,885
2,920,000 6.95 05/15/20 581,460
- ----------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,792,338) $14,139,938
- ----------------------------------------------------------------------
Repurchase Agreements--19.0%
Joint Repurchase Agreement Account/(a)/
$ 13,900,000 5.58% 11/01/96 $13,900,000
- ----------------------------------------------------------------------
Total Repurchase Agreements
(Cost $13,900,000) $13,900,000
- ----------------------------------------------------------------------
Total Investments
(Cost $84,035,320/(e)/) $84,866,715
======================================================================
</TABLE>
Futures contracts open at October 31, 1996 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type Long (f) Month Gain
- ------------------------- ------------ --------------- ------------
<S> <C> <C> <C>
Euro Dollars 5 December 1996 $5,125
Euro Dollars 5 March 1997 6,875
Euro Dollars 3 September 1997 825
Euro Dollars 5 June 1997 7,500
Euro Dollars 5 June 1998 3,625
5-Year U.S. Treasury
Notes 7 December 1996 8,641
10-Year U.S. Treasury
Notes 18 December 1996 65,625
=====================================================================
$98,216
-----------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 993,383
Gross unrealized loss for investments in
which cost exceeds value (243,229)
=====================================================================
Net unrealized gain $ 750,154
- ---------------------------------------------------------------------
</TABLE>
/(a)/Portions of these securities are being segregated for open TBA purchases,
mortgage dollar rolls and futures.
/(b)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally + / -2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(c)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(d)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(e)/The aggregate cost for federal income tax purposes is $84,116,561.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year U.S. Treasury Note and, 10-Year U.S. Treasury Note contract
represents $100,000 in notional par value. The total notional amount and
market value are $25,500,000 and $8,144,325, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==============================================================
<S> <C> <C> <C> <C>
Assets:
Investments in securities, at value (cost $618,544,961, $100,440,420,
$36,328,338 and $84,035,320, respectively) $617,783,125 $1O1,067,616 $36,530,762 $84,866,715
Receivables:
Investment securities sold 9,023,710 -- 2,639,947 4,512,122
Interest 6,238,391 962,570 560,207 981,011
Fund shares sold 93,534 9,761 48,407
Variation margin -- -- -- 5,475
Cash 23,482 85,863 133,870 70,206
Deferred organization expenses, net -- -- 20,748 53,352
Other assets 186,057 127,499 66,001 66,089
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 633,348,299 102,253,309 39,999,942 90,554,970
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,479,757 109,402 20,960 23,483
Investment securities purchased 3,134,490 -- 4,336,434 17,313,687
Fund shares repurchased 732,405 55,958 20,916 6,846
Variation margin 20,125 256 -- --
Investment adviser fees 210,539 34,534 11,033 22,677
Transfer agent fees 46,181 -- 5,254 3,058
Authorized dealer service fees 1,675 -- -- --
Accrued expenses and other liabilities 54,249 35,598 48,693 40,800
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,679,421 235,748 4,443,290 17,410,551
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 680,810,713 115,128,671 39,403,964 72,421,889
Accumulated undistributed (distributions in excess of) net
investment income (3,441,783) 770,624 90,133 33,551
Accumulated net realized loss on investment and futures
transactions (49,082,170) (14,541,811) (4,139,869) (240,632)
Net unrealized gain (loss) on investments and futures (617,882) 660,077 202,424 929,611
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $627,668,878 $102,017,561 $35,556,652 $73,144,419
===================================================================================================================================
Net asset value, offering and redemption price per share
Institutional shares $9.83 $9.83 $9.96 $9.85
Administration shares $9.83 $9.85 $9.96 $9.84
Service shares -- $9.82 $9.97 $9.86
Class A shares(a) $9.83 -- -- --
===================================================================================================================================
Shares Outstanding:
Institutional shares 62,407,407 10,168,881 3,494,408 7,312,322
Administration shares 385,738 25,537 4,845 71,240
Service shares -- 185,492 69,696 38,782
Class A shares 1,091,335 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value
(unlimited number of shares authorized) 63,884,480 10,379,910 3,568,949 7,422,344
===================================================================================================================================
</TABLE>
(a) Maximum public offering price per share (NAV per share x 1.0152) for Class A
shares of GS Adjustable Rate Government Fund is $9.97
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Operations
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==========================================================
<S> <C> <C> <C> <C>
Investment income:
Interest, net (a) $39,925,070 $7,068,555 $1,979,825 $4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 39,925,070 7,068,555 1,979,825 4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 2,535,709 514,200 169,796 246,568
Distribution fees 30,905 -- -- --
Authorized dealer service fees 30,905 -- -- --
Administration share fees 9,833 107 129 751
Service share fees -- 1,222 2,322 422
Transfer agent fees 278,337 -- 16,980 24,657
Custodian fees 136,975 66,180 53,929 81,841
Professional fees 86,751 56,020 54,712 53,340
Registration fees 72,001 37,210 44,701 48,435
Amortization of deferred organization expenses 20,848 -- 22,735 24,562
Trustees' fees 1,899 1,287 760 915
Other 106,857 59,952 65,554 30,136
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,311,020 736,178 431,618 511,627
Less--Expenses reimbursable and fees waived by Goldman Sachs (417,768) (272,069) (238,097) (233,065)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 2,893,252 464,109 193,521 278,562
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 37,031,818 6,604,446 1,786,304 4,013,477
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (310,326) (222,458) 367,144 (108,070)
Futures transactions (2,192,298) (345,361) (35,506) (145,350)
Net change in unrealized gain (loss) on:
Investments 6,892,986 661,003 (396,071) (192,910)
Futures 818,120 (41,385) -- 117,560
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 5,208,482 51,799 (64,433) (328,770)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $42,240,300 $ 6,656,245 $ 1,721,871 $3,684,707
====================================================================================================================================
(a) Net of $1,314 in foreign withholding tax for the Core Fixed Income Fund.
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
----------------------------------------------------------
<S> <C> <C> <C> <C>
From Operations:
Net investment income $ 37,031,818 $6,604,446 $1,786,304 $4,013,477
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819) 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618 (396,071) (75,350)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245 1,721,871 3,684,707
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519) (1,766,892) (4,019,797)
Administration shares (220,450) (2,548) (2,032) (19,144)
Service shares -- (14,792) (17,380) (5,349)
Class A shares (577,779) -- -- --
In excess of net investment income
Institutional shares (1,304,006) -- -- --
Administration shares (7,930) -- -- --
Class A shares (20,794) -- -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- -- -- (450,016)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859) (1,786,304) (4,494,306)
- ------------------------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441 22,248,684 21,976,567
Reinvestment of dividends and distributions 18,181,648 4,153,816 1,401,492 4,315,748
Cost of shares repurchased (477,107,914) (47,993,112) (46,918,400) (7,840,575)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from shares transactions (52,339,892) (1,819,855) (23,268,224) 18,451,740
- ------------------------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469) (23,332,657) 17,642,141
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of year $676,133,018 $103,760,030 $58,889,309 $55,502,278
- ------------------------------------------------------------------------------------------------------------------------------
End of year $627,668,878 $102,017,561 $35,556,652 $73,144,419
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed
net investment income $ (3,441,783) $ 770,624 $ 90,133 $ 33,551
- ------------------------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467 2,233,482 2,244,430
Reinvestment of dividends and distributions 1,856,783 424,274 140,950 439,299
Shares repurchased (48,741,470) (4,905,357) (4,727,959) (811,075)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616) (2,353,527) 1,872,654
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
32
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short-Term
Rate Government
Government Agency
Agency Fund Fund
==================================
<S> <C> <C>
From Operations:
Net investment income $ 42,586,453 $ 8,885,667
Net realized gain (loss) from investment and futures transactions (12,000,479) (4,030,174)
Net change in unrealized gain on investments and futures 16,138,367 5,735,691
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 46,724,341 10,591,184
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (42,629,917) (8,684,213)
Administration shares (278,448) (11,164)
Service shares -- --
Class A shares (425,863) --
In excess of net investment income
Institutional shares (2,124,188) --
Administration shares (13,875) --
Class A shares (21,220) --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (45,493,511) (8,695,377)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 456,762,969 49,034,023
Proceeds from reorganizations 37,593,780 --
Reinvestment of dividends and distributions 21,273,685 4,993,443
Cost of shares repurchased (790,211,526) (145,988,674)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (274,581,092) (91,961,208)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (273,350,262) (90,065,401)
Net Assets:
Beginning of year 949,483,280 193,825,431
- ----------------------------------------------------------------------------------------------------------------
End of year $676,133,018 $103,760,030
================================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ (2,129,902) $ 708,450
================================================================================================================
Summary of Share Transactions:
Shares sold 46,809,171 5,072,030
Shares exchanged in reorganizations 3,843,169 --
Reinvestment of dividends and distributions 2,181,117 516,178
Shares repurchased (81,125,615) (15,135,663)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (28,292,158) (9,547,455)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GS Short GS Core
Duration Fixed
Tax-Free Income
Fund Fund
============================
<S> <C> <C>
From Operations:
Net investment income $ 2,814,454 $2,248,195
Net realized gain (loss) from investment and futures transactions (472,312) 921,130
Net change in unrealized gain on investments and futures 1,270,197 1,663,176
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,612,339 4,832,501
- ---------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (2,771,793) (2,253,625)
Administration shares (20,584) --
Service shares (22,077) --
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
- ---------------------------------------------------------------------------------------------------------
Total distributions to shareholders (2,814,454) (2,253,625)
- ---------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 36,468,900 30,256,879
Proceeds from reorganizations -- --
Reinvestment of dividends and distributions 1,873,154 2,232,160
Cost of shares repurchased (67,865,169) (4,073,379)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (29,523,115) 28,415,660
- ---------------------------------------------------------------------------------------------------------
Total (decrease) increase (28,725,230) 30,994,536
Net Assets:
Beginning of year 87,614,539 24,507,742
- ---------------------------------------------------------------------------------------------------------
End of year $58,889,309 $55,502,278
=========================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ 67,398 $ 40,202
=========================================================================================================
Summary of Share Transactions:
Shares sold 3,733,382 3,077,397
Shares exchanged in reorganizations -- --
Reinvestment of dividends and distributions 190,942 230,595
Shares repurchased (6,950,294) (411,156)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,025,970) 2,896,836
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust
registered under the Investment Company Act of 1940 (as amended) as an open-end,
management investment company. Included in this report are the financial
statements for the GS Adjustable Rate Government Fund, GS Short Duration
Government Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund,
collectively, ("the Funds"). The Funds are diversified portfolios of the Trust
offering three classes of shares - Institutional shares, Administration shares
and Service shares. In addition, the GS Adjustable Rate Government Fund offers
Class A shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
-------------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations
for which accurate market quotations are readily available are valued on the
basis of quotations furnished by a pricing service or provided by dealers in
such securities. Other securities are valued based on yield equivalents, a
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Portfolio securities for which accurate market
quotations are not readily available are valued based on yield equivalents,
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Short-term debt obligations maturing in sixty days or
less are valued at amortized cost.
B. Security Transactions and Investment Income
------------------------------------------------
Security transactions are recorded on trade date. Realized gains and
losses on sales of portfolio securities are calculated on the identified cost
basis. Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account actual principal
prepayment experience and estimates of future principal prepayments. Certain
mortgage security paydown gains and losses are taxable as ordinary income. Such
paydown gains and losses increase or decrease taxable ordinary income available
for distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
Market premiums resulting from the purchase of long-term debt securities are
amortized to interest income over the life of the security with a corresponding
decrease in the cost basis of that security for GS Short Duration Tax-Free Fund.
Market discounts and market premiums on debt securities, other than mortgage
backed securities, are amortized to interest income over the life of the
security with a corresponding adjustment in the cost basis of that security for
GS Core Fixed Income Fund.
C. Mortgage Dollar Rolls
--------------------------
The Funds, with the exception of the GS Short Duration Tax-Free Fund, may
enter into mortgage "dollar rolls" in which the Fund sells securities in the
current month for delivery and simultaneously contracts with the same
counterparty to repurchase similar (same type,
34
<PAGE>
coupon and maturity) but not identical securities on a specified future date.
The Fund loses the right to receive principal and interest paid on the
securities sold. However, the Fund benefits to the extent of any price received
for the securities sold and the lower forward price for the future purchase
(often referred to as the "drop") or fee income plus the interest earned on the
cash proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high-grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
D. Futures Contracts
----------------------
The Funds may enter into futures transactions in order to hedge against
changes in interest rates, securities prices, currency exchange rates in the
case of GS Core Fixed Income Fund or to seek to increase total return. A Fund
will engage in futures transactions only for bona fide hedging purposes as
defined in regulations of the CFTC or to seek to increase total return to the
extent permitted by such regulations. The use of futures contracts involve, to
varying degrees, elements of market risk which may exceed the amounts recognized
in the Statements of Assets and Liabilities.
Upon entering into a futures contract, a Fund is required to deposit with
a broker an amount of cash or securities equal to the minimum "initial margin"
requirement of the futures exchange on which the contract is traded. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the contract, and are
recorded for financial reporting purposes as unrealized gains or losses by the
Fund. When entering into a closing transaction, the Fund will realize, for book
purposes, a gain or loss equal to the difference between the value of the
futures contract to sell and the futures contract to buy. Futures contracts are
valued at the most recent settlement price, unless such price does not reflect
the fair market value of the contract, in which case the position will be valued
using methods as approved by the Board of Trustees.
Certain risks may arise upon entering into futures contracts. The
predominant risk is that the changes in the value of the futures contract may
not directly correlate with changes in the value of the underlying securities.
This risk may decrease the effectiveness of the Funds' hedging strategies and
may also result in a loss to the Funds.
E. Deferred Organization Expenses
-----------------------------------
Organization-related costs are being amortized on a straight-line basis
over a period of five years.
F. Expenses
-------------
Expenses incurred by the Trust that do not specifically relate to an
individual portfolio of the Trust are allocated to the portfolios based on each
portfolio's relative average net assets for the period.
Shareholders of Administration shares and Service shares bear all expenses
and fees paid to service organizations for their services with respect to such
shares as well as other expenses (subject to expense limitations) which are
directly attributable to such shares. For the GS Adjustable Rate Government
Fund, shareholders of Class A shares bear all expenses and fees relating to the
distribution and authorized dealer service plans as well as other expenses which
are directly attributable to such shares.
G. Federal Taxes
------------------
It is each Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute each
year substantially all of its investment company taxable and tax-exempt income
to its shareholders. Accordingly, no federal tax provisions are required.
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The characterization of distributions to shareholders for financial
statement purposes as either from or in excess of net investment income or net
realized gain on investment transactions, or from capital, depends on the type
of book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. federal tax purposes:
<TABLE>
<CAPTION>
Years of
Fund Amount Expiration
- --------------------------------------- --------------------- -----------------
<S> <C> <C>
GS Adjustable Rate
Government Fund $47,923,000 2000-2003
GS Short Duration Government
Fund $13,272,000 2002-2003
GS Short Duration Tax-Free
Fund $4,271,000 2002-2003
GS Core Fixed Income
Fund $77,000 2004
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by applicable laws or regulations.
3. Agreements
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman,
Sachs & Co. ("Goldman Sachs"), serves as the investment adviser for the GS
Adjustable Rate Government and GS Short Duration Government Funds pursuant to
Investment Advisory Agreements. Goldman Sachs Asset Management ("GSAM"), a
separate operating division of Goldman Sachs, serves as the investment adviser
for the GS Short Duration Tax-Free and GS Core Fixed Income Funds pursuant to
Investment Advisory Agreements. Under the Investment Advisory Agreements, the
adviser, subject to the general supervision of the Trust's Board of Trustees,
manages the Funds' portfolios and provides for the administration of the Funds'
other affairs. As compensation for the services rendered under the Investment
Advisory Agreements and the assumption of the expenses related thereto, the
adviser is entitled to a fee, computed daily and payable monthly at an annual
rate equal to .40% of average daily net assets of GS Adjustable Rate Government,
GS Short Duration Tax-Free and GS Core Fixed Income Funds and .50% of average
daily net assets of GS Short Duration Government Fund. Until further notice,
GSFM has voluntarily agreed not to impose .10% of its investment advisory fee
for the GS Short Duration Government Fund. For the year ended October 31, 1996,
investment advisory fees of approximately $103,000 were waived for the GS Short
Duration Government Fund.
The adviser has voluntarily agreed to limit certain of the Funds' expenses
(excluding investment advisory fees, taxes, interest, brokerage, litigation,
administrative and service share fees, indemnification and other extraordinary
expenses and with respect to GS Adjustable Rate Government Class A shares,
distribution and authorized dealer service fees) to the extent that such
expenses exceed .05% per annum of each Fund's average daily net assets. For the
year ended October 31, 1996, the amount of reimbursed expenses for the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and GS Core Fixed Income Funds were approximately $387,000, $169,000,
$238,000 and $233,000, respectively. The amounts reimbursable to the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and the GS Core Fixed Income Funds at October 31, 1996 were
approximately $29,000, $12,000, $31,000 and $19,000, respectively, and are
included in "Other assets" in the accompanying Statements of Assets and
Liabilities.
Goldman Sachs serves as Distributor of the shares of the Funds pursuant to
a Distribution Agreement and receives no compensation in this capacity with the
exception of GS Adjustable Rate Government Fund Class A shares. At October 31,
1996, Goldman Sachs retained approximately $79,000 of sales load related to
Class A shares. Goldman Sachs also serves as Transfer Agent of the Funds for a
fee.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
The Trust, on behalf of the GS Adjustable Rate Government Fund, has
adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 for the Class A
shares. Under the Plan, Goldman Sachs is entitled to receive a quarterly
distribution fee equal, on an annual basis, to .25% of the average daily net
assets of Class A shares. Currently, Goldman Sachs has agreed to voluntarily
waive this distribution fee. Distribution fees waived for the period amounted to
approximately $31,000.
The Trust, on behalf of the GS Adjustable Rate Government Fund, has
adopted a non-Rule 12b-1 Authorized Dealer Service Plan (the "Service Plan")
pursuant to which Goldman Sachs and Authorized Dealers are compensated for
providing personal and account maintenance services. GS Adjustable Rate
Government Fund pays a fee under the Service Plan equal, on an annual basis, to
.25% of its average daily net assets attributable to Class A shares.
For the year ended October 31, 1996, GS Adjustable Rate Government Fund,
GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS Core
Fixed Income Fund incurred commission expenses of approximately $108,000,
$24,000, $1,000 and $4,000, respectively, in connection with futures contracts
entered into with Goldman Sachs. At October 31, 1996, GS Adjustable Rate
Government Fund had approximately $20,000, payable to Goldman Sachs related to
variation margin on futures contracts. Approximately $5,000 relating to
variation margin was due to the GS Core Fixed Income Fund from Goldman Sachs.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving
line of credit facility to be used solely for temporary or emergency purposes.
Under the most restrictive arrangement, each fund must own securities having a
market value in excess of 300% of the total bank borrowings. The interest rate
on the borrowings is based on the federal funds rate. During the year ended
October 31, 1996, the Funds did not have any borrowings under this facility.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for
the year ended October 31, 1996, were as follows:
================================================================================
GS GS GS
Adjustable Short Short GS
Rate Duration Duration Core Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
- --------------------------------------------------------------------------------
Purchases of U.S.
Government and
agency obligations $319,204,368 $117,205,724 -- $227,149,602
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) -- -- $101,504,852 41,015,852
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 370,448,093 113,784,637 -- 251,512,185
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) -- -- 128,041,004 19,684,141
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
Fund Dollars Shares
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $391,363,204 39,981,299
Reinvestment of dividends and
distributions 17,432,484 1,780,288
Shares repurchased (456,776,795) (46,666,343)
----------------------------------------
(47,981,107) (4,904,756)
----------------------------------------
Administration Shares:
Shares sold 1,457,872 148,981
Reinvestment of dividends and
distributions 94,420 9,641
Shares repurchased (1,356,764) (138,609)
----------------------------------------
195,528 20,013
----------------------------------------
37
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund: Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares:
Shares sold $ 13,765,298 1,404,698
Reinvestment of dividends and distributions 654,744 66,854
Shares repurchased (18,974,355) (1,936,518)
-------------------------------------
(4,554,313) (464,966)
-------------------------------------
Total $ (52,339,892) (5,349,709)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 39,855,638 4,072,082
Reinvestment of dividends and distributions 4,137,041 422,559
Shares repurchased (47,875,174) (4,893,286)
-------------------------------------
(3,882,495) (398,645)
-------------------------------------
Administration Shares:
Shares sold 326,101 33,251
Reinvestment of dividends and distributions 2,032 207
Shares repurchased (77,312) (7,921)
-------------------------------------
250,821 25,537
-------------------------------------
Service Shares:
Shares sold 1,837,702 188,134
Reinvestment of dividends and distributions 14,743 1,508
Shares repurchased (40,626) (4,150)
-------------------------------------
1,811,819 185,492
-------------------------------------
Total $ (1,819,855) (187,616)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 20,777,050 2,085,253
Reinvestment of dividends and distributions 1,383,351 139,126
Shares repurchased (45,664,878) (4,601,865)
-------------------------------------
(23,504,477) (2,377,486)
-------------------------------------
Administration Shares:
Shares sold 105,302 10,672
Reinvestment of dividends and distributions 2,017 203
Shares repurchased (105,478) (10,644)
-------------------------------------
1,841 231
-------------------------------------
Service Shares:
Shares sold $ 1,366,332 137,557
Reinvestment of dividends and distributions 16,124 1,621
Shares repurchased (1,148,044) (115,450)
-------------------------------------
234,412 23,728
-------------------------------------
Total $ (23,268,224) (2,353,527)
=====================================
GS Core Fixed Income Fund
Institutional Shares:
Shares sold $ 20,524,422 2,094,833
Reinvestment of dividends and distributions 4,292,533 436,903
Shares repurchased (7,431,360) (769,104)
-------------------------------------
17,385,595 1,762,632
-------------------------------------
Administration Shares:
Shares sold 1,029,912 106,074
Reinvestment of dividends and distributions 17,883 1,847
Shares repurchased (358,284) (36,681)
-------------------------------------
689,511 71,240
-------------------------------------
Service Shares:
Shares sold 422,233 43,525
Reinvestment of dividends and distributions 5,332 549
Shares repurchased (50,931) (5,292)
-------------------------------------
376,634 38,782
-------------------------------------
Total $ 18,451,740 1,872,654
=====================================
</TABLE>
- --------------------------------------------------------------------------------
Share activity for the year ended October 31, 1995 is as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $ 445,293,934 45,635,666
Shares exchanged in reorganization 18,823,725 1,926,438
Reinvestment of dividends and distributions 20,730,137 2,125,494
Shares repurchased (771,265,543) (79,186,935)
-------------------------------------
(286,417,747) (29,499,337)
-------------------------------------
Administration Shares:
Shares sold 648,042 66,628
Shares exchanged in reorganization 1,561,584 159,814
Reinvestment of dividends and distributions 124,368 12,743
Shares repurchased (5,731,937) (588,307)
-------------------------------------
(3,397,943) (349,122)
-------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
============================================================================================
<S> <C> <C>
Class A Shares:
Shares sold 10,820,993 1,106,877
Shares exchanged in reorganization 17,208,471 1,756,917
Reinvestment of dividends and distributions 419,180 42,880
Shares repurchased (13,214,046) (1,350,373)
-------------------------------------
15,234,598 1,556,301
-------------------------------------
Total $(274,581,092) (28,292,158)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 49,032,419 5,071,865
Reinvestment of dividends and distributions 4,993,225 516,155
Shares repurchased (145,260,300) (15,059,774)
-------------------------------------
(91,234,656) (9,471,754)
-------------------------------------
Administration Shares:
Shares sold 1,604 165
Reinvestment of dividends and distributions 218 23
Shares repurchased (728,374) (75,889)
-------------------------------------
(726,552) (75,701)
-------------------------------------
Total $ (91,961,208) (9,547,455)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 18,780,011 1,920,432
Reinvestment of dividends and distributions 1,860,104 189,624
Shares repurchased (46,762,899) (4,787,105)
-------------------------------------
(26,122,784) (2,677,049)
-------------------------------------
Administration Shares:
Shares sold -- --
Reinvestment of dividends and distributions 2,483 246
Shares repurchased (3,800,930) (390,639)
-------------------------------------
(3,798,447) (390,393)
-------------------------------------
Service Shares:
Shares sold 17,688,889 1,812,950
Reinvestment of dividends and distributions 10,567 1,072
Shares repurchased (17,301,340) (1,772,550)
-------------------------------------
398,116 41,472
-------------------------------------
Total $(29,523,115) (3,025,970)
=====================================
</TABLE>
7. Repurchase Agreements
- --------------------------------------------------------------------------------
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Fund's custodian, or at subcustodians. GSFM and GSAM
monitor the market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having
advisory agreements with GSFM and GSAM or their affiliates, transfer uninvested
cash balances into a joint account, the daily aggregate balance of which is
invested in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of October 31, 1996, the GS Adjustable Rate Government, GS Short Duration
Government and GS Core Fixed Income Funds had an .49%, .04% and .52%,
respectively, undivided interest in the repurchase agreements in the following
joint account which equaled $13,000,000, $1,000,000 and $13,900,000,
respectively, in principal amount.
- --------------------------------------------------------------------------------
39
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
As of October 31, 1996, the repurchase agreement in the joint account along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,290,445, 5.5%--8.50%, 2.1.09-6/1/26; FHLMC: $165,859,789, 5.50%--8.50%,
9/1/98--8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (U.S. Treasury
Notes: $942,903,967, 4.38%--8.50%, 11/15/96--8/15/03)
924,700,000 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,600,142, 5.50%--8.00%, 2/1/02-10/1/26; FHLMC:
$464,523,981, 6.00%--9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S. Treasury
Interest Only Stripped Securities: $11,653,277, 2/15/98--5/15/02; U.S. Treasury
Notes: $85,997,728, 5.25%--7.75%, 5/15/97-10/15/06; U.S. Treasury Principal
Only Stripped Securities: $33,993,571, 5/15/97--5/15/05; U.S. Treasury Bills:
$41,756,285, 12/12/96--3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price
$175,026,979
(Treasury Notes: $178,528,739, 6.88%--7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement $2,669,700,000
================================================================================
</TABLE>
9. Administration and Service Plans
The Funds have adopted Administration and Service Plans. These plans allow
for Administration shares and Service shares, respectively, to compensate
service organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
10. Other Matters
On April 28, 1995, the GS Adjustable Rate Government Fund acquired the
assets of GS Government Agency Portfolio (For Financial Institutions) in
exchange solely for (i) the issuance of Institutional shares and Administration
shares of beneficial interest of the GS Adjustable Rate Government Fund and
(ii) the assumption by GS Adjustable Rate Government Fund of the liabilities of
GS Government Agency Portfolio (For Financial Institutions). Following this
transfer, GS Government Agency Portfolio (For Financial Institutions) was
liquidated and GS Adjustable Rate Government Fund's Institutional and
Administration shares were distributed to the former shareholders of GS
Government Agency Portfolio (For Financial Institutions).
The Reorganization was accomplished by a tax-free transfer of assets whereby
each shareholder of GS Government Agency Portfolio (For Financial Institutions)
received a number of full and fractional shares of GS Adjustable Rate Government
Fund having a total net asset value of their shares of GS Government Agency
Portfolio (For Financial Institutions) held on April 28, 1995. The net assets,
including $370,489 of unrealized depreciation for the GS Government Agency
Portfolio (For Financial Institutions), net asset values per share and shares
outstanding as of April 28, 1995 were:
================================================================================
GS Government
Agency
Portfolio
(For Financial GS Adjustable GS Adjustable
Institutions Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
Net Assets $20,385,309 $673,292,455 $693,677,764
Shares Outstanding
Institutional Shares 1,912,506 68,506,367 70,432,805
Administration Shares 158,661 401,122 560,936
Net Asset Value Per Share
Institutional Shares 9.84 9.77 9.77
Administration Shares 9.84 9.77 9.77
================================================================================
On May 11, 1995, shareholders of the GS Adjustable Rate Mortgage Fund
approved a Plan of Reorganization (the Plan) which was completed on May 12,
1995. Under the Plan, GS Adjustable Rate Mortgage Fund was reorganized as a
separate class (Class A) of the GS
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Adjustable Rate Government Fund. GS Adjustable Rate Mortgage Fund's assets were
acquired by GS Adjustable Rate Government Fund in exchange solely for (i) the
issuance of Class A shares of beneficial interest of GS Adjustable Rate
Government Fund and (ii) the assumption by GS Adjustable Rate Government Fund of
the liabilities of GS Adjustable Rate Mortgage Fund. Following this transfer, GS
Adjustable Rate Mortgage Fund was liquidated and GS Adjustable Rate Government
Fund Class A shares were distributed to the former shareholders of GS Adjustable
Rate Mortgage Fund.
The Reorganization was accomplished by a tax-free transfer of assets
whereby each shareholder of GS Adjustable Rate Mortgage Fund received a number
of Class A full and fractional shares of GS Adjustable Rate Government Fund
having a total net asset value of their shares of GS Adjustable Rate Mortgage
Fund held as of May 12, 1995. The net assets, including $45,684 of net
unrealized depreciation for the GS Adjustable Rate Mortgage Fund, net asset
values per share and shares outstanding as of May 12, 1995 were:
================================================================================
<TABLE>
<CAPTION>
GS Adjustable
Rate Mortgage GS Adjustable GS Adjustable
Fund Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Assets $17,208,471 $727,300,372 $744,508,843
Shares Outstanding
Institutional Shares -- 73,743,084 73,743,084
Administration Shares -- 561,352 561,352
Class A Shares 3,552,167 -- 1,756,917
Net Asset Value Per Share
Institutions Shares -- 9.79 9.79
Administration Shares -- 9.79 9.79
Class A Shares 4.84 -- 9.79
</TABLE>
================================================================================
The total amount of capital loss carryforward brought on to the books of
the GS Adjustable Rate Government Fund due to these reorganization was
approximately $3,154,000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing
and Retirement Income Plan was beneficial owner of approximately 29% of the
outstanding shares of the GS Short Duration Government Fund.
11. Certain Reclassifications
In accordance with Statement of Position 93-2, the GS Adjustable Rate
Government Fund, GS Short Duration Tax-Free Fund, and GS Core Fixed Income Fund
have reclassified $20,849, $36,587, $22,735, and $24,162, respectively, from
paid-in capital to accumulated undistributed net investment income. These
reclassifications have no impact on the net asset value of the Fund and are
designed to present the Fund's capital accounts on a tax basis.
- --------------------------------------------------------------------------------
41
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
=================================================================== ============================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option of net
beginning investment futures related investment investment and futures investment
of period income transactions transactions operations income transactions income
================================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ $9.77 $0.5759(a) $0.0772(a) -- $0.6531 $ (0.5725) -- $ (0.0206)
1996-Administration
Shares............ 9.77 0.5489(a) 0.0797(a) -- 0.6286 (0.5489) -- (0.0198)
1996-Class A
Shares............ 9.77 0.5481(a) 0.0806(a) -- 0.6287 (0.5489) -- (0.0198)
1995-Institutional
Shares............ 9.74 0.5630(a) 0.0717(a) -- 0.6347 (0.5759) -- (0.0287)
1995-Administration
Shares............ 9.74 0.5366(a) 0.0737(a) -- 0.6103 (0.5528) -- (0.0275)
1995-Class A
Shares(c)......... 9.79 0.2721(a) (0.0090)(a) -- 0.2631 (0.2697) -- (0.0134)
1994-Institutional
Shares............ 10.00 0.4341(a) (0.2455)(a) -- 0.1886 (0.4486) -- --
1994-Administration
Shares............ 10.00 0.4211(a) (0.2572)(a) -- 0.1639 (0.4239) -- --
1993-Institutional
Shares............ 10.04 0.4397 (0.0376)(d) -- 0.4021 (0.4397) -- (0.0024)
1993-Administration
Shares(e)......... 10.02 0.2146 (0.0173)(d) -- 0.1973 (0.2146) -- (0.0027)
1992-Institutional
Shares............ 10.03 0.5599 (0.0029)(d) -- 0.5570 (0.5470) -- --
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 10.00 0.1531 0.0322(d) -- 0.1853 (0.1553) -- --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
=========================================
In excess of
net realized Net
gain on increase Ratio of
investment, From Total (decrease) Net asset net
option and paid distributions in net value at expenses
futures in to asset end of Total to average
transactions capital shareholders value period return(k) net assets
==============================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ -- -- $(0.5931) $0.0600 $9.83 6.86% 0.45%
1996-Administration
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1996-Class A
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1995-Institutional
Shares............ -- -- (0.6046) 0.0301 9.77 6.75 0.46
1995-Administration
Shares............ -- -- (0.5803) 0.0300 9.77 6.48 0.71
1995-Class A
Shares(c)......... -- -- (0.2831) (0.0200) 9.77 2.74(f) 0.69(b)
1994-Institutional
Shares............ -- -- (0.4486) (0.2600) 9.74 1.88 0.46
1994-Administration
Shares............ -- -- (0.4239) (0.2600) 9.74 1.63 0.71
1993-Institutional
Shares............ -- -- (0.4421) (0.0400) 10.00 4.13 0.45
1993-Administration
Shares(e)......... -- -- (0.2173) (0.0200) 10.00 2.01(f) 0.70(b)
1992-Institutional
Shares............ -- -- (0.5470) 0.0100 10.04 6.12 0.42
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ -- -- (0.1553) 0.0300 10.03 2.14(f) 0.20(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
=============================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
========================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ 5.85% 52.36% $613,149 0.51% 5.79%
1996-Administration
Shares............ 5.59 52.36 3,792 0.76 5.53
1996-Class A
Shares............ 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares............ 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares............ 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares(c)......... 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institutional
Shares............ 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares............ 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares............ 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares(e)......... 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institutional
Shares............ 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations Distributions to shareholders
---------------------------------------------------------- ----------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------------------
GS SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares ........... $9.82 $0.6290/(a)/ $0.0136/(a)/ -- $0.6426 $(0.6326) --
1996-Administration
Shares/(h)/ ...... 9.86 0.3837/(a)/ 0.0003/(a)/ -- 0.3840 (0.3940) --
1996-Service
Shares/(i)/ ...... 9.72 0.3134/(a)/ 0.1018/(a)/ -- 0.4152 (0.3152) --
1995-Institutional
Shares ........... 9.64 0.6652/(a)/ 0.1666/(a)/ -- 0.8318 (0.6518) --
1995-Administration
Shares ........... 9.64 0.2384/(a)/ (0.0433)/(a)/ -- 0.1951 (0.2051) --
1994-Institutional
Shares ........... 10.14 0.5628/(a)/ (0.4592)/(a)/ -- 0.1036 (0.5598) (0.0438)
1994-Administration
Shares ........... 10.14 0.5329/(a)/ (0.4539)/(a)/ -- 0.0790 (0.5352) (0.0438)
1993-Institutional
Shares ........... 10.16 0.5627 (0.0135)/(d)/ -- 0.5492 (0.5627) --
1993-Administration
Shares/(e)/ ...... 10.23 0.2725 (0.0900)/(d)/ -- 0.1825 (0.2725) --
1992-Institutional
Shares ........... 10.22 0.6703 (0.0600)/(d) -- 0.6103 (0.6703) --
1991-Institutional
Shares ........... 10.00 0.8020 0.2200/(d)/ -- 1.0220 (0.8020) --
1990-Institutional
Shares ........... 10.07 0.8300 (0.0700)/(d) -- 0.7600 (0.8300) --
1989-Institutional
Shares ........... 10.10 0.8800 -- -- 0.8800 (0.8800) --
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ........... 10.00 0.1800 0.1000/(d)/ -- 0.2800 (0.1800) --
<CAPTION>
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of
income transactions capital shareholders value period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
1996-Institutional
Shares ............ -- -- -- $(0.6326) $0.0100 $9.83
1996-Administration
Shares/(h)/ ....... -- -- -- (0.3940) (0.0100) 9.85
1996-Service
Shares/(i)/ ....... -- -- -- (0.3152) 0.1000 9.82
1995-Institutional
Shares ............ -- -- -- (0.6518) 0.1800 9.82
1995-Administration
Shares ............ -- -- -- (0.2051) (0.0100) 9.63/(h)/
1994-Institutional
Shares ............ -- -- -- (0.6036) (0.5000) 9.64
1994-Administration
Shares ............ -- -- -- (0.5790) (0.5000) 9.64
1993-Institutional
Shares ............ (0.0065) -- -- (0.5692) (0.0200) 10.14
1993-Administration
Shares/(e)/ ....... -- -- -- (0.2725) (0.9000) 10.14
1992-Institutional
Shares ............ -- -- -- (0.6703) (0.0600) 10.16
1991-Institutional
Shares ............ -- -- -- (0.8020) 0.2200 10.22
1990-Institutional
Shares ............ -- -- -- (0.8300) (0.0700) 10.00
1989-Institutional
Shares ............ -- -- (0.0300) (0.9100) (0.0300) 10.07
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ -- -- -- (0.1800) 0.1000 10.10
<CAPTION>
Ratios assuming
not voluntary waiver
of fees or
expense limitations
--------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
Total to average to average turnover period to average to average
return/(k)/ net assets net assets rate/(d)/ (in 000s) net assets net assets
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
1996-Institutional
Shares ............ 6.75% 0.45% 6.44% 115.45% $99,944 0.71% 6.18%
1996-Administration
Shares/(h)/ ....... 4.00/(f)/ 0.70%/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/ ....... 4.35/(f)/ 0.95/(b)/ 6.05/(b) 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional
Shares ............ 8.97 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares ............ 2.10 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional
Shares ............ 0.99 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares ............ 0.73 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares ............ 5.55 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/ ....... 1.74 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional
Shares ............ 6.24 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares ............ 10.93 0.45 8.25 155.44 158,948 0.79 7.91
1990-Institutional
Shares ............ 8.23 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares ............ 9.03 0.46 8.71 137.37 31,015 1.39 7.78
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ 3.30/(f)/ 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
================================================ ===================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
===============================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $9.94 $0.4192/(a)/ $0.0200/(a)/ -- $0.4392 $(0.4192) --
1996-Administration Shares.......... 9.94 0.3944/(a)/ 0.0200/(a)/ -- 0.4144 (0.3944) --
1996-Service Shares................. 9.95 0.3697/(a)/ 0.0200/(a)/ -- 0.3897 (0.3697) --
1995-Institutional Shares........... 9.79 0.4235/(a)/ 0.1500/(a)/ -- 0.5735 (0.4235) --
1995-Administration Shares.......... 9.79 0.3989/(a)/ 0.1500/(a)/ -- 0.5489 (0.3989) --
1995-Service Shares................. 9.79 0.3744/(a)/ 0.1600/(a)/ -- 0.5344 (0.3744) --
1994-Institutional Shares........... 10.23 0.3787/(a)/ (0.3575)/(a)/ -- 0.0212 (0.3787) (0.0825)
1994-Administration Shares.......... 10.23 0.3537/(a)/ (0.3575)/(a)/ -- (0.0038) (0.3537) (0.0825)
1994-Service Shares/(j)/............ 9.86 0.0475/(a)/ (0.0700)/(a)/ -- (0.0225) (0.0475) --
1993-Institutional Shares........... 9.93 0.3834 0.3000/(d)/ -- 0.6834 (0.3834) --
1993-Administration Shares/(j)/..... 10.16 0.1555 0.0720/(d)/ -- 0.2275 (0.1555) --
For the Period October 1, 1992/(g)/ through October 31,
- ----------------------------------------------------
1992-Institutional Shares........... 10.00 0.0341 (0.0700)/(d)/ -- (0.0359) (0.0341) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
==================================
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return/(k)/ net assets
==================================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
====================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.4192) $0.0300 $9.96 4.50% 0.45%
1996-Administration Shares.......... -- -- -- (0.3944) 0.0300 9.96 4.24 0.70
1996-Service Shares................. -- -- -- (0.3697) 0.0200 9.97 3.98 0.95
1995-Institutional Shares........... -- -- -- (0.4235) 0.1500 9.94 5.98 0.45
1995-Administration Shares.......... -- -- -- (0.3989) 0.1500 9.94 5.76 0.70
1995-Service Shares................. -- -- -- (0.3744) 0.1600 9.95 5.59 0.95
1994-Institutional Shares........... -- -- -- (0.4612) (0.4400) 9.79 0.17 0.45
1994-Administration Shares.......... -- -- -- (0.4362) (0.4400) 9.79 (0.11) 0.70
1994-Service Shares/(j)/............ -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/ 0.95/(b)/
1993-Institutional Shares........... -- -- -- (0.3834) 0.3000 10.23 7.03 0.41
1993-Administration Shares/(j)/..... -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/ 0.70/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/ 0.05/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
==================================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate/(d)/ (in 000s) net assets net assets
==========================================================
GS SHORT DURATION TAX-FREE FUND
- --------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 4.21% 231.65% $34,814 1.01% 3.65%
1996-Administration Shares.......... 3.96 231.65 48 1.26 3.40
1996-Service Shares................. 3.74 231.65 695 1.51 3.18
1995-Institutional Shares........... 4.31 259.52 58,389 0.77 3.99
1995-Administration Shares.......... 4.14 259.52 46 1.02 3.82
1995-Service Shares................. 3.87 259.52 454 1.27 3.55
1994-Institutional Shares........... 3.74 354.00 83,704 0.61 3.58
1994-Administration Shares.......... 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/............ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares........... 3.70 404.60 115,803 1.06 3.05
1993-Administration Shares/(j)/..... 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
----------------------------------------------------- ------------------------------
Net realized
Net realized and From net
and unrealized unrealized Total realized gain
gain (loss) gain (loss) income on
Net asset on investment, on foreign (loss) investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-----------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $10.00 $0.6448 $(0.0704) -- $0.5744 $(0.6438) $(0.0806)
1996-Administrative Shares(l)....... 9.91 0.4083 (0.0703) -- 0.3380 (0.4080) --
1996-Service Shares(l).............. 9.77 0.3756 0.0898 -- 0.4654 (0.3754) --
1995-Institutional Shares........... 9.24 0.6423 0.7610 -- 1.4033 (0.6433) --
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 10.00 0.4648 (0.7617) -- (0.2969) (0.4648) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
---------------------------------------------------
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return(k) net assets
--------------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.7244) $(0.1500) $9.85 5.98% 0.45%
1996-Administrative Shares(l)....... -- -- -- (0.4080) (0.0700) 9.84 3.56(f) 0.70(b)
1996-Service Shares(l).............. -- -- -- (0.3754) 0.0900 9.86 4.90(f) 0.95(b)
1995-Institutional Shares........... -- -- -- (0.6433) 0.7600 10.00 15.72 0.45
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... -- -- -- (0.4648) (0.7617) 9.24 (3.00) 0.45(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
-------------------------
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 6.51% 414.20% $72,061 0.83% 6.13%
1996-Administrative Shares(l)....... 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service Shares(l).............. 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional Shares........... 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
</TABLE>
- ------------------
(a)Calculated based on the average shares outstanding methodology.
(b)Annualized.
(c)Class A share activity commenced on May 15, 1995.
(d)Includes the effect of mortgage dollar roll transactions.
(e)Administration share activity commenced on April 15, 1993.
(f)Not annualized.
(g)Commencement of operations.
(h)GS Short Duration Government Fund Administration shares were redeemed in
full on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
(i)Service share activity commenced on April 10, 1996.
(j)Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
(k)Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and not sales
charges. For Class A shares only, total return would be reduced if a sales
charge were taken into account.
(l)Administration and Service share activity commenced on February 28, 1996 and
March 13, 1996 respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the GS Adjustable Rate Government
Fund, GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS
Core Fixed Income Fund:
We have audited the accompanying statements of assets and liabilities of the
GS Adjustable Rate Government Fund, GS Short Duration Government Fund, GS Short
Duration Tax-Free Fund and GS Core Fixed Income Fund (portfolios of Goldman
Sachs Trust, a Massachusetts Business Trust) including the statements of
investments, as of October 31, 1996, and the related statements of operations,
the statements of changes in net assets and the financial highlights for each of
the periods presented. These financial statements and the financial highlights
are the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the GS Adjustable Rate Government Fund, GS Short Duration Government
Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund as of
October 31, 1996, the results of their operations and the changes in their net
assets and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 12, 1996
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
-------------------------------------------------------------------
Annual Report
October 31, 1996
GS Adjustable Rate Government Fund
GS Short Duration Government Fund
GS Short Duration Tax-Free Fund
GS Core Fixed Income Fund
Goldman
Sachs
GST/AR/1096(INST)
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning each Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with a
robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and Treasury
prices remained in a narrow trading range throughout the summer and fall. During
September and October, however, interest rates retreated and the bond market
strengthened. The rebound was primarily due to evidence of a slowing U.S.
economy and strong demand for Treasury bonds from the central banks of China,
Japan and Germany, which accelerated their purchases dramatically toward the end
of the period. By the end of October, prices of 30-year Treasuries broke out of
the trading range that had persisted for over six months.
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 24
Goldman Sachs Government Income Fund 4 Notes to Financial Statements 28
Goldman Sachs Global Income Fund 11 Financial Highlights 36
Goldman Sachs Municipal Income Fund 17
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Treasuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Retail Treasury Bar Chart
<S> <C> <C>
10/31/95 10/31/96
3-Month 5.49% 5.13
6-Month 5.55 5.26
1 5.54 5.4
2 5.61 5.73
3 5.68 5.86
5 5.81 6.07
10 6.02 6.34
30 6.33 6.64
</TABLE>
Source: Bloomberg, L.P.
The yield curve steepened on the short end and shifted upward on the longer
end.
The Dollar's Climb Versus the Mark and the Yen
Continued
During the period under review, the U.S. dollar appreciated against both the
Deutsche mark and Japanese yen, rising more against the yen. The dollar
strengthened relative to the mark as the Bundesbank progressively edged rates
lower during the period to stimulate the sluggish German economy, reaching a 15-
month high against the mark in May. By October, the dollar had retreated
slightly as further Bundesbank cuts became less likely. In contrast, the
dollar's climb against the yen continued through the end of October, when it
reached a three-and-a-half-year high. The yen's weakness was primarily due to
the softness in Japan's economic recovery. However, in November the yen rose
against the dollar as Japanese officials made it clear that they believed the
yen had weakened enough.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a Republican-
controlled Congress, which points toward continued budgetary restraint.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and we
look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head, Goldman Sach Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head, Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Government Income Fund seeks to provide shareholders with
a high level of current income consistent with safety of principal. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
U.S. government securities and in repurchase agreements collateralized by such
securities. The fund may also invest in securities of nongovernmental issuers,
including asset-backed securities, privately issued mortgage-backed securities
and corporate debt obligations. Such securities will be rated triple-A at the
time of investment or, if unrated, deemed to be of comparable quality by Goldman
Sachs Asset Management, the fund's investment adviser. The fund's interest rate
sensitivity is expected to be comparable to that of a five-year bond.
Mortgage-Backed Securities Strengthened Amid Slowing Prepayments
During the 12-month period under review, the performance of mortgage-backed
securities (MBSs) was closely linked to the changing direction of interest
rates. From November 1995 through February 1996, declining interest rates
spurred homeowners to switch to long-term, fixed rate mortgages, resulting in a
high level of refinancing activity and widening spreads between MBSs and
Treasuries. Long-term interest rates began to rise at the end of January and
prepayments peaked in February. Throughout the spring, the mortgage-backed
securities market strengthened due to declining prepayment fears, and adjustable
rate mortgages (ARMs) and fixed rate mortgage pass-throughs continued to do well
when rates stabilized during the summer. However, the direction of interest
rates reversed course beginning in September, and by the end of October, rates
on 30-year mortgages had slipped below 8%. The decline increased some
homeowners' incentive to refinance, but rates continued to be significantly
above their levels of a year earlier and "seasoned" mortgage-backed securities
(securities backed by older mortgages that typically have lower prepayment risk)
continued to do well. In addition, the market's technical balance remained
strong, with prices supported by healthy investor demand coupled with no
significant new issuance.
Performance Review: Fund Performed Well Due to Mortgage-and Asset-Backed
Securities
During the 12-month period ended October 31, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to favorable results from the fund's positions in collateralized
mortgage obligations (CMOs) and asset-backed securities (ABSs). The fund's Class
B shares, which opened on May 1, 1996 when interest rates were still rising,
also achieved positive returns.
The fund performed well compared with its peers. The fund's Class A shares
ranked eighth out of 124 intermediate U.S. government income funds based on
total return for the 12 months ended October 31, 1996, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they were in
existence less than 12 months.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
--------- ---------
<S> <C> <C>
Total Return (based on net asset value) 5.80% 4.85%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 6.56% 3.01%
- --------------------------------------------------------------------------------
Return From Price Depreciation/ -0.76% 1.84%
Appreciation
- --------------------------------------------------------------------------------
Total Return of Lehman Brothers
Government/Mortgage Index 5.74% 5.12%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.36 $14.37
- --------------------------------------------------------------------------------
NAV Change -$0.11 +$0.26
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Portfolio Composition and Investment Strategies
During the period under review, we significantly reduced the portfolio's
holdings of U.S. Treasuries in favor of mortgage-backed and asset-backed
securities.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Agency Debentures 0.4%
Repos/Cash Equivalents 1.1%
U.S. Treasuries 16.2%
Asset-Backed Securities 19.9%
CMOs 22.0%
Fixed Rate Mortgage Pass-Throughs 40.4%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Fixed Rate Mortgage Pass-Throughs. The fund's single largest position as of
October 31, 1996 was in fixed rate mortgage pass-throughs at 40.4% (nearly
unchanged from a year ago), which was overweighted relative to the Index
allocation of 36.4%. Overall, the fund benefited from the sector's incremental
yield compared with similar-duration Treasury securities. Although pass-throughs
suffered from a high rate of mortgage prepayments when the period began, the
sector improved when interest rates began to rise at the end of January.
During the period, we occasionally used mortgage dollar rolls, which helped
the portfolio to benefit from short-term supply and demand imbalances in the
mortgage settlement process. (Mortgage dollar rolls refer to transactions that
involve selling mortgage securities owned by the fund and simultaneously
contracting to buy back similar mortgage securities with the same coupon on a
specified future date -- usually one month forward.) At all times, we "cover"
the mortgage dollar rolls by keeping cash or high-grade liquid debt securities
equal to the dollar amount of the forward commitment in a segregated account
with the fund's custodian.
. CMOs. As of October 31, the fund's allocation in CMOs was 22.0%, up from
7.7% a year ago. These securities included sequential-pay/support CMOs (13.0%),
a position we initiated in February, which offered relative stability and
attractive spreads compared with Treasuries. We cut the portfolio's allocation
in planned amortization class (PAC) CMOs to 5.5% from 6.3% a year ago in favor
of other sectors that offered greater relative value. We also held very small
positions in inverse floaters, interest-only (IO) and principal-only (PO)
securities, discussed below.
. Asset-Backed Securities. The portfolio's ABS holdings, which were primarily
issues backed by credit card and automobile debt, represented 19.9% of the
portfolio, up from 14.3% a year ago. This position consisted of short-term,
triple-A-rated issues that offered attractive incremental yield over similar-
duration Treasuries. The ABS market began the period on a weak note, as concerns
surrounding credit card delinquencies impacted the sector during November and
December 1995. From January through the end of the period, these uncertainties
faded and the sector strengthened. Spreads between ABSs and Treasuries
tightened, as the ABS market benefited from strong investor demand from a
variety of sources: foreign banks, insurance companies and an increasing number
of corporate and CMO "crossover" accounts. ABS supply was robust as well, with a
wide variety of innovative new issues across a range of maturities, collateral
types and structures, but demand kept pace.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. We reduced the
fund's allocation in U.S. Treasuries and repurchase agreements/cash equivalents
to take advantage of securities in other sectors that offered better relative
value. As of October 31, Treasuries accounted for 16.2% of the portfolio,
significantly
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
underweighted relative to the Index (55.4%), while cash equivalents were a 1.1%
position.
. Agency Debentures. During the period, we reduced the fund's holdings in
agency debentures (bonds issued by agencies of the U.S. government) to a scant
0.4% because we determined that the sector's tight spreads compared with
Treasuries did not offer attractive return potential.
. Issuer Composition. The breakdown of the portfolio's mortgage-backed
security holdings by issuer was 23.3% in Federal National Mortgage Association
(FNMA) issues, 14.0% in Government National Mortgage Association (GNMA) issues,
9.8% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 15.3% in
private issues.
. Credit Quality. As of October 31, U.S. government and agency securities
accounted for 66.6% of the portfolio, triple-A-rated securities were 32.3% of
the portfolio and cash equivalents were 1.1% of the portfolio.
. Prudent Use of Derivatives. As noted, sequential-pay/ support and PAC CMOs,
which are generally considered to be lower risk derivative instruments,
accounted for 13.0% and 5.5% of the portfolio, respectively. The portfolio also
held inverse floaters (1.3%) for their potential to add incremental yield, as
well as a "combo" consisting of minor positions in interest-only and principal-
only CMOs. When IOs are held along with POs, they can produce a position with a
similar risk profile as a fixed rate mortgage pass-through but with a higher
yield. In addition, we used futures as a tool to help manage the portfolio's
duration.
. Duration. The fund's duration as of October 31 was 4.5 years, in line with
the Index. We carefully manage the fund's duration to approximate that of the
Index rather than attempting to make interest rate predictions. Instead, we seek
excess return over the Index through our sector weightings and specific security
selection.
Fund Outlook
We have a cautiously optimistic view of the mortgage pass-through market in
general. Certain segments continue to be attractively valued, and we believe
that our current seasoned holdings should fare well relative to other sectors if
interest rates continue to fall and prepayments increase. We have a neutral
outlook for the CMO sector in general, which we believe does not offer
significant value over mortgage pass-throughs. However, we continue to identify
specific CMO securities that present attractive investment opportunities. In the
ABS market, significant spread premiums relative to comparably rated corporate
securities are expected to continue to buoy investor demand. In addition, Fed
surveys indicate that banks have been tightening their underwriting standards
over the last three quarters, which should help to allay lingering investor
concerns surrounding consumer credit card delinquencies. During the coming year,
we will continue to actively allocate the portfolio's assets among the various
fixed income sectors as their relative value changes.
Distribution Policy
The fund's Class A shares paid out monthly distributions of approximately
$0.92 per share during the 12-month period ended October 31, 1996. From their
inception on May 1, 1996 through October 31, 1996, the fund's Class B shares
paid out approximately $0.41 per share. Dividends are declared daily and paid on
a monthly basis. The fund distributes substantially all of its taxable income,
as is required for all investment companies.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
We thank you for your support and look forward to continuing to serve your
investment needs in the future.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Erica Adelberg
Erica Adelberg
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Government Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Government Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares), is
compared with its benchmarks--the Lehman Brothers Mutual Fund
Government/Mortgage Index ("Lehman Gov't/MBS Index") and the Lehman Brothers
Mutual Fund General U.S. Government Index ("Lehman U.S. Gov't Index"). All
performance data shown represents past performance and should not be considered
indicative of future performance which will fluctuate as market conditions
change. The investment return and principal value of an investment will
fluctuate with changes in market conditions so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
HYPOTHETICAL $10,000 INVESTMENT
Class A/(a)/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Lehman
(no sales (w/sales Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3/1/93 $10,000 $ 9,550 $10,000 $10,000
10/31/93 10,506 10,033 10,584 10,699
10/31/94 10,192 9,734 10,267 10,220
10/31/95 11,710 11,183 11,819 11,792
10/31/96 12,392 11,834 12,500 12,395
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares Lehman Lehman
(no redemption (w/redemption Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
10/31/96 10,485 9,985 10,512 10,508
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(b)/
- -----------------------------------------------------------------------------
<S> <C> <C>
Class A, excluding sales 5.80% 6.72%
charge
- -----------------------------------------------------------------------------
Class A, including sales 1.06% 5.41%
charge
- -----------------------------------------------------------------------------
Class B, excluding
redemption charge N/A 4.85%/(c)/
- -----------------------------------------------------------------------------
Class B, including
redemption charge N/A (0.15%)/(c)/
- -----------------------------------------------------------------------------
</TABLE>
/a/ For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
/b/ Class A and Class B shares commenced operations February 10, 1993 and May 1,
1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
8
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--55.5%
Federal Home Loan Mortgage Corp.(FHLMC)--10.3%
$ 3,000,000 7.50% TBA 30-Yr/(a)/ $ 3,010,290
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--16.5%
$ 989,360 7.00 02/01/26 $ 970,493
831,317 8.50 07/01/26 860,147
168,683 8.50 09/01/26 174,533
1,000,000 7.00 TBA 30-Yr/(a)/ 1,034,680
2,000,000 8.00 TBA 30-Yr/(a)/ 2,040,000
- --------------------------------------------------------------------------------
$ 5,079,853
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA)--14.1%
$ 939,735 7.00% 08/15/23 $ 927,115
353,966 9.00 TBA 30-Yr/(a)/ 377,748
1,363,733 7.50 TBA 30-Yr/(a)/ 995,228
2,000,000 8.00 TBA 30-Yr/(a)/ 2,045,000
- --------------------------------------------------------------------------------
$ 4,345,091
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--26.4%
Interest Only--0.7%
FNMA Interest-Only Stripped Security, Series 151, Class 2
$ 712,363/(b)/ 9.50% 07/25/22 $ 225,926
- --------------------------------------------------------------------------------
Inverse Floater--1.3%
FNMA Remic Trust, Series 1992-62, Class S
404,038 10.00%/(c)/ 05/25/99 413,699
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC)--5.4%
FNMA Remic Trust, Series 1993-160, Class PG
1,000,000 6.30% 09/25/18 987,500
GE Capital Mortgage Services, Inc. Series 1994-11, Class A1
693,546 6.50 03/25/24 694,191
- --------------------------------------------------------------------------------
$ 1,681,691
- --------------------------------------------------------------------------------
Principal Only--1.4%
FNMA Remic Trust, Series G-35, Class N
575,000/(e)/ 5.28% 10/25/21 415,369
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--2.9%
Citicorp Mortgage Securities Series 1993-11, Class A6
907,177 6.25% 09/25/08 880,207
- --------------------------------------------------------------------------------
Support--13.2%
Bear Stearns Mortgage Securities, Inc., Series 1996-7, Class AD
$ 988,793 6.50% 11/27/23 900,395
GE Capital Mortgage Services, Inc. Series 1994-10, Class A22
996,703 6.50 03/25/24 874,966
Housing Securities, Inc. Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,370,928
Prudential Securities Series 1995-2, Class A
916,596 5.76 11/15/15 918,243
- --------------------------------------------------------------------------------
$ 4,064,532
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,681,424
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $16,959,996) $17,106,368
- --------------------------------------------------------------------------------
Asset-Backed Securities--16.6%
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
$ 720,000 6.23% 06/15/03 $ 717,746
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 593,870
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 629,077
MBNA Master Credit Card Trust, Series 1991-1, Class A
245,000 7.75 10/15/98 245,688
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
304,971 6.55 11/20/01 306,780
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
540,182 6.85 06/15/01 544,666
Premier Auto Trust, Series 1993-6, Class A2
403,341 4.65 11/02/99 398,675
Premier Auto Trust, Series 1994-1, Class A3
310,533 4.75 02/02/00 308,592
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 483,000
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 875,583
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $5,174,476) $ 5,103,677
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
===============================================================================
<S> <C> <C> <C>
U.S. Government Agency Obligations--0.4%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 110,000 8.20% 01/16/98 $ 110,636
- -------------------------------------------------------------------------------
Total Government Agency Obligations
(Cost $113,163) $ 110,636
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--15.9%
United States Treasury Bonds/(d)/
$ 360,000 8.75% 05/15/17 $ 440,550
280,000 8.75 08/15/20 345,668
United States Treasury Notes/(d)/
2,210,000 7.38 11/15/97 2,249,360
700,000 5.88 04/30/98 702,184
700,000 6.88 08/31/99 717,500
United States Treasury Principal-Only Stripped Securities/(e)/
230,000 6.41 11/15/04 138,344
1,550,000 6.95 05/15/20 307,570
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $4,910,644) $ 4,901,176
- -------------------------------------------------------------------------------
Repurchase Agreement--27.0%
Joint Repurchase Agreement Account/(d)/
$8,400,000 5.58% 11/01/96 $ 8,400,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $8,400,000) $ 8,400,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $38,555,545/(f)/) $38,632,147
===============================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(/g/) Month Gain
- -------------------------- ------------- ----------------- -----------
Euro Dollars 3 September 1997 $2,850
5 Year U.S. Treasury Notes 4 December 1996 3,000
10 Year U.S. Treasury Notes 2 December 1996 8,313
U.S. Long Term Bond 14 December 1996 60,437
------------
$74,600
===============================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 260,565
Gross unrealized loss for investments in which cost exceeds
value (195,408)
- -------------------------------------------------------------------------------
Net unrealized gain $ 65,157
===============================================================================
</TABLE>
/(a)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally +/-2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(b)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(c)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(d)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(e)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(f)/The aggregate cost for federal income tax purposes is $38,566,990.
/(g)/Each 10-Year U.S. Treasury Note, 5-Year Treasury Note and U.S. Treasury
Bond contract represents $100,000 in notional par value. Each Euro Dollar
contract represents $1,000,000 in notional par value. The total notional
amount and market value are $5,000,000 and $2,936,825, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Global Income Fund seeks high total return, composed of
both current income and capital appreciation. The fund is permitted to invest in
government and other high-quality (double-A or better) fixed income securities
issued in the United States and in foreign markets. The fund has the additional
flexibility to invest in sovereign (government) debt rated single-A (or better)
or deemed to be of comparable quality. The maximum duration of the fund is 7.5
years and its approximate interest rate sensitivity is comparable to that of a
six-year bond. Under normal market conditions, the fund's neutral position is to
be fully hedged into U.S. dollars to best serve the needs of U.S. shareholders.
However, the fund may engage in currency transactions, both to hedge exchange
rate risk and to seek to enhance returns.
European Bond Markets Achieved the Strongest Performance While Treasuries Lagged
During the 12 months ended October 31, 1996, global bonds generally
performed well, particularly during the second half of the period, with a number
of markets achieving extremely strong returns. Most international bond markets
have outperformed the United States, thus illustrating the benefits of
diversification.
The European higher yielding bonds (Italy, Spain and Sweden) were the best
performers of all the major bond markets during the period, while most of the
other European bond markets achieved good, albeit more modest, returns (hedged
into U.S. dollars). In general, European bond markets benefited from an
accommodative environment of sluggish economic growth and low inflation.
European bonds were also buoyed by tighter fiscal policies, as several European
countries attempted to reduce their deficits enough to qualify for European
monetary union. To counter less government spending, several countries (notably
Germany) attempted to stimulate economic growth by lowering their interest
rates.
The total return of Japanese Government Bonds (JGBs) during the period
under review was lower than those of most European bond markets but still
favorable (hedged into U.S. dollars). After lackluster performance during the
first half of the period amid fears of accelerating growth, JGBs experienced a
volatile, halting recovery when Japan's economy showed signs of weakening during
the summer and fall of 1996.
U.S. Treasuries underperformed all of the major bond markets. Though
Treasuries performed well in November and December 1995, accelerating economic
growth triggered a sharp correction from January through May 1996. The U.S. bond
market partially recovered when it rallied during September and October, but it
continued to lag. Within the dollar bloc, Canadian bonds did particularly well
during the period, reflecting a continuing easing of monetary policy by the Bank
of Canada, a strong currency and a relatively weak economy.
Performance Review: Favorable Country Allocations Benefited Fund Performance
During the period under review, the Goldman Sachs Global Income Fund's
Class A and Institutional shares outperformed the fund's benchmark, the J.P.
Morgan Global Government Bond Index (hedged into U.S. dollars) (the "Index").
The Index covers 14 major bond markets and reflects their currency exposures.
That favorable performance relative to the benchmark was primarily due to the
fact that during most of the period the fund was overweighted in European bonds
and moderately underweighted in U.S. Treasuries.
The fund's Class B shares, which began operations on May 1, 1996 while U.S.
interest rates were still rising, underperformed the benchmark.
- --------------------------------------------------------------------------------
11
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B* Institutional
(10/31/95- (5/1/96- (10/31/95-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net asset 11.05% 6.24% 11.55%
value)
- --------------------------------------------------------------------------------
Return From Monthly 10.50% 2.68% 11.07%
Distributions
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.55% 3.56% 0.48%
- --------------------------------------------------------------------------------
Total Return of J.P. Morgan 10.06% 6.53% 10.06%
Global Government Bond Index
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.53 $14.53 $14.52
- --------------------------------------------------------------------------------
NAV Change +$0.08 +$0.50 +$0.07
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Though the portfolio is typically fully hedged into U.S. dollars, we
occasionally employed currency strategies during the period. These included the
initiation of a long position in the U.S. dollar against the yen and European
currencies, which helped the fund's performance when the dollar strengthened
during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Sweden 1.9%
Denmark 2.5%
Spain 2.6%
Netherlands 2.6%
Ireland 2.7%
Italy 5.7%
U.K. 6.3%
Japan 9.0%
Germany 15.0%
Cash 15.4%
U.S. 36.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Dollar Bloc. As of October 31, 1996, U.S. Treasuries were the fund's sole
allocation in the dollar bloc countries. However, during the period, we
intermittently held positions in Canadian and Australian bonds.
U.S. During most of the period, the portfolio was underweighted in U.S.
Treasuries relative to the benchmark, which worked to its advantage when the
U.S. market was impacted by rising interest rates. In September and October, we
raised the fund's Treasury allocation, and the shift helped performance when the
Treasury market rallied during those months. As of October 31, the portfolio
held a 36.3% Treasury allocation, in line with the benchmark.
Other Dollar Bloc. The fund began the period overweighted in Canada (7.7%
as of October 31, 1995). However, we reduced the position in January and
liquidated the remainder in May on the expectation that Canada's current round
of interest rate easing had run its course, which proved not to be the case. In
July, we reestablished an overweighting in Canada, then sold the position the
following month after the market rallied. During September and October, the
Canadian bond market rose again on weaker economic news, but the fund did not
participate. Though the fund was not invested in Australia as of October 31, it
held an overweighted position at times during the period, which contributed to
performance when the market strengthened in anticipation of easing monetary
policy.
. Europe. The fund benefited from being overweighted in Europe during much of
the period. After we sold part of the allocation in the region at a profit, the
fund was slightly underweighted in European bonds relative to the Index, 39.3%
versus 43.9%, as of October 31.
Germany. Germany's economic growth was anemic during the first half of the
period, with real GDP declining during the fourth quarter of 1995 and the first
quarter of 1996. To help stimulate growth amid a tight fiscal policy, the
Bundesbank aggressively cut interest rates, which proved only modestly
successful as high unemployment and weak manufacturing activity continued to
persist. To
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
participate in Germany's favorable bond market environment, we significantly
overweighted our holdings at 15.0% (versus 9.6% for the Index), preferring
Germany over France in the core European markets.
Italy, Spain and Sweden. During the period, we increased the fund's
allocation in the higher yielding European markets, then trimmed its exposure
after these markets became less favorably valued. In January, we initiated a
position in Italy, which was attractive due to its tight fiscal policy, expected
interest rate cuts and better than anticipated inflation data. As of October 31,
Italy was overweighted relative to the benchmark, 5.7% versus 5.2%, and it
significantly benefited the fund as it proved to be the best performing bond
market during the period. Spain, another top-performing bond market, was cut to
a 2.6% position as of October 31 after we determined the market fully reflected
expectations that Spain would meet the criteria for European monetary union. We
also benefited by establishing and maintaining an overweighted position in
Sweden during most of the period, then subsequently reduced the position to
1.9%, nearly in line with the benchmark.
U.K. The U.K.'s economy was sluggish during much of the period, but by
September economic activity began to rebound, particularly in the consumer
sector. In anticipation of renewed inflationary pressures, as well as political
uncertainty related to the forthcoming general election, we sold approximately
half of the portfolio's U.K. position during the period. As of October 31, the
portfolio's 6.3% U.K. weighting was in line with the benchmark.
Ireland, the Netherlands and Denmark. Small, new positions added during the
period included Ireland (2.7%), the Netherlands (2.6%) and Denmark (2.5%). Like
the rest of Europe, these countries had attractive bond market environments, and
they contributed to the fund's performance. We believe Ireland is particularly
attractive as it has an exemption on its debt level, enabling it to join
European monetary union (EMU) on the first round.
France. Over the course of the year we reduced the fund's position in
France, finally liquidating our remaining holdings in July, in favor of German
bonds that we believed were more attractively valued. Unfortunately, this
strategy was not successful when France subsequently outperformed Germany.
Belgium. Belgium, a 3.5% allocation last year, performed well and we
trimmed the position over the course of the year. In October, we sold the fund's
remaining holdings in Belgium in favor of the Netherlands, which our analysis
determined offered greater total return potential.
. Japan. JGBs accounted for 9.0% of the portfolio, significantly
underweighted compared with the benchmark (15.1%), which benefited the fund when
JGBs were weak during the first half of the period, but did not work in its
favor when JGBs rebounded in the second half of the year. However, the fund
partially participated in the Japanese bond rally through a call option on JGBs,
as well as its direct investments.
. Cash Equivalents. The fund's allocation in cash equivalents was 15.4%,
approximately the same as a year ago (16.4%). We anticipate reducing the
position as we identify attractive investment opportunities.
. Credit Quality. The portfolio was 100% invested in triple-A-rated
securities as of the end of the period.
. Duration. As of October 31, the fund's duration of 4.4 years was
approximately a half year lower than that of the benchmark. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's net asset value [NAV] should move in relation
to interest rate fluctuations.) The duration difference was primarily due to the
portfolio's cash equivalent position and its underweighting in Japan.
- --------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
Fund Outlook
Going forward, we expect European bonds to continue to outperform U.S.
Treasuries, in terms of both capital gains and yields. In general, European
economies are weaker than that of the United States, with slow growth, high
unemployment and tight fiscal policies. Germany's economic recovery appears
intact, which makes us somewhat more cautious on German bonds at current low
yield levels. Nevertheless, German bonds still offer excess returns over cash,
provided German monetary policy remains on hold. Longer term, we favor the U.K.
gilt, as we believe the market has overreacted to the U.K.'s lack of
participation in European monetary union and its recent political uncertainty.
We also have a positive longer term view of the higher yielding markets of Italy
and Spain, though they have not offered investors a sufficient risk premium in
recent months. As of this writing, we are neutral on U.S. Treasuries, but we
will be watching for signs that the U.S. Federal Reserve expects to preempt any
potential inflationary pressure with tighter monetary policy in the near future.
Our analysis indicates that after their spectacular run, Canadian bonds do not
offer attractive relative value, but we are considering reestablishing a
position in Australia, which is experiencing slowing growth and waning
inflationary pressures. We expect to remain underweighted in Japan because we
anticipate that its economic recovery will resume despite recent weakness,
opening the possibility for monetary tightening. With JGBs currently yielding
just under 3%, our analysis indicates that we would not be adequately
compensated for their level of risk.
Distribution Policy
During the 12-month period under review, the fund's Class A and
Institutional shares paid out distributions of $1.43 and $1.50 per share,
respectively. From their inception on May 1, 1996 through October 31, 1996, the
fund's Class B shares paid out $0.36 per share. The fund declares and pays
dividends on a monthly basis. The fund distributes substantially all of its
taxable income, as is required for all investment companies.
As always, we will utilize the resources of Goldman, Sachs & Co.'s London-
based Economics Research Group for economic and market trend analysis as we
continue to seek out attractive global bond investment opportunities. We
appreciate your investment in the Goldman Sachs Global Income Fund and look
forward to continuing to help you achieve your investment goals.
Sincerely,
/s/ Stephen C. Fitzgerald
Stephen C. Fitzgerald
Portfolio Manager, Fixed Income Investments
/s/ Andrew F. Wilson
Andrew F. Wilson
Portfolio Manager, Fixed Income Investments
/s/ Gareth I. Evans
Gareth I. Evans
Portfolio Manager, Currency
Goldman Sachs Global Income Fund
London, November 29, 1996
- --------------------------------------------------------------------------------
14
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Global Income Fund (assuming both the maximum
sales charge of 4.5% and no sales charge for the Class A shares, the first year
maximum redemption fee of 5% and no redemption fee for the Class B shares and
net asset value for the Institutional shares) is compared with its benchmark--
the J.P. Morgan Global Government Bond Index hedged to U.S. Dollars ("J.P.
Morgan GGB Index-$ Hedged"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
HYPOTHETICAL $10,000 INVESTMENT
[CHART APPEARS HERE]
Class A Shares (a)
<TABLE>
<CAPTION>
Class A Shares Class A Shares J.P. Morgan GGB Index-
(no sales charge) (w/sales charge) $ Hedged
<S> <C> <C> <C>
09/01/91 $10,000 $9,500 $10,000
10/31/91 $10,145 $9,688 $10,263
10/31/92 $11,034 $10,538 $11,156
10/31/93 $12,220 $11,670 $12,509
10/31/94 $11,672 $11,146 $12,051
10/31/95 $13,432 $12,827 $13,903
10/31/96 $14,921 $14,250 $15,306
</TABLE>
Class B Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares J.P. Morgan GGB
(no redemption charge) (w/redemption charge) Index-$ Hedged
<S> <C> <C> <C>
05/01/96 $10,000 $10,000 $10,000
10/31/96 $10,624 $10,124 $10,653
</TABLE>
Institutional shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional J.P. Morgan GGB
Shares Index-$ Hedged
<S> <C> <C>
08/01/95 $10,000 $10,000
10/31/95 $10,442 $10,351
10/31/96 $11,651 $11,395
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
Average Annual Total Return
----------------------------------------------------
One Year Five Year Since Inception(b)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, excluding
sales charge 11.05% 8.01% 8.02%
- ---------------------------------------------------------------------------
Class A, including
sales charge 6.08% 7.02% 7.08%
- ---------------------------------------------------------------------------
Class B, excluding
redemption charge N/A N/A 6.24%(c)
- ---------------------------------------------------------------------------
Class B, including
redemption charge N/A N/A 1.24%(c)
- ---------------------------------------------------------------------------
Institutional Class 11.55% N/A 12.95%
- ---------------------------------------------------------------------------
</TABLE>
(a) For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations of
the Class A shares.
(b) The Class A, Class B and Institutional shares commenced operations August 2,
1991, May 1, 1996 and August 1, 1995, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount (a) Rate Date Value
================================================================================
<S> <C> <C> <C>
Debt Obligations--83.2%
British Pound Sterling--6.2%
United Kingdom Treasury
BPS 9,000,000 8.50% 12/07/05 $ 15,573,120
- --------------------------------------------------------------------------------
Danish Krone--2.5%
Kingdom of Denmark
DKK 33,000,000 9.00% 11/15/00 $ 6,415,484
- --------------------------------------------------------------------------------
Deutschemark--14.8%
Federal Republic of Germany
DEM 8,000,000 7.12% 12/20/02 $ 5,742,980
7,500,000 6.75 07/15/04 5,245,292
33,000,000 6.50 10/14/05 22,549,455
3,500,000 7.38 01/03/05 2,528,510
Treuhandanstalt
2,000,000 6.50 04/23/03 1,388,437
- --------------------------------------------------------------------------------
$ 37,454,674
- --------------------------------------------------------------------------------
Irish Pound--2.7%
Republic of Ireland
IEP 4,000,000 8.00% 10/18/00 $ 6,905,421
- --------------------------------------------------------------------------------
Italian Lira--5.4%
Republic of Italy
ITL 19,000,000,000 10.50% 11/01/00 $ 13,851,419
- --------------------------------------------------------------------------------
Japanese Yen--8.9%
International Bank for Reconstruction &
Development
JPY 700,000,000 6.75% 06/18/01 $ 7,536,474
Japanese Developmental Bank
1,400,000,000 6.50 09/20/01 15,019,116
- --------------------------------------------------------------------------------
$ 22,555,590
- --------------------------------------------------------------------------------
Netherlands Guilder--2.5%
Dutch Government Bond
NLG 10,000,000 7.00% 06/15/05 $ 6,350,937
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 500,000,000 10.30% 06/15/02 $ 4,448,842
Kingdom of Spain
200,000,000 10.15 01/31/06 1,804,930
- --------------------------------------------------------------------------------
$ 6,253,772
- --------------------------------------------------------------------------------
Swedish Krona--1.8%
Kingdom of Sweden
SEK 32,000,000 6.00% 02/09/05 $ 4,489,558
- --------------------------------------------------------------------------------
United States Dollar--35.9%
United States Treasury Notes
USD 10,000,000 6.88% 07/31/99 $ 10,243,700
18,000,000 5.25 01/31/01 17,507,880
17,000,000 6.38 03/31/01 17,196,520
8,200,000 6.25 02/15/03 8,229,438
10,000,000 7.88 11/15/04 10,975,000
12,000,000 6.50 08/15/05 12,125,640
14,000,000 7.00 07/15/06 14,616,840
- --------------------------------------------------------------------------------
$ 90,895,018
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $206,293,080) $210,744,993
- --------------------------------------------------------------------------------
Short-Term Obligations--15.4%
Euro-Time Deposit
USD 38,987,507 5.50% 11/01/96 38,987,507
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $38,987,507) $ 38,987,507
- --------------------------------------------------------------------------------
Total Investments
(Cost $245,280,587/(b)/ ) $249,732,500
================================================================================
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $6,414,087
Gross unrealized loss for investments in which cost
exceeds value (2,188,683)
- --------------------------------------------------------------------------------
Net unrealized gain $4,225,404
================================================================================
</TABLE>
/(a)/ The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
BPS = British Pound Sterling ITL = Italian Lira
NLG = Netherlands Guilder JPY = Japanese Yen
DKK = Danish Krone ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
IEP = Irish Pound USD = United States Dollar
/(b)/ The aggregate cost for federal income tax purposes is $245,507,096. The
percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Municipal Income Fund seeks to provide a high level of
current income that is exempt from regular federal income tax, consistent with
the preservation of capital. In pursuit of its objective, the fund invests in a
diversified portfolio of municipal securities with a weighted average credit
quality of double-A or better. The fund buys only investment-grade securities
or, if unrated, deemed to be of comparable quality. Under normal interest rate
conditions, the fund's duration is expected to be within one year of its
benchmark, the Lehman Brothers 15-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a 15-year bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a 15-year municipal bond (as
calculated from data provided by Municipal Market Data, an independent municipal
market information provider) rose approximately 0.50%, while yields declined
from 5.35% on October 31, 1995 to 5.30% on October 31, 1996.
The municipal bond market began the period under review on a weak note. Tax
reform uncertainty impacted investor demand during November and December 1995,
while municipal bond supply was high due to seasonably heavy year-end issuance
and relatively low interest rates. The market environment improved during
January and February 1996, when fading tax reform concerns helped to revive
investor interest in the sector and issuance declined. From March through the
end of the period, the market's technical balance was generally healthy, though
occasional spikes in supply periodically overwhelmed demand and briefly impacted
performance. The largest of these surges occurred in June when supply rose to
its highest level since late 1995, but subsequently both new issuance and
secondary supply fell dramatically from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (who control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[YIELD CURVE LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year of Maturity 10/31/96 10/31/95
---------------- -------- --------
<S> <C> <C>
1997 3.6 3.9
1998 3.9 4.1
1999 4.15 4.2
2000 4.3 4.3
2001 4.4 4.4
2002 4.5 4.5
2003 4.6 4.6
2004 4.7 4.7
2005 4.8 4.8
2006 4.9 4.95
2007 5 5.05
2008 5.1 5.15
2009 5.2 5.25
2010 5.25 5.35
2011 5.3 5.4
2012 5.35 5.45
2013 5.4 5.5
2014 5.4 5.55
2015 5.45 5.55
2016 5.45 5.55
2017 5.45 5.55
2018 5.5 5.55
2019 5.5 5.6
2020 5.5 5.6
2021 5.5 5.6
2022 5.5 5.6
2023 5.5 5.6
2024 5.5 5.6
2025 5.5 5.6
</TABLE>
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review: Term Structure, Sector Weightings and Security Selection
Contributed to the Fund's Favorable Performance
During the period under review, the fund's Class A shares outperformed
their benchmark, the Lehman Brothers 15-Year Municipal Bond Index (the "Index").
The fund's Class B shares, which opened on May 1, 1996 while interest rates were
still rising, also performed well but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We are pleased to report that the fund's Class A shares outperformed most of
their peers. For the 12 months ended October 31, 1996, Class A shares ranked in
the top 20% of general municipal debt funds (36 out of 228) based on total
return, according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results. Class B shares were not included because they
were not in existence during the entire 12-month period.)
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
-------- --------
<S> <C> <C>
Total Return (based on net asset value) 6.13% 4.40%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 4.72% 1.98%
- --------------------------------------------------------------------------------
Return From Price Appreciation 1.41% 2.42%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal
Bond Index 5.99% 4.80%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.37 $14.37
- --------------------------------------------------------------------------------
NAV Change +$0.20 +$0.34
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
. The portfolio's neutral term structure is "credit-barbelled," emphasizing
high-quality bonds with maturities of 20 to 30 years on the long end of the
yield curve and lower quality bonds with four to ten year maturities on the
short end of the curve. However, during the period, we regularly adjusted the
term structure to take advantage of changing market conditions. For example,
when the municipal bond yield curve flattened during September and the beginning
of October, we sold securities in the 20- to 30-year range in favor of 15- to
20-year bonds. In mid-October, the yield curve steepened as we anticipated, and
the fund's 15- to 20-year bonds outperformed 20- to 30-year bonds. By the end of
the month, when longer maturity bonds had become more attractively valued, we
reestablished a more evenly distributed maturity structure.
. In September, we underweighted the fund's municipal bond position relative
to the Index when our analysis indicated that municipal bonds had become
expensive compared with Treasuries. We replaced a small percentage of the fund's
duration with U.S. Treasury bond futures contracts, which we preferred over
buying Treasuries directly because they allowed us to participate in a Treasury
rally without incurring taxable net investment income. This strategy proved
successful when municipal bonds underperformed Treasuries in October, and we
returned the fund to its 100% municipal bond weighting after municipals had
cheapened to an attractive level at the end of the month.
. The fund's performance also benefited from our extensive credit analysis.
Our research helped us identify specific investment opportunities, such as
"story" bonds. These securities are often misunderstood or incorrectly valued,
but can have unique security structures and attractive yield potential.
Portfolio Composition and Investment Strategies:
Revenue Bonds Were Stressed Over GOs
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Variable Rate Demand Notes 7.6%
General Obligations 5.5%
Insured Revenue Bonds 34.7%
Revenue Bonds 27.9%
Insured General Obligations 24.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of October 31, the fund held a 62.6% position in a combination of insured and
uninsured revenue bonds, overweighted compared with the Index (53.9%). (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. As of October 31, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 29.8% versus 45.6%. Though the fund's total
GO allocation was little changed from a year ago, we did increase its weighting
in insured GOs (to 24.3% versus 12.6% last year) and reduced uninsured GOs (to
5.5% versus 16.6% last year) due to security-specific investment opportunities.
. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. The position
accounted for 7.6% of the portfolio, nearly unchanged from last year.
. Credit Quality. During the period, the fund's average credit quality has
remained double-A. However, in contrast to last year's emphasis on triple-A-
rated bonds, this year the fund's credit quality was structured like a
"barbell," with higher quality securities at the long end of the yield curve and
lower quality securities (but still investment grade) at the short end. As of
October 31, 70.5% of the fund was invested in triple-A-rated securities, nearly
the same as a year ago, while double-A- and single-A-rated securities were
reduced to 9.3% and 1.8%, respectively. In the late spring of 1996, we initiated
a new position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 18.4% of the portfolio by the
end of the period. We used extensive credit research to identify specific
securities that offered higher yields than average triple-B-rated securities,
but still were of sound credit quality. The triple-B-rated position benefited
the fund's performance during the period by enabling us to lock in above-market
yields and providing greater price appreciation potential relative to the
market. Each of these positions is monitored carefully, and we will remain
vigilant for any changes in their credit quality.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
During the period under review, the fund's Class A shares paid out
distributions of $0.65 per share. The fund's Class B shares, which opened on May
1, 1996, paid out $0.27 per share from their inception through October 31, 1996.
Dividends are declared daily and paid on a monthly basis. The fund intends to
distribute substantially all of its investment company tax-exempt and taxable
income, as required by tax law.
- --------------------------------------------------------------------------------
19
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We value your investment in the Goldman Sachs Municipal Income Fund and we
look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Municipal Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
20
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Municipal Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares) is
compared with its benchmark--the Lehman Brothers 15-Year Municipal Bond Index
("Lehman 15-Year Muni Index"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
HYPOTHETICAL $10,000 INVESTMENT
Class A /(a)/
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman 15-year
Date (no sales charge) (w/sales charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
8/1/93 $10,000 $9,550 $10,000
- --------------------------------------------------------------------------------
10/31/93 $10,455 $9,984 $10,385
- --------------------------------------------------------------------------------
10/31/94 $9,878 $9,434 $9,860
- --------------------------------------------------------------------------------
10/31/95 $11,241 $10,735 $11,414
- --------------------------------------------------------------------------------
10/31/96 $11,933 $11,395 $12,100
- --------------------------------------------------------------------------------
</TABLE>
Class B
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman
(no redemption (w/redemption 15-year
Date charge) charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
- --------------------------------------------------------------------------------
Oct 31, 96 10,440 9,940 10,480
- --------------------------------------------------------------------------------
</TABLE>
-----------------------------------
Average Annual Total Return
-----------------------------------
One Year Since Inception/(b)/
--------------------------------------------------------
Class A, excluding
sales charge 6.13% 5.27%
--------------------------------------------------------
Class A, including
sales charge 1.35% 3.80%
--------------------------------------------------------
Class B, excluding
redemption charge N/A 4.40%/(c)/
--------------------------------------------------------
Class B, including
redemption charge N/A (0.60%)/(c)/
--------------------------------------------------------
/(a)/For comparative purposes, Class A initial investment is assumed to be made
on the first day of the month following the Fund's commencement of
operations.
/(b)/Class A and Class B commenced operations July 20, 1993 and May 1, 1996,
respectively.
/(c)/An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
21
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations--102.2%
Arizona--5.1%
Maricopa County, AZ Unified School District No. 41 GO
(FSA)(AAA/Aaa)
$2,500,000 6.25% 07/01/15 $ 2,653,300
- --------------------------------------------------------------------------------
California--8.1%
Contra Costa, CA Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $ 2,022,980
San Buenaventura, CA Sewer Revenue RB (FGIC)
(AAA/Aaa)
2,255,000 5.50 03/01/15 2,231,435
- --------------------------------------------------------------------------------
$ 4,254,415
- --------------------------------------------------------------------------------
Colorado--4.8%
Englewood MFH RB (BBB)
$2,500,000 6.65% 12/01/26 $ 2,499,750
- --------------------------------------------------------------------------------
Connecticut--3.9%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $ 2,072,220
- --------------------------------------------------------------------------------
Florida--2.8%
Escambia County, FL Housing Authority, Single Family
(GNMA/FNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $ 1,464,949
- --------------------------------------------------------------------------------
Illinois--19.1%
Chicago, IL GO Series A-2 (AMBAC) (AAA/Aaa) (e)
$1,750,000 6.25% 01/01/14 $ 1,877,873
Cook County, IL GO(FGIC) (AAA/Aaa)
2,000,000 5.75 11/15/12 2,015,720
Lake County, IL Unified School District No. 116 GO (FSA) (AAA/Aaa)
2,000,000 7.60 02/01/14 2,428,340
1,525,000 6.10 02/01/16 1,588,089
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,109,780
- --------------------------------------------------------------------------------
$10,019,802
- --------------------------------------------------------------------------------
Indiana--9.5%
East Allen, IN Elementary School Building Corp. RB (FSA)
(AAA/Aaa)
$3,115,000 5.88% 07/01/12 $ 3,178,079
Indiana Transportation Finance Authority RB Series A
(MBIA) (AAA/Aaa)
1,500,000 7.25 06/01/15 1,789,305
- --------------------------------------------------------------------------------
$ 4,967,384
================================================================================
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Kentucky--2.0%
Nelson County, KY Industrial Building RB for Mabex
Universal Corp. Project AMT (A3)
$1,000,000 6.50% 04/01/05 $ 1,066,790
- --------------------------------------------------------------------------------
Maine--1.5%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 725,000 6.80% 12/01/07 $ 765,462
- --------------------------------------------------------------------------------
Michigan--3.6%
Detroit, MI GO (BBB-)
$1,885,000 5.70% 05/01/02 $ 1,907,714
- --------------------------------------------------------------------------------
New York--9.0%
New York State Municipal Bond Agency RB, Series A (BBB+)
$1,610,000 6.60% 03/15/01 $ 1,699,854
New York State Thruway Authority Highway & Bridges RB
(BBB/Baa1)
1,000,000 5.25 04/01/03 1,004,630
Syracuse, NY IDA RB (AA)
2,000,000 5.13 10/15/02 2,005,600
- --------------------------------------------------------------------------------
$ 4,710,084
- --------------------------------------------------------------------------------
North Dakota--3.8%
Mercer County, ND PCRB for Basin Electric Power 2nd
Series (AMBAC) (AAA/Aaa) (e)
$2,000,000 6.05% 01/01/19 $ 2,055,380
- --------------------------------------------------------------------------------
Ohio--8.9% Akron, OH COPs (a) (BBB) (c)
$2,000,000 6.90% 12/01/16 $ 1,438,500
Kent State University RB (MBIA) (AAA/Aaa)
2,280,000 5.50 05/01/28 2,181,504
Trumbull County, OH GO (AMBAC) (AAA/Aaa)
1,000,000 5.75 12/01/03 1,061,870
- --------------------------------------------------------------------------------
$ 4,681,874
- --------------------------------------------------------------------------------
Texas--8.8%
Denison, TX Waterworks & Sewer RB (AAA/Aaa)
$1,250,000 5.50% 09/01/08 $ 1,258,525
1,250,000 5.40 09/01/09 $ 1,258,475
East Texas Criminal Justice Facilities Financing Corp. RB
(AMBAC) (AAA/Aaa)
$2,000,000 5.75 11/01/09 $ 2,032,560
Fort Bend, TX Independent School District RB (AAA/Aaa)
50,000 5.00 02/15/18 46,226
- --------------------------------------------------------------------------------
$ 4,595,786
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
22
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations(continued)
Washington--7.1%
Chelan County, WA Public Utility RB (AAA/Aaa)/c/
$2,500,000 6.35% 07/01/28 $ 2,540,125
Washington State Series C GO (AA/Aa)
1,155,000 6.50 07/01/00 1,232,373
- --------------------------------------------------------------------------------
$ 3,772,498
- --------------------------------------------------------------------------------
Wisconsin--4.2%
Wisconsin Housing & Economic Development Authority RB,
Series B (AA/Aa)/e/
$2,060,000 7.10% 09/01/15 $ 2,181,623
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $52,677,902) $53,669,031
- --------------------------------------------------------------------------------
Short-Term Obligations--8.4%
Alabama--6.5%
Columbia County, AL IDB/b/ (A/A2)
$1,200,000 3.65% 11/01/96 $ 1,200,000
Parrish, AL IDB/b/ (A/A1)
2,200,000 3.65 11/01/96 2,200,000
- --------------------------------------------------------------------------------
$ 3,400,000
- --------------------------------------------------------------------------------
Wyoming--1.9%
Converse, WY PCRB/b/ (AAA)
$1,000,000 3.65% 11/01/96 $ 1,000,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $4,400,000) $ 4,400,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $57,077,902/d/) $58,069,031
================================================================================
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 1,018,643
Gross unrealized loss for investments in which cost
exceeds value (27,514)
- --------------------------------------------------------------------------------
Net unrealized gain $ 991,129
================================================================================
/a/The interest rate disclosed for these securities represents effective
yields to maturity.
/b/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/c/When-issued security.
/d/The amount stated also represents aggregate cost for federal income tax
purposes.
/e/Portions of these securities are being segregated for when-issued securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal
Bond Assurance Corp.
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty
Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
================================================================================
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
23
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
========================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $38,555,545, $245,280,587
and $57,077,902) $38,632,147 $249,732,500 $58,069,031
Receivables:
Investment securities sold 3,011,458 -- --
Interest 255,950 4,572,733 688,717
Forward foreign currency exchange contracts -- 1,073,237 --
Fund shares sold 38,729 23,757 12,145
Foreign tax withheld -- 100,251 --
Cash 17,149 248 48,127
Variation margin 6,788 -- --
Deferred organization expenses, net 23,998 -- 30,090
Other assets 65,284 31,883 29,773
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 42,051,503 255,534,609 58,877,883
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 11,129,422 -- 6,076,685
Forward foreign currency exchange contracts -- 1,816,332 --
Fund shares repurchased 14,381 124,500 128,184
Investment adviser fees 6,423 94,713 18,124
Administration fees -- 32,334 6,857
Authorized dealer service fees 6,166 44,409 9,224
Distribution fees 151 35,488 154
Accrued expenses and other liabilities 57,538 211,388 116,255
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 11,214,081 2,359,164 6,355,483
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 30,678,648 247,410,169 52,495,830
Accumulated undistributed net investment income 53,331 6,704,225 60,331
Accumulated net realized loss on investment transactions (45,759) (4,636,687) (1,024,890)
Accumulated net realized foreign currency gain -- 43,634 --
Net unrealized gain on investments and futures 151,202 4,864,862 991,129
Net unrealized loss on translation of assets and liabilities denominated in foreign
currencies -- (1,210,758) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets $30,837,422 $253,175,445 $52,522,400
==================================================================================================================================
Net asset value, offering /(a)/ and redemption price per share
Class A $14.36 $14.53 $14.37
Class B $14.37 $14.53 $14.37
Institutional -- $14.52 --
==================================================================================================================================
Shares Outstanding
Class A 2,131,467 13,670,270 3,637,437
Class B 16,317 17,603 17,778
Institutional -- 3,735,251 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 2,147,784 17,423,124 3,655,215
==================================================================================================================================
</TABLE>
/(a)/Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $15.04, $15.21 and $15.05 for Government Income, Global Income
and Municipal Income, respectively. At redemption, Class B shares are
subject to a contingent deferred sales charge, assessed on the amount equal
to the lesser of the current net asset value or the original purchase price
of the shares.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Trust
- ------------------------------------------------------------------------------
Statements of Operations
For the Year Ended October 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
======================================
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $2,048,891 $18,287,214 $2,869,729
- ------------------------------------------------------------------------------
Total income 2,048,891 18,287,214 2,869,729
- ------------------------------------------------------------------------------
Expenses:
Investment adviser fees 148,120 1,965,605 211,283
Administration fees 44,433 393,263 79,231
Authorized dealer service fees 74,171 549,289 132,051
Distribution fees 74,281 549,538 132,304
Custodian fees 44,987 210,420 36,172
Transfer agent fees 72,237 121,212 90,284
Professional fees 58,897 92,538 60,094
Registration fees 14,992 63,673 32,549
Amortization of deferred organization
expenses 18,848 46,256 17,593
Trustee fees 478 3,073 707
Other 8,763 78,430 27,214
- ------------------------------------------------------------------------------
Total expenses 560,207 4,073,297 819,482
Less--expenses reimbursable and fees
waived by Goldman Sachs (411,644) (1,241,452) (370,128)
- ------------------------------------------------------------------------------
Net expenses 148,563 2,831,845 449,354
- ------------------------------------------------------------------------------
Net investment income 1,900,328 15,455,369 2,420,375
- ------------------------------------------------------------------------------
Realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions:
Net realized gain (loss) from:
Investment transactions 115,970 9,268,666 1,390,846
Futures transactions (68,389) -- (151,156)
Foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on:
Investments and options (332,205) 54,149 (513,085)
Futures 74,600 -- --
Translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions (210,024) 12,079,256 726,605
- ------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $1,690,304 $27,534,625 $3,146,980
==============================================================================
</TABLE>
/(a)/Net of $96,252 in foreign withholding tax for the Global Income
Fund.
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,900,328 $ 15,455,369 $ 2,420,375
Net realized gain from investment transactions 47,581 9,268,666 1,239,690
Net realized loss from foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on investments, futures and options (257,605) 54,149 (513,085)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,690,304 27,534,625 3,146,980
- ------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,898,372) (22,455,377) (2,418,570)
Class B (3,324) (3,052) (1,805)
Institutional Class -- (4,050,770) --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,901,696) (26,509,199) (2,420,375)
- ------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 8,922,548 39,747,372 6,389,765
Reinvestment of dividends and distributions 1,614,587 16,968,046 1,484,778
Cost of shares repurchased (8,990,920) (82,019,748) (9,875,982)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 1,546,215 (25,304,330) (2,001,439)
- ------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 1,334,823 (24,278,904) (1,274,834)
Net assets:
Beginning of year 29,502,599 277,454,349 53,797,234
- ------------------------------------------------------------------------------------------------------------------------
End of year $ 30,837,422 $ 253,175,445 $ 52,522,400
========================================================================================================================
Accumulated undistributed net investment income $ 53,331 $ 6,704,225 $ 60,331
========================================================================================================================
Summary of share transactions:
Shares sold 624,626 2,811,314 449,496
Reinvestment of dividends and distributions 112,977 1,198,568 104,201
Shares repurchased (628,175) (5,784,097) (694,794)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 109,428 (1,774,215) (141,097)
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,357,262 $ 19,658,884 $ 2,466,930
Net realized gain from investment transactions 603,048 5,556,002 938,332
Net realized gain from foreign currency related transactions -- 18,804,029 --
Net change in unrealized gain on investments 902,391 14,759,004 3,055,111
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies -- (15,288,240) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,862,701 43,489,679 6,460,373
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (1,361,620) (20,883,123)(a) (2,466,930)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,361,620) (20,883,123) (2,466,930)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 15,973,014 53,349,100 11,879,853
Reinvestment of dividends and distributions 1,123,498 13,008,610 1,551,121
Cost of shares repurchased (3,546,816) (208,094,050) (11,000,210)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 13,549,696 (141,736,340) 2,430,764
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 15,050,777 (119,129,784) 6,424,207
Net assets:
Beginning of year 14,451,822 396,584,133 47,373,027
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $29,502,599 $ 277,454,349 $ 53,797,234
====================================================================================================================================
Accumulated undistributed net investment income $ 36,251 $ 16,641,827 $ 42,738
====================================================================================================================================
Summary of share transactions:
Shares sold 1,139,008 3,822,903 876,447
Reinvestment of dividends and distributions 80,152 935,191 113,767
Shares repurchased (253,583) (15,079,626) (816,569)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 965,577 (10,321,532) 173,645
====================================================================================================================================
</TABLE>
(a) The Global Income Fund distributed $20,322,640 and $560,483 from net
investment income for the Class A and Institutional class of shares,
respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end, management
investment company. Included in this report are the financial statements for the
Goldman Sachs Government Income Fund (Government Income), the Goldman Sachs
Global Income Fund (Global Income) and the Goldman Sachs Municipal Income Fund
(Municipal Income), collectively, "the Funds" or individually a "Fund."
Government Income and Municipal Income are diversified portfolios whereas Global
Income is a non-diversified portfolio. As of October 31, 1996, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. As of October 31, 1996, there outstanding no Service shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in debt securities, other than money market instruments, held by the
Funds are valued on the basis of dealer-supplied quotations or by a pricing
service approved by the Board of Trustees if such prices are believed by the
investment adviser to accurately represent market value. The prices derived by a
pricing agent reflect broker/dealer-supplied valuations and electronic data
processing techniques. If those prices are not deemed by the Fund's Investment
Adviser to be representative of the market values at the time the net asset
value is calculated, then such securities will be valued at fair value as
described below. Options and futures contracts are valued at the last sale price
on the market where any such option or futures contract is principally traded.
Forward foreign currency exchange contracts are valued at the mean between the
last bid and asked quotations supplied by a dealer in such contracts. All other
securities and other assets, including debt securities, for which prices are
supplied by a pricing agent but are not deemed by the Fund's Investment Adviser
to be representative of market values, restricted securities and securities for
which no market quotation is available, but excluding money market instruments
with a remaining maturity of sixty days or less, are valued at fair value as
determined in good faith pursuant to procedures established by the Board of
Trustees. Money market instruments held by the Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which
approximates market value.
Investments in portfolio securities held by Government Income and Municipal
Income for which accurate market quotations are readily available are valued on
the basis of quotations furnished by a pricing service or provided by dealers in
such securities. Portfolio securities held by Government Income and Municipal
Income, for which accurate market quotations are not readily available are
valued at fair value using methods determined in good faith under procedures
established by the Trust's Board of Trustees and may include yield equivalents
or a pricing matrix. Exchange traded options and futures contracts will be
valued by the investment adviser at the last sale price on the exchange where
such contracts and options are principally traded. Short-term debt obligations
maturing in sixty days or less are valued at amortized cost.
B. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account principal prepayment
experience and estimates of future principal prepayments. Certain mortgage
security paydown gains and losses are taxable as ordinary income. Such paydown
gains and losses increase or decrease taxable ordinary income available for
distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
For Municipal Income, market premiums on other long-term debt securities are
amortized to interest income while for Global Income, market discounts on other
long-term debt securities are accreted to interest income.
C. Foreign Currency Translations
- --------------------------------
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized and unrealized gain (loss) on foreign currency transactions will
represent: (i) foreign exchange gains and losses from the sale and holdings of
foreign currencies and investments; (ii) gains and losses between trade date and
settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
interest recorded and the amounts actually received.
D. Forward Foreign Currency Exchange Contracts
- ----------------------------------------------
Global Income may enter into forward foreign exchange contracts for the purchase
or sale of a specific foreign currency at a fixed price on a future date as a
hedge or cross-hedge against either specific transactions or portfolio
positions. Global Income may also purchase and sell forward contracts to seek to
increase total return. All commitments are "marked-to-market" daily at the
applicable translation rates and any resulting unrealized gains or losses are
recorded in the Fund's financial statements. The Fund records realized gains or
losses at the time the forward contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
E. Mortgage Dollar Rolls
- ------------------------
Government Income and Global Income may enter into mortgage "dollar rolls" in
which the Fund sells securities in the current month for delivery and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund loses the right to receive principal and interest paid on the
securities sold but benefits to the extent of any price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
- --------------------------------------------------------------------------------
29
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
F. Option Accounting Principles
- -------------------------------
When call or put options are written, an amount equal to the premium received is
recorded as an asset and as an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current market value of the
option written. When a written option expires on its stipulated expiration date,
or a closing purchase transaction has been entered into, a gain or loss is
realized without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished.
Upon the purchase of a call option or a protective put option, the premium paid
is recorded as an investment, and subsequently marked-to-market to reflect the
current market value of the option. If an option which has been purchased
expires on the stipulated expiration date, a loss is realized in the amount of
the cost of the option. If a closing sale transaction has been entered into, a
gain or loss is realized, depending on whether the sale proceeds from the
closing sale transaction are greater or less than the cost of the option.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices, currency exchange rates in the case of
Global Income or to seek to increase total return. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return to the extent permitted by such
regulations. The use of futures contracts involve, to varying degrees, elements
of market risk which may exceed the amounts recognized in the Statements of
Assets and Liabilities.
Payments for futures contracts ("variation margin") are made or received by the
Funds each day, dependent on the daily fluctuations in the value of the
contract, and are recorded for financial reporting purposes, as unrealized gains
or losses. When entering into a closing transaction, the Funds will realize a
gain or loss equal to the difference between the value of the futures contract
to sell and the futures contract to buy. Futures contracts are valued at the
most recent settlement price, unless such price does not reflect the fair market
value of the contract, in which case the position will be valued using methods
as approved by the Funds' Board of Trustees.
Certain risks may arise upon entering into futures contracts. The predominant
risk is that changes in the value of the futures contract that may not directly
correlate with changes in the value of the underlying securities. The risk may
decrease the effectiveness of the Funds' hedging strategies and may also result
in a loss to the Funds.
H. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all investment company tax-exempt and taxable income to its
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of a portfolio's distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from paid-in capital, depending on the type
of book/tax differences that may exist.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. Federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ------------ ----------------
<S> <C> <C>
Global Income $4,471,734 2002
Municipal Income $1,534,884 2002
</TABLE>
I. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
J. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are allocated to the portfolios based on each portfolio's
relative average net assets for the period.
Class A and Class B shareholders of the Funds bear all expenses and fees
relating to their respective distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. Transfer
agent fees are subject to separate arrangements for each class.
3. Agreements
- -------------
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as each Fund's investment adviser
pursuant to Investment Advisory Agreements. Goldman Sachs Asset Management
International ("GSAM International"), an affiliate of Goldman Sachs, acts as
subadviser under a Subadvisory Agreement for Global Income. Under the Investment
Advisory and Subadvisory Agreements, GSAM and GSAM International, subject to the
general supervision of the Trust's Board of Trustees, manage the Funds'
portfolios. As compensation for the services rendered pursuant to the Investment
Advisory Agreements and the assumption of the expenses related thereto, GSAM is
entitled to a fee, computed daily and payable monthly at an annual rate equal to
.50%, .25% and .40% of average daily net assets of Government Income, Global
Income and Municipal Income, respectively. As compensation for the services
rendered pursuant to the Subadvisory Agreement, GSAM International is entitled
to a subadvisory fee from Global Income of .50% of the average daily net assets.
GSAM serves as each Fund's administrator pursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreement, GSAM is entitled to
a fee, computed daily and payable monthly at an annual rate equal to .15% of
each Fund's average daily net assets.
GSAM has voluntarily agreed to limit certain of the Funds' expenses (excluding
advisory, administration, distribution and authorized dealer service fees,
taxes, interest, brokerage, litigation, indemnification and other extraordinary
expenses and with respect to Global Income, transfer agent fees) to the extent
such expenses exceed .00%, .06% and .05% per annum of Government Income, Global
Income and Municipal Income, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to a
Distribution Agreement and as such may receive a portion of the sales load
imposed on the sale of Fund shares. During the year ended October 31, 1996,
Goldman Sachs retained approximately $17,300, $52,600 and $24,900 of sales loads
related to Government Income, Global Income and Municipal Income, respectively.
The Trust, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% and .75% of each Fund's average
daily net assets attributable to Class A and Class B shares, respectively.
- --------------------------------------------------------------------------------
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The Trust, on behalf of each Fund, has adopted an Authorized Dealer Service Plan
(the "Service Plan") pursuant to which Goldman Sachs and Authorized Dealers are
compensated for providing personal and account maintenance services. Each Fund
pays a fee under its Service Plan equal, on an annual basis, up to .25% of the
average daily net assets attributable to the Class A and Class B shares. Goldman
Sachs also serves as the Transfer Agent of the Funds for a fee.
For the year ended October 31, 1996, the advisors, administrators and
distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
<TABLE>
<CAPTION>
Waivers
--------------------------------------
Reimburse-
Admin- Class A Reimburse- ment
Fund Advisor istrator 12b-1 ment Outstanding
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government
Income 74 44 74 220 27
Global
Income 848 -- 56 337 7
Municipal
Income -- -- 132 238 30
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such waivers
and limitations in the future at their discretion.
For the year ended October 31, 1996, Government Income and Municipal Income
incurred commissions expense of approximately $1,200 and $2,750 respectively, in
connection with futures contracts entered into with Goldman Sachs. At October
31, 1996, Goldman Sachs owes approximately $7,000 to Government Income related
to variation margin on futures contracts.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, Global Income participates in a $50,000,000
committed, unsecured revolving line of credit facility. Both facilities are to
be used solely for temporary or emergency purposes. Under the most restrictive
arrangement, each Fund must own securities having a market value in excess of
300% of the total bank borrowings. The interest rate on borrowings is based on
the federal funds rate. The committed facility also requires a fee to be paid
based on the amount of the commitment which has not been utilized. For the year
ended October 31, 1996, the Funds did not have any borrowings under these
facilities.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for the
year ended October 31, 1996, were as follows:
<TABLE>
<CAPTION>
================================================================================
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and
agency obligations $133,097,699 $117,740,548 $ --
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 9,741,716 410,144,747 184,788,273
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 136,922,990 102,151,633 --
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) 3,909,735 446,269,068 189,391,870
================================================================================
</TABLE>
For the year ended October 31, 1996, option transactions in Global Income were
as follows:
<TABLE>
<CAPTION>
Options Purchased Cost
- --------------------------------------------------------------------------------
<S> <C>
Balance outstanding, beginning of period $ --
Options purchased 202,160
Options expired (202,160)
- --------------------------------------------------------------------------------
Balance outstanding, end of period $ --
================================================================================
</TABLE>
32
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At October 31, 1996, Global Income had outstanding forward foreign currency
exchange contracts to sell foreign currencies as follows:
<TABLE>
<CAPTION>
===============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Danish Krone
Expiring 1/22/97 $ 6,348,652 $ 6,443,676 $ (95,024)
Deutschemark
Expiring 11/27/96 37,735,809 38,044,516 (308,707)
Expiring 2/27/97 12,671,000 12,775,513 (104,513)
British Pound Sterling
Expiring 11/14/96 15,423,575 16,184,359 (760,784)
Irish Pound
Expiring 1/8/97 6,842,743 6,964,425 (121,682)
Italian Lira
Expiring 1/29/97 1,326,853 1,335,737 (8,884)
Japanese Yen
Expiring 1/24/97 23,059,781 22,755,697 304,084
Netherlands Guilder
Expiring 1/9/97 6,442,727 6,510,658 (67,931)
Spanish Peseta
Expiring 1/16/97 6,543,897 6,612,046 (68,149)
Swedish Krona
Expiring 1/28/97 4,708,899 4,736,457 (27,558)
Swiss Franc
Expiring 1/29/97 12,952,107 12,453,735 498,372
Expiring 1/29/97 12,083,214 12,109,196 (25,982)
- -------------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $146,139,257 $146,926,015 $(786,758)
===============================================================================
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered.
At October 31, 1996, Global Income had sufficient cash and/or securities to
cover any commitments under these contracts.
Global Income has recorded a "Receivable for forward foreign currency exchange
contracts" and "Payable for forward foreign currency exchange contracts"
resulting from open and closed but not settled forward foreign currency exchange
contracts of $1,073,237 and $1,816,332 respectively, in the accompanying
Statement of Assets and Liabilities. Included in the "Receivable and Payable for
forward foreign currency exchange contracts" are $270,781 and $227,118
respectively, related to forward contracts closed but not settled as of
October 31, 1996.
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $8,675,868 607,156
Reinvestment of dividends and
distributions 1,611,387 112,752
Shares repurchased (8,971,389) (626,797)
----------------------------------
1,315,866 93,111
----------------------------------
Class B Shares
Shares sold 246,680 17,470
Reinvestment of dividends
and distributions 3,200 225
Shares repurchased (19,531) (1,378)
----------------------------------
230,349 16,317
- -------------------------------------------------------------------------------
$1,546,215 109,428
===============================================================================
<CAPTION>
Global Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 15,545,777 1,089,521
Reinvestment of dividends
and distributions 13,419,614 947,846
Shares repurchased (76,216,894) (5,376,065)
----------------------------------
(47,251,503) (3,338,698)
----------------------------------
Class B Shares
Shares sold 265,053 18,628
Reinvestment of dividends
and distributions 1,708 119
Shares repurchased (16,373) (1,144)
----------------------------------
250,388 17,603
----------------------------------
Institutional Shares:
Shares sold 23,936,542 1,703,165
Reinvestment of dividends
and distributions 3,546,724 250,603
Shares repurchased (5,786,481) (406,888)
----------------------------------
21,696,785 1,546,880
- -------------------------------------------------------------------------------
$(25,304,330) (1,774,215)
================================================================================
</TABLE>
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Municipal Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 6,139,212 431,736
Reinvestment of dividends
and distributions 1,482,976 104,074
Shares repurchased (9,874,431) (694,685)
------------------------------------
(2,252,243) (158,875)
------------------------------------
Class B Shares
Shares sold 250,553 17,760
Reinvestment of dividends
and distributions 1,802 127
Shares repurchased (1,551) (109)
------------------------------------
250,804 17,778
- --------------------------------------------------------------------------------
$ (2,001,439) (141,097)
================================================================================
</TABLE>
Share activity for the year ended October 31, 1995 is as follows:
<TABLE>
<CAPTION>
Global Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 22,864,336 1,659,380
Reinvestment of dividends
and distributions 12,448,128 895,996
Shares repurchased (207,889,246) (15,065,279)
-----------------------------------
(172,576,782) (12,509,903)
-----------------------------------
Institutional Shares:
Shares sold 30,484,764 2,163,523
Reinvestment of dividends
and distributions 560,482 39,195
Shares repurchased (204,804) (14,347)
-----------------------------------
30,840,442 2,188,371
- -------------------------------------------------------------------------------
$(141,736,340) (10,321,532)
===============================================================================
</TABLE>
7. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Funds' custodian, or at subcustodians. GSAM monitors the
market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
Government Income, together with other registered investment companies having
advisory agreements with GSAM or its affiliates, transfers uninvested cash
balances into a joint account, the daily aggregate balance of which is invested
in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of October 31, 1996, Government Income had a 0.3% undivided interest in the
repurchase agreement in the joint account which equaled $8,400,000 in principal
amount. As of October 31, 1996, the repurchase agreements in the joint account
along with the corresponding underlying securities (including the type of
security, market value, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
===============================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,686,102, 5.50%-8.50%, 2/1/09-6/1/26; FHLMC: $166,359,033, 5.50%-8.50%,
9/1/98-8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (Treasury
Notes: $942,903,967, 4.38%-8.50%, 11/15/96-8/15/03)
924,700,00 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,658,433, 5.50%-8.00%, 6/1/03-10/1/26; FHLMC:
$465,441,174, 6.00%-9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S
Treasury Interest Only Stripped Securities: $11,653,277, 2/15/98-5/15/02; U.S.
Treasury Notes: $85,997,728, 5.25%-7.75%, 5/15/97-10/15/06; U.S. Treasury
Principal Only Stripped Securities: $33,993,571, 5/15/97-5/15/05; U.S.
Treasury Bills: $41,756,285, 12/12/96-3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price $175,026,979
(U.S. Treasury Notes: $178,694,649, 6.88%-7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- -------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $2,669,700,000
===============================================================================
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
9. Certain Reclassifications
In accordance with Statement of Position 93-2, the Government Income, Global
Income and Municipal Income Funds have reclassified $18,448, $46,256 and
$17,593, respectively, from paid-in capital to accumulated undistributed net
investment income. Additionally, the Global Income Fund has reclassified
$862,007, $207,585 and $380 from accumulated net realized gain, accumulated net
realized foreign currency gain and paid in capital, respectively to accumulated
undistributed net investment income. These reclassifications have no impact on
net asset values of the Funds and are designed to present the Funds' capital
accounts on a tax basis.
10. Other
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(a)/ Distributions to shareholders
============================================================== ========================================
====================================================================================================================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.47 $0.92 $(0.11) -- $0.81 $(0.92) -- --
1996-Class B shares/(c)/ 14.11 0.41 0.26 -- 0.67 (0.41) -- --
1995-Class A shares 13.47 0.94 1.00 -- 1.94 (0.94) -- --
1994-Class A shares 14.90 0.85 (1.28) -- (0.43) (0.85) (0.12) (0.02)
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 14.32 0.56 0.58 -- 1.14 (0.56) -- --
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.45 $0.71 $0.62 $0.18 $1.51 $(1.43) -- --
1996-Class B shares/(c)/ 14.03 0.34 0.41 0.11 0.86 (0.36) -- --
1996-Institutional
shares 14.45 1.15 0.32 0.10 1.57 (1.50) -- --
1995-Class A shares 13.43 0.89 0.92 0.15 1.96 (0.94) -- --
1995- Institutional
shares/(f)/ 14.09 0.22 0.34 0.06 0.62 (0.26) -- --
1994-Class A shares 15.07 0.84 (1.37) (0.12) (0.65) (0.22) (0.16) --
1993-Class A shares 14.69 0.85 1.07 (0.42) 1.50 (0.85) (0.27) --
1992-Class A shares 14.60 1.14 0.45 (0.36) 1.23 (1.14) -- --
For the Period August 2, 1991/(d)/ through October 31,
=========================================================
1991-Class A shares 14.55 0.25 0.23 (0.19) 0.29 (0.24) -- --
<CAPTION>
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
- -----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares -- -- $(0.92) $(0.11) $14.36
1996-Class B shares/(c)/ -- -- (0.41) 0.26 14.37
1995-Class A shares -- -- (0.94) 1.00 14.47
1994-Class A shares (0.01) -- (1.00) (1.43) 13.47
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares -- -- (0.56) 0.58 14.90
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------------------------
For the Years Ended October 31,
===========================================================
1996-Class A shares -- -- $(1.43) $0.08 $14.53
1996-Class B shares/(c)/ -- -- (0.36) 0.50 14.53
1996-Institutional
shares -- -- (1.50) 0.07 14.52
1995-Class A shares -- -- (0.94) 1.02 14.45
1995-Institutional
shares/(f)/ -- -- (0.26) 0.36 14.45
1994-Class A shares -- (0.61) (0.99) (1.64) 13.43
1993-Class A shares -- -- (1.12) 0.38 15.07
1992-Class A shares -- -- (1.14) 0.09 14.69
For the Period August 2, 1991 (d) through October 31,
============================================================
1991-Class A shares -- -- (0.24) 0.05 14.60
<CAPTION>
Ratio of Net
Ratio of net assets
net investment at end
expenses income Portfolio of
Total to average to average turnover period
return /(b/) net assets net assets rate /(h)/ (in 000s)
===================================================================================================
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares 5.80% 0.50% 6.42% 485.09% $30,603
1996-Class B shares/(c)/ 4.85/(g)/ 1.25/(e)/ 5.65/(e)/ 485.09 234
1995-Class A shares 14.90 0.47 6.67 449.53 29,503
1994-Class A shares (2.98) 0.11 6.06 654.90 14,452
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 8.03/(g)/ 0.00/(e)/ 4.87/(e)/ 725.41/(g/ 12,860
- ---------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares 11.05% 1.16% 5.81% 232.15% $198,665
1996-Class B shares/(c)/ 6.24/(g)/ 1.70/(e)/ 5.16/(e)/ 232.15 256
1996-Institutional
shares 11.55 0.65 6.35 232.15 54,254
1995-Class A shares 15.08 1.29 6.23 265.86 245,835
1995-Institutional
shares/(f)/ 4.42/(g)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619
1994-Class A shares (4.49) 1.28 5.73 343.74 396,584
1993-Class A shares 10.75 1.30 5.78 313.88 675,662
1992-Class A shares 8.77 1.37 7.85 270.75 588,893
For the Period August 2, 1991 (d) through October 31,
=========================================================
1991- Class A shares 2.00 0.38 /(g)/ 1.72 /(g)/ 34.22 /(g)/ 388,744
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
------------------------------
Ratio of
net
Ratio of investment
expenses income
to average to average
net assets net assets
==============================================================
- --------------------------------------------------------------
<S> <C> <C>
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.89% 5.03%
1996-Class B shares/(c)/ 2.39/(e)/ 4 .51/(e)/
1995-Class A shares 2.34 4.80
1994-Class A shares 2.86 3.31
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares 4.00/(e)/ 0.87/(e)/
- ------------------------------------------------------------
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.64% 5.33%
1996-Class B shares/(c)/ 2.14 /(e)/ 4.72/(e)/
1996-Institutional
shares 1.11 5.89
1995-Class A shares 1.58 5.94
1995-Institutional
shares/(f)/ 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.53 5.48
1993-Class A shares 1.55 5.53
1992-Class A shares 1.62 7.60
For the Period August 2, 1991 (d) through October 31,
==========================================================
1991-Class A shares 0.44/(g)/ 1.66/(g)/
- ------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations (a) Distributions to shareholders
-------------------------------------------- -----------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $14.17 $0.65 $0.20 -- $0.85 $(0.65) -- --
1996- Class B shares /(c)/ 14.03 0.27 0.34 -- 0.61 (0.27) -- --
1995- Class A shares 13.08 0.67 1.09 -- 1.76 (0.67) -- --
1994- Class A shares 14.64 0.73 (1.51) -- (0.78) (0.73) (0.05) --
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 14.32 0.22 0.32 -- 0.54 (0.22) -- --
<CAPTION>
Distributions to shareholders
----------------------------------------
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares -- -- $(0.65) $0.20 $14.37
1996- Class B shares /(c)/ -- -- (0.27) 0.34 14.37
1995- Class A shares -- -- (0.67) 1.09 14.17
1994- Class A shares -- -- (0.78) (1.56) 13.08
For the Period July 20, 1993
1993- Class A shares -- -- (0.22) 0.32 14.64
<CAPTION>
Ratio of
Ratio of net
net investment
expenses income Portfolio
Total to average to average turnover
return /(b/) net assets net assets rate /(h)/
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares 6.13% 0.85% 4.58% 344.13%
1996- Class B shares /(c)/ 4.40 /(g)/ 1.60 /(e)/ 3.55 /(e)/ 344.13
1995- Class A shares 13.79 0.76 4.93 335.55
1994- Class A shares (5.51) 0.45 5.28 357.54
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 3.73 /(g)/ 0.00 /(e)/ 5.15 /(e)/ 99.99 /(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
---------------------
Net Ratio of
assets net
at end Ratio of investment
of expenses income
period to average to average
(in 000s) net assets net assets
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $52,267 1.55% 3.88%
1996- Class B shares /(c)/ 255 2.05 /(e)/ 3.10 /(e)/
1995- Class A shares 53,797 1.49 4.20
1994- Class A shares 47,373 1.55 4.18
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 30,166 2.42 /(e)/ 2.73 /(e)/
</TABLE>
- ---------------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions, a complete redemption of the investment
at the net asset value at the end of period and no sales charge. Total
return would be reduced if a sales charge for Class A shares or a contingent
deferred sales charge for Class B shares were taken into account.
(c) Class B shares commenced operations on May 1, 1996.
(d) Commencement of operations.
(e) Annualized.
(f) Institutional shares commenced operations on June 1, 1995.
(g) Not annualized.
(h) Includes the effect of mortgage dollar roll transactions for the Government
Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Goldman Sachs Government Income
Fund, Goldman Sachs Global Income Fund and Goldman Sachs Municipal Income Fund:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund (portfolios of Goldman Sachs Trust, a
Massachusetts Business Trust), including the statements of investments, as of
October 31, 1996, and the related statements of operations, the statements of
changes in net assets and the financial highlights for each of the periods
presented. These financial statements and the financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund as of October 31, 1996, the results of their
operations and the changes in their net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
December 12, 1996
- --------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning the Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
================================================================================
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[GOLDMAN SACHS LOGO APPEARS HERE]
================================================================================
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders
- -------------------------------------------------------------------------------
Dear Shareholders:
A return of robust economic growth during the period under review fueled
fears of higher inflation, which pushed Treasury yields higher across the
maturity spectrum. In this semiannual report, we will review the performance of
the Goldman Sachs Fixed Income Funds for the six-month period ended April 30,
1997, as well as provide a brief overview of the U.S. economy and the bond
market. We are pleased to note that during the period, the Goldman Sachs Fixed
Income Funds performed well compared with their peers.
Economic Activity Rebounded, Led by Consumer Spending
After a sluggish third quarter, the pace of economic growth strengthened
during the period. During November and December, consumer spending rebounded,
the trade deficit narrowed and industrial production climbed significantly. As a
result, fourth-quarter real Gross Domestic Product (GDP) growth was 3.8%
(annualized), up from 2.1% in the prior quarter.
Economic activity continued to gain momentum during the first quarter of
1997, with real GDP surging 5.8%, the largest jump in a decade. Signs of
strength were led by a sharp increase in consumer spending, which resulted in
solid sales gains for automobile manufacturers and retailers. In addition,
upbeat reports on factory orders and inventories, construction outlays and labor
market conditions all pointed towards economic acceleration. Despite the growth
spurt, reported inflation remained surprisingly mild during the period.
Furthermore, several economic reports for April came in at the low end of
consensus expectations, which suggested that the economy could moderate during
the second quarter.
The Bond Market Rallied, Then Fell as Inflation Fears Reemerged
The U.S. fixed income market came under pressure during the period under
review. In November, bonds performed well in anticipation of a continued
slowdown in U.S. economic growth. However, the market experienced a reversal in
December when better-than-expected economic data, in particular, robust
employment figures, triggered a sell-off and drove interest rates higher. In
early February, bond prices briefly rebounded, but later faltered as it became
increasingly likely that the U.S. Federal Reserve would raise short term
interest rates in March. By the end of March, the yield on the benchmark 30-year
Treasury bond rose above the psychologically important 7% threshold. Despite the
lackluster performance of the U.S. bond market for the period as a whole, a
sharp rebound at the end of April helped bonds recoup part of their earlier
losses.
The Fed Raised the Federal Funds Rate in March
In March 1997, the Fed raised the federal funds rate by 25 basis points to
5.50%. Though there were few signs of actual inflation, the Fed tightening was
prompted by the economy's pervasive strength. The Fed's action was its first
since a quarter-point cut in January 1996.
During the period under review, the yield curve shifted higher across all
maturities. The yield on six-month Treasury bills rose from 5.26% on October 31,
1996 to approximately 5.52% on April 30, 1997. For the same period, the yield on
the 30-year U.S. Treasury bond rose more dramatically, climbing from 6.64% to
6.95%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 18
Goldman Sachs Government Income Fund 3 Notes to Financial Statements 22
Goldman Sachs Global Income Fund 8 Financial Highlights 29
Goldman Sachs Municipal Income Fund 13
----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
1
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders (continued)
- -------------------------------------------------------------------------------
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
10/31/96 4/30/97
<S> <C> <C>
3-Month 5.14% 5.23%
6-Month 5.26% 5.52%
1 5.40% 5.89%
2 5.73% 6.27%
3 5.86% 6.40%
5 6.07% 6.57%
10 6.34% 6.71%
30 6.64% 6.95%
</TABLE>
Source: Bloomberg, L.P.
The yield curve shifted upward across all maturities and steepened sharply at
the short end.
Outlook: Strengthening Economic Growth May Trigger Further Preemptive Rate Hikes
Despite reports of economic moderation and minimal price acceleration, the
economy's broad-based fundamental strength and resilient equity market make
additional Fed rate increases likely this year. Goldman Sachs' economists
believe that the speed and extent of Fed tightening will depend in large part on
the emergence of conclusive signs that the economy is nearing maximum capacity,
rather than immediate evidence of increased inflationary pressures.
In conclusion, we thank you for your support of the Goldman Sachs Fixed
Income Funds and we look forward to continuing our relationship.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
May 30, 1997
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Government Income Fund seeks to provide shareholders with
a high level of current income consistent with safety of principal. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
U.S. government securities and in repurchase agreements collateralized by such
securities. The fund may also invest in securities of nongovernmental issuers,
including asset-backed securities, privately issued mortgage-backed securities
and corporate debt obligations. Such securities will be rated triple-A at the
time of investment or, if unrated, deemed to be of comparable quality by Goldman
Sachs Asset Management, the fund's investment adviser. The fund's interest rate
sensitivity is expected to be comparable to that of a five-year bond.
Mortgage-Backed Securities Continued to Perform Well
During the period under review, mortgage-backed securities (MBS) performed
very well, buoyed by a surge in investor demand and stable prepayment activity.
Investor interest in the MBS market was triggered primarily by the favorable
interest rate environment. Throughout the period, rates remained in a fairly
tight range, allowing prepayment anxieties to subside. In addition, with other
highly rated fixed income instruments yielding approximately the same as
similar-duration Treasuries, investors turned to the mortgage-backed sector for
yield enhancement. Finally, an increase in collateralized mortgage obligation
(CMO) creation led to steady demand for underlying pass-through securities. As a
result of all of these positive factors, mortgage-backed securities became
increasingly expensive during the period as their yield spreads relative to
Treasuries tightened.
Performance Review
For the six-month period ended April 30, 1997, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to strong results from its investments in mortgage-backed
securities, particularly CMOs. The fund's Class B shares, which have higher
expenses, also achieved positive returns. The net asset value (NAV) of both
classes declined due to rising interest rates during the period.
We are pleased to report that the fund's Class A shares ranked within the
top 10% of intermediate U.S. government income funds (seventh out of 122) based
on total return for the 12 months ended April 30, 1997, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they have been
in existence less than 12 months.)
- -----------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
Total Return (based on net asset value) 1.83% 1.43%
- --------------------------------------------------------------------
Return From Monthly Distributions 3.67% 3.28%
- --------------------------------------------------------------------
Return From Price Depreciation -1.84% -1.85%
- --------------------------------------------------------------------
Total Return of Lehman Brothers 1.81% 1.81%
Government/Mortgage Index
- --------------------------------------------------------------------
NAV (as of 4/30/97) $14.10 $14.11
- --------------------------------------------------------------------
NAV Change -$0.26 -$0.26
- --------------------------------------------------------------------
</TABLE>
Portfolio Composition and Investment Strategies
The primary changes to the portfolio's sector allocations during the period
were a reduction of fixed rate mortgage pass-through and asset-backed securities
in favor of U.S. Treasuries and agency debentures.
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
U.S. Treasuries 36.7%
Fixed Rate Mortgage Pass-Throughs 26.1%
CMO's 13.0%
Asset-Backed Securities 11.0%
Agency Debentures 10.2%
Repos/Cash Equivalents 3.0%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio
held a 36.7% position in U.S. Treasuries, its single largest allocation as of
April 30. The fund's holdings in Treasuries more than doubled as we scaled back
exposure to the mortgage-backed and asset-backed sectors, both of which were
nearing full value.
. Fixed Rate Mortgage Pass-Throughs. As of April 30, the fund's investment in
fixed rate mortgage pass-throughs accounted for 26.1% of the portfolio, down
from 40.4% six months earlier. The sector performed well during the period, as
many of the factors which supported MBS through 1996 remained in place: low
volatility, range-bound interest rates, tight yield spreads on alternative
sectors, and light issuance of corporate and asset-backed securities (ABS).
However, as the MBS market repriced to reflect the favorable environment, we
reduced the position.
We also used mortgage dollar rolls during the period, which helped the
portfolio to benefit from short-term supply and demand imbalances in the
mortgage settlement process. (Mortgage dollar rolls refer to transactions that
involve selling mortgage securities owned by the fund and simultaneously
contracting to buy back similar mortgage securities with the same coupon on a
specified future date -- usually one month forward.) At all times, we "cover"
the mortgage dollar rolls by keeping cash or liquid assets equal to the dollar
amount of the forward commitment in a segregated account with the fund's
custodian.
. CMOs. The CMO market enjoyed strong demand from yield-seeking investors,
while the supply of CMOs, though rising, remained relatively low from a
historical perspective. As the sector became more expensive, we reduced the
fund's allocation to 13.0% from 22.0% last October. Specifically, we cut
sequential-pay/support CMOs to 7.2%, approximately half their weighting six
months ago, and planned amortization class (PAC) CMOs to 4.2% from 5.5%.
. Asset-Backed Securities. As of April 30, the fund's ABS position was 11.0%,
down from 19.9% last October. During the period, the ABS sector experienced some
selling pressure, in part due to negative credit events among selected credit
card and sub-prime auto lenders. Overall, however, the sector performed well:
investor interest remained broad-based, ratings held firm and, relative to
similarly rated spread products, ABSs continued to offer attractive yield
enhancement opportunities.
. Agency Debentures. Agency debentures represented 10.2% of the portfolio as
of the end of the period, constituting an overweighted position compared with
the benchmark's 8.0%. We added to the allocation during the period as
alternative sectors richened.
. Issuer Composition. The portfolio composition of the fund's mortgage-backed
security holdings by issuer was 13.6% in Federal National Mortgage Association
(FNMA) issues and 13.2% in Government National Mortgage Association (GNMA)
issues.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
. Credit Quality. As of April 30, 75.5% of the portfolio was invested in U.S.
government and agency securities, 21.5% of the portfolio was invested in triple-
A-rated securities and 3.0% of the portfolio was invested in cash equivalents.
. Prudent Use of Derivatives. As discussed earlier, the fund held a 7.2%
position in sequential-pay/support CMOs and a 4.2% position in PAC CMOs,
securities that are generally considered to be lower risk derivative
instruments. In addition, the portfolio held small positions in inverse
floaters, interest-only (IO) CMOs and principal-only (PO) CMOs for their
potential to add incremental yield. The portfolio's combined position in these
higher risk derivatives was 1.6% as of the end of the period.
. Duration. We seek excess return over the Index through sector weightings
and specific security selection rather than attempting to make interest rate
predictions. Therefore, we manage the fund's duration to approximate that of the
Index, partly through the use of futures. As of April 30, the fund's duration
was 4.4 years, in line with that of the Index.
Market Outlook
Despite some suggestion of economic moderation, we continue to believe that
interest rates are likely to move higher during the balance of the year. This
expectation is predicated on the economy's broad-based fundamental strength, as
well as the Fed's well-publicized commitment to monetary discipline.
Regarding specific fixed income sectors, investor demand for mortgage-
backed securities remains robust, but lower rates and rising volatility increase
the risk of refinancings and lead us to maintain a cautious outlook for mortgage
pass-throughs over the next few months. Similarly, while CMOs do not generally
offer significant value over mortgage pass-throughs, specific structures within
the CMO market present attractive investment opportunities. In the ABS sector,
anxiety regarding negative credit events during the first quarter appears to be
subsiding. However, we believe the market is now more alert to credit
distinctions among issuers, servicers and collateral types, and has begun
pricing securities accordingly. Consequently, it may become more challenging to
identify unrecognized value within the ABS sector, particularly among the higher
quality issues that we tend to emphasize.
Distribution Policy
The fund's Class A and Class B shares paid out monthly distributions of
approximately $0.52 and $0.47 per share, respectively, during the six-month
period ended April 30, 1997. Dividends are declared daily and paid on a monthly
basis. The fund distributes substantially all of its taxable income, as is
required for all investment companies.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Erica Adelberg
Erica Adelberg
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Government Income Fund
May 30, 1997
- --------------------------------------------------------------------------------
5
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--37.7%
Federal Home Loan Mortgage Corp. (FHLMC)--1.8%
$ 1,000,000 7.00% TBA 15-Yr /(a)/ $ 990,930
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--8.7%
$ 1,000,000/(h)/ 6.50% TBA 7-Yr /(a)/ $ 981,560
1,000,000 7.00 TBA 30-Yr /(a)/ 968,750
1,000,000 7.50 TBA 30-Yr /(a)/ 942,500
2,000,000/(h)/ 7.50 TBA 30-Yr /(a)/ 1,985,000
- --------------------------------------------------------------------------------
$ 4,877,810
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA) --13.0%
$ 238,209 9.00% 10/15/19 $ 253,098
97,383 9.00 12/15/19 103,470
315,821 7.50 04/15/23 314,933
610,646 7.50 07/15/23 608,930
368,845 7.00 08/15/23 359,162
695,669 7.00 10/15/23 677,408
61,762 7.00 11/15/23 60,141
877,541 7.00 12/15/23 854,506
1,005,084 8.00 12/15/26 1,018,690
2,000,000/(h)/ 7.50 TBA 30-Yr /(a)/ 1,982,500
1,000,000/(h)/ 8.00 TBA 30-Yr /(a)/ 1,013,430
- --------------------------------------------------------------------------------
$ 7,246,268
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--14.2%
Interest Only--0.4%
FNMA Interest-Only Stripped Security, Series 151, Class 2/(d)/
$ 643,343 11.30% 07/25/22 $ 213,024
- --------------------------------------------------------------------------------
$ 213,024
- --------------------------------------------------------------------------------
Inverse Floater--0.7%
FNMA Remic Trust, Series 1992-62, Class S
$ 404,038 9.27%/(c)/ 05/25/99 $ 405,941
- --------------------------------------------------------------------------------
$ 405,941
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC) CMOs--2.9%
FNMA Remic Trust, Series 1997-9, Class B
$ 1,000,000 6.50% 10/25/22 $ 962,510
GE Capital Mortgage Services, Inc., Series 1994-11, Class A1
644,342 6.50 03/25/24 644,941
- --------------------------------------------------------------------------------
$ 1,607,451
- --------------------------------------------------------------------------------
Principal Only--1.9%
FNMA Remic Trust, Series G-35, Class N/(d)/
$ 575,000 6.16% 10/25/21 $ 419,376
FNMA Remic Trust, Series 1993-205, Class C/(d)/
750,000 7.23% 09/25/23 625,545
- --------------------------------------------------------------------------------
$ 1,044,921
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--1.4%
Citicorp Mortgage Securities, Series 1993-11, Class A6
$ 818,108 6.25% 09/25/08 $ 788,362
- --------------------------------------------------------------------------------
$ 788,362
- --------------------------------------------------------------------------------
Support--7.0%
GE Capital Mortgage Services, Inc., Series 1994-10, Class A22
$ 996,703 6.50% 03/25/24 $ 865,497
Housing Securities, Inc., Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,329,852
Prudential Securities, Series 1995-2, Class A
797,338 5.77 11/15/15 799,578
Salomon Brothers Mortgage Securities VII, Series 1996-6H, Class A1
1,000,000 6.00 09/30/08 899,840
- --------------------------------------------------------------------------------
$ 3,894,767
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,954,466
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $21,101,884) $ 21,069,474
- --------------------------------------------------------------------------------
Asset-Backed Securities--11.6%
Asset Securitization Corp., Series 1996, Class A1
$ 300,000 6.88% 11/13/26 $ 295,699
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
720,000 6.23 06/15/03 710,546
CPS Auto Grantor Trust, Series 1993-3, Class A
855,634 6.30 08/15/02 850,107
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 589,263
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 622,980
JP Morgan Commercial Mortgage Finance Corp., Series 1997-C4
500,000 7.32 12/26/28 498,614
Morgan Stanley Capital Commercial Mortgage, Inc. Series 1997-C1
500,000 7.46 05/15/06 506,875
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
224,429 6.55 11/20/01 225,129
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset-Backed Securities(continued)
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
$ 420,638 6.85% 06/15/01 $ 424,099
Premier Auto Trust, Series 1993-6, Class A2
271,484 4.65 11/02/99 269,021
Premier Auto Trust, Series 1994-1, Class A3
176,500 4.75 02/02/00 175,672
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 473,368
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 860,533
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $6,623,680) $ 6,501,906
- --------------------------------------------------------------------------------
U.S. Government Agency Obligations--10.0%
Small Business Administration
$ 1,700,000 7.15% 03/01/17 $ 1,685,176
1,400,000 7.50 04/01/17 1,416,562
Sri Lanka Aid/(c)/
2,500,000 6.06 02/21/16 2,464,075
- --------------------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $5,562,500) $ 5,565,813
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--35.6%
United States Treasury Bonds
$ 140,000 8.75% 05/15/17 $ 165,484
270,000/(e)/ 8.88 08/15/17 322,988
3,450,000 8.75 05/15/20 4,109,813
180,000 8.75 08/15/20 214,565
690,000/(e)/ 7.63 02/15/25 740,025
United States Treasury Notes
1,460,000/(e)/ 7.38 11/15/97 1,471,636
700,000 5.88 04/30/98 699,342
5,650,000/(e)/ 6.88 08/31/99 5,712,659
3,700,000 6.13 07/31/00 3,664,739
1,100,000 5.63 11/30/00 1,070,091
1,200,000 7.50 02/15/05 1,256,436
United States Treasury Principal-Only Stripped Securities/(d)/
300,000 6.85 05/15/05 174,777
1,550,000 7.23 05/15/20 302,790
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $20,041,673) $ 19,905,345
- --------------------------------------------------------------------------------
Repurchase Agreement--19.9%
Joint Repurchase Agreement Account/(e)/
$ 11,100,000 5.49% 05/01/97 $ 11,100,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $11,100,000) $ 11,100,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $64,429,737/(f)/) $ 64,142,538
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long (Short)/(g)/ Month Gain (Loss)
- --------------------------- ------------------ -------------- -------------
<S> <C> <C> <C>
Euro Dollars 3 September 1997 $375
5 Year U.S. Treasury Notes 19 June 1997 4,312
U.S. Long Term Bond 3 June 1997 6,282
-------------
$10,969
- --------------------------------------------------------------------------------
</TABLE>
Federal Income Tax Information:
<TABLE>
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 118,460
Gross unrealized loss for investments in which cost
exceeds value (509,387)
- --------------------------------------------------------------------------------
Net unrealized loss $ (390,927)
- --------------------------------------------------------------------------------
</TABLE>
/(a)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally + / -2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(b)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(c)/Variable rate security. Coupon rate disclosed is that which is in effect at
April 30, 1997.
/(d)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(e)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(f)/The aggregate cost for federal income tax purposes is $64,533,465.
/(g)/Each 5-Year U.S. Treasury Note and U.S. Long Term Bond contract represents
$100,000 in notional par value. Each Euro Dollar contract represents
$1,000,000 in notional par value. The total notional amount and market
value at risk are $5,200,000 and $3,032,288, respectively. The
determination of notional amounts as presented here are indicative only of
volume of activity and not a measure of market risk.
/(h)/When-issued security.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Global Income Fund seeks high total return, composed of
both current income and capital appreciation. The fund is permitted to invest in
government and other high-quality (double-A or better) fixed income securities
issued in the United States and in foreign markets. The fund has the additional
flexibility to invest in sovereign (government) debt rated single-A (or better)
or deemed to be of comparable quality. The maximum duration of the fund is 7.5
years and its approximate interest rate sensitivity is comparable to that of a
six-year bond. Under normal market conditions, the fund's neutral position is to
be fully hedged into U.S. dollars to best serve the needs of U.S. shareholders.
However, the fund may engage in currency transactions, both to hedge exchange
rate risk and to seek to enhance returns.
Special Event
To accommodate different clients' needs and preferences, on March 12, 1997,
the fund opened a new share class (Service).
Favorable Economic Factors Helped European Bonds While Rising Rates Impacted
Treasuries
Global bonds began the period under review on a strong note, but weakened
during the first quarter of 1997. European bonds were the best performers during
the period, while the United States lagged along with the dollar bloc markets.
The economic fundamentals that supported most European bonds throughout
1996 -- particularly weak economic growth and contained inflation -- remained
intact during the period. This favorable backdrop, plus yield convergence ahead
of European monetary union (EMU), helped the higher yielding bonds of Spain
achieve the best performance of all the major bond markets (hedged into U.S.
dollars). The "core" European markets such as Germany also fared well due to
increased expectations of tighter fiscal policies to help them meet EMU
criteria. In contrast, the U.K. gilt underperformed most European bonds as
sharply accelerating growth triggered fears of higher inflation. In Japan, the
performance of Japanese Government Bonds (JGBs) trailed nearly all of the major
European markets but still fared reasonably well (hedged into U.S. dollars). The
Japanese market strengthened following a sharp November sell-off when continued
weakness in the financial sector made near-term rate hikes by the Bank of Japan
unlikely.
In the United States, stronger than expected economic growth pushed yields
higher and prompted the Federal Reserve to raise the federal funds rate by a
quarter-percentage point in March. As a result, U.S. Treasuries posted the
poorest performance of all the major bond markets.
Performance Review: Country Allocations Contributed to Performance
During the period under review, the Goldman Sachs Global Income Fund's
Institutional shares outperformed the fund's benchmark, the J.P. Morgan Global
Government Bond Index (hedged into U.S. dollars) (the "Index"). The Index covers
14 major bond markets and reflects their currency exposures. The fund's
favorable results were primarily due to its overweighting in German bonds, one
of the strongest European markets during the period, and its underweighting in
the United States, the weakest market.
The fund's Class A and B shares, which have higher expenses than the
Institutional shares, lagged the benchmark. The fund's Service shares achieved
positive performance since their inception on March 12, 1997; however, a partial
period of approximately 1 1/2 months is obviously too brief a period to measure
performance meaningfully.
The fund's Institutional and Class A shares fared well compared with their
peers. For the 12-month period ended April 30, the Institutional and Class A
shares ranked 25th and 29th, respectively, out of 133 global income funds based
on total return, according to Lipper Analytical Services, Inc. (Please note that
Lipper rankings do not take sales charges into account and that past
- -------------------------------------------------------------------------------
8
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
performance is not a guarantee of future results. Class B and Service shares
were not ranked for this period because they were in existence less than 12
months.)
We are also pleased to announce that for the five-year period ended April
30, 1997, the fund's Class A shares were rated "four stars" (out of 641 taxable
bond funds) by Morningstar, Inc., an independent rating agency./1/
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
Institu-
Class A Class B tional Service*
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Total Return (based on net
asset value) 3.22% 2.94% 3.50% 0.21%
- ----------------------------------------------------------------------------------------------------------------------
Return From Monthly 2.80% 2.59% 3.08% 0.01%
Distributions
- ----------------------------------------------------------------------------------------------------------------------
Return From Price 0.42% 0.35% 0.42% 0.20%
Appreciation
- ----------------------------------------------------------------------------------------------------------------------
Total Return of J.P. 3.47% 3.47% 3.47% 0.50%
Morgan Global
Government Bond Index
- ----------------------------------------------------------------------------------------------------------------------
NAV (as of 4/30/97) $14.59 $14.58 $14.58 $14.59
- ----------------------------------------------------------------------------------------------------------------------
NAV Change +$0.06 +$0.05 +$0.06 -$0.10
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period. Performance and net asset value
(NAV) change are from its inception date on 3/12/97.
- ------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Class A shares received "four stars"
for both the three- and one-year periods and were rated among 1,193 and 1,709
taxable bond funds for the three- and one-year periods, respectively. The
Morningstar ratings apply only to the fund's Class A shares; the fund's Class B,
Institutional and Service shares have not been rated. Class B and Service shares
are subject to additional fees and expenses that may have the effect of lowering
performance and may affect any future Morningstar rating. Morningstar rates each
fund against its peers in the same category. In all, there are four Morningstar
categories (domestic equity, international equity, taxable bond and municipal).
Morningstar ratings range from five stars (highest) to one star (lowest). Funds
with five-star ratings are in the top 10% of their category, four-star ratings
in the next 22.5%, three stars the next 35%, two stars the next 22.5% and one
star the lowest 10% of their categories.
During the period, we successfully employed several currency strategies
relative to our neutral position, which is to be fully hedged into U.S. dollars.
The main contributors to the positive currency performance were the fund's long
U.S. dollar positions against the yen and long positions in the high-yielding
European currencies against the Deutschemark and Swiss franc. The U.S. dollar
was supported by strong growth and rising short-term rates while the high-
yielding European currencies benefited from the EMU process gaining momentum.
Portfolio Composition and Investment Strategies
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
U.S. 33.1%
Germany 11.0%
Cash 10.7%
Japan 10.4%
U.K. 10.1%
Australia 8.5%
Italy 6.3%
Sweden 4.3%
France 3.0%
Spain 2.6%
</TABLE>
* The percentages shown are of total portfolio investments that have settled
and include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Dollar Bloc. As of April 30, 1997, the fund was slightly underweighted in
the dollar bloc countries (e.g., U.S., Canada and Australia) relative to the
Index, 41.6% versus 44.3%.
U.S. In the U.S., Treasury prices came under pressure when accelerating
economic growth drove bond yields
- -------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
higher and prompted a Fed rate hike. As noted, the fund was underweighted in
Treasuries, which significantly benefited its performance relative to the Index.
As of April 30, 33.1% of the portfolio was invested in U.S. Treasuries compared
with a 40.2% allocation for the benchmark.
Other Dollar Bloc. The fund was not invested in Australia when the period
began, but we took advantage of improving bond fundamentals and a widening of
the Australia/U.S. bond yield differential by reestablishing a position in
December 1996. As of April 30, Australian bonds accounted for 8.5% of the
portfolio, overweighted compared with the benchmark's 1.2%. The fund also
briefly held a position in Canada, which performed well and was sold at a
profit.
. Europe. European bonds were the strongest performers and they contributed
to the fund's favorable results during the period. As of April 30, the region
accounted for 37.3% of the portfolio compared with a 41.4% weighting for the
Index.
Germany. Despite a pickup in growth in mid-1996, the period under review
was marked by a return of softening economic activity. The most dramatic
indication of Germany's continuing economic difficulties was a record increase
in unemployment in January to levels last seen in 1933. The belief that an end
of the Bundesbank's very easy monetary policy was not in sight continued to
support the bond market. The fund held an overweighted position in Germany
relative to the Index, 11.0% versus 8.9%.
Spain, Sweden and Italy. When the period began, increased optimism
regarding EMU particularly benefited the higher-yielding bonds of Spain and
Sweden. Though the prospects for EMU dimmed somewhat during the first quarter,
Spain, a 2.6% position as of April 30, continued to perform well due to
favorable economic fundamentals. Sweden's portfolio weighting was in line with
the Index for most of the period, then increased to 4.3% in April in
anticipation of further rate cuts on the back of favorable inflation reports.
Finally, as of April 30, the portfolio was overweighted in Italy, 6.3% versus
4.9% for the Index, because growth remains muted and we expect it to benefit
from further yield convergence.
U.K. The U.K.'s economy continued to grow at a pace well above that of the
rest of Europe. The prospect of higher rates, as well as concerns surrounding
the general election, raised investor uncertainty and impacted the performance
of the U.K. gilt. However, we increased the portfolio's U.K. position in January
in the belief that the forward interest rate curve reflected an overly
pessimistic view of potential monetary tightening. By April 30, the U.K. was
10.1% of the portfolio, overweighted compared with the benchmark (6.4%).
France. Though the fund was not invested in France during most of the
period, we established a 3.0% position in April, as we believed that the
underperformance of shorter term bonds in that market presented an attractive
investment opportunity relative to Germany.
Ireland, Denmark and the Netherlands. During the period, we sold the
portfolio's small positions in Ireland, Denmark and the Netherlands after they
performed well and fulfilled our return expectations.
. Japan. The fund significantly underweighted Japan relative to the Index
(10.4% versus 14.3%) because economic growth, though muted, continued to point
towards economic recovery. To a significant extent, the Japanese bond market
shrugged off signs of strengthening growth as being "front loading" ahead of the
consumption tax hike on April 1. Instead, the market focused on the need for a
continuation of low rates to assist the troubled financial sector.
. Cash Equivalents. We reduced the fund's cash equivalent position to 10.7%,
down from 15.5% six months ago, in favor of attractive investment opportunities.
. Credit Quality. Throughout the period, the portfolio was 100% invested in
triple-A-rated securities.
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- -------------------------------------------------------------------------------
. Duration. As of the end of the period, the fund's duration was shorter
than that of the Index, 4.7 years compared with 5.1 years, primarily due to its
underweighting in Japan and its cash equivalent position. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's NAV should move in relation to interest rate
fluctuations.)
Distribution Policy
During the six-month period under review, the fund's Class A, B and
Institutional shares paid out distributions of $0.40, $0.37 and $0.44 per share,
respectively. From their inception on March 12 through April 30, the fund's
Service shares paid out $0.13 per share. The fund declares and pays dividends on
a monthly basis. The fund distributes substantially all of its taxable income,
as is required for all investment companies.
Fund Outlook
The rapid pace of U.S. economic growth during the past two quarters leads
us to expect further Fed tightening. Despite early signs of a possible slowdown
in the second quarter, we continue to believe that bond yields will need to rise
from current levels to ensure that inflationary pressures remain in check.
European growth remains modest, but even more importantly, inflation
appears to be set for further declines (excluding the U.K.). Provided EMU
remains on track, short rates across Europe appear likely to stay at current
levels for a sustained period. Consequently, we expect European bonds to provide
reasonable returns, outperforming the weaker U.S. bond market. In the U.K., a
25-basis-point rate hike and greater independence for the Bank of England has
established the new Labor government's anti-inflation credentials. Any policy
that moves towards a closer relationship with continental Europe will further
highlight the fundamentally cheap levels for U.K. gilts relative to other
European bonds.
In Japan, a rate hike in the near future remains unlikely but JGBs are
vulnerable to the threat of a change in government policy or an asset allocation
shift. For example, the weakness of the life insurance companies may force the
authorities to consider the cost of maintaining historically low short-term
rates. Furthermore, the strong performance of the equity market at the end of
the period may prompt an asset allocation shift away from bonds into equities,
putting further upward pressure on Japanese yields.
/s/ Stephen C. Fitzgerald
Stephen C. Fitzgerald
Portfolio Manager, Fixed Income Investments
/s/ Andrew F. Wilson
Andrew F. Wilson
Portfolio Manager, Fixed Income Investments
/s/ Gareth I. Evans
Gareth I. Evans
Portfolio Manager, Currency
Goldman Sachs Global Income Fund
London, May 30, 1997
- -------------------------------------------------------------------------------
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount(a) Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--87.7%
Australian Dollar--8.4%
Commonwealth of Australia
AUD 21,700,000 10.00% 02/15/06 $ 19,262,621
- --------------------------------------------------------------------------------
British Pound Sterling--9.8%
United Kingdom Treasury
BPS 8,000,000 8.50% 12/07/05 $ 13,833,063
5,300,000 7.50 12/07/06 8,528,207
- --------------------------------------------------------------------------------
$ 22,361,270
- --------------------------------------------------------------------------------
Deutschemark--10.8%
Federal Republic of Germany
DEM 28,000,000 7.50% 11/11/04 $ 18,101,859
2,000,000 6.50 10/14/05 1,216,538
9,000,000 6.25 04/26/06 5,383,994
- --------------------------------------------------------------------------------
$ 24,702,391
- --------------------------------------------------------------------------------
French Franc--3.0%
Government of France
FRF 40,000,000 4.75% 03/12/02 $ 6,851,366
- --------------------------------------------------------------------------------
Italian Lira--6.1%
Republic of Italy
ITL 22,000,000,000 9.50% 05/01/01 $ 13,922,058
- --------------------------------------------------------------------------------
Japanese Yen--10.2%
International Bank for Reconstruction & Development
JPY 1,400,000,000 4.50% 06/20/00 $ 12,132,194
700,000,000 6.75 06/18/01 6,665,813
500,000,000 4.50 03/20/03 4,497,873
- --------------------------------------------------------------------------------
$ 23,295,880
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 700,000,000 10.15% 01/31/06 $ 5,841,114
- --------------------------------------------------------------------------------
Swedish Krona--4.2%
Kingdom of Sweden
SEK 50,000,000 5.50% 04/12/02 $ 6,157,023
30,000,000 6.00 02/09/05 3,586,638
- --------------------------------------------------------------------------------
$ 9,743,661
- --------------------------------------------------------------------------------
United States Dollar--32.7%
United States Treasury Notes
USD 15,000,000 5.25% 01/31/01 $ 14,392,950
17,000,000 6.38 03/31/01 16,909,730
8,200,000 6.25 02/15/03 8,059,042
10,000,000 7.88 11/15/04 10,684,400
4,000,000 6.50 08/15/05 3,940,640
14,700,000 7.00 07/15/06 14,947,989
6,200,000 6.50 10/15/06 6,098,258
- --------------------------------------------------------------------------------
$ 75,033,009
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $204,539,209) $ 201,013,370
- --------------------------------------------------------------------------------
Short-Term Obligations--13.6%
State Street Bank & Trust Euro-Time Deposit
USD 31,090,625 5.66% 05/01/97 31,090,625
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $31,090,625) $ 31,090,625
- --------------------------------------------------------------------------------
<CAPTION>
Contracts Description Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Options--0.0%
FRF 60,000,000 Government of France 4.75% Call, $ 71,961
exp 7/97, Strike yield 4.85%
FRF 40,000,000 Government of France 4.75% Put, $ 39,750
exp 7/97, Strike yield 4.85%
- --------------------------------------------------------------------------------
Total Options
(Cost $124,428) $ 111,711
- --------------------------------------------------------------------------------
Total Investments
(Cost $235,754,262(b)) $ 232,215,706
- --------------------------------------------------------------------------------
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value $ 1,972,384
exceeds cost
Gross unrealized loss for investments in which cost (5,579,488)
exceeds value
- --------------------------------------------------------------------------------
Net unrealized loss $ (3,607,104)
- --------------------------------------------------------------------------------
</TABLE>
(a)The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
AUD = Australian Dollar JPY = Japanese Yen
BPS = British Pound Sterling ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
FRF = French Franc USD = United States Dollar
ITL = Italian Lira
/(b)/The aggregate cost for federal income tax purposes is $235,822,810.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Municipal Income Fund seeks to provide a high level of
current income that is exempt from regular federal income tax, consistent with
the preservation of capital. In pursuit of its objective, the fund invests in a
diversified portfolio of municipal securities with a weighted average credit
quality of double-A or better. The fund buys only investment-grade securities
or, if unrated, securities deemed to be of comparable quality. Under normal
interest rate conditions, the fund's duration is expected to be within one year
of its benchmark, the Lehman Brothers 15-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a 15-year bond.
A Stable Municipal Bond Market
The municipal market has remained at relatively rich levels compared with
the taxable market since the end of 1996, as light primary and secondary supply
has been consumed easily by stable demand. The average price of a 15-year
municipal bond (as calculated from data provided by Municipal Market Data, an
independent municipal market information provider) declined approximately 1.07%,
while yields rose from 5.30% on October 31, 1996 to 5.40% on April 30, 1997.
Supply increased throughout most of the period, though it remained light
compared with historical averages. In November, municipal bond issuance was up
30% versus the prior three-month average. As is typical, increased supply
continued in early December due to the approaching year-end. The 1997 new issue
supply has followed historical early-month patterns, with January and February
supply well below annual averages (slightly more than $10 billion each month)
and March and April supply closer to normal levels ($13 to $14 billion).
Demand from individual investors (who control approximately two-thirds of
municipal bond ownership either through mutual funds or direct investment)
remained stable, but not strong, as long-term municipal yields were below the
psychologically significant 6% level. While yields have not yet cracked that
barrier, President Clinton's reelection and the loss of Republican momentum have
put talk of tax reform and talk of significant changes in the tax-exempt status
of municipal bonds on the back burner, comforting some of the investors
concerned about the market. In addition, the emergence of "nontraditional"
buyers during April has helped support the long end of the market.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Yield
Year of Maturity 4/30/97 10/31/96
<S> <C> <C>
1998 3.85% 3.90%
1999 4.40% 4.15%
2000 4.60% 4.30%
2001 4.70% 4.40%
2002 4.80% 4.50%
2003 4.85% 4.60%
2004 4.90% 4.70%
2005 4.95% 4.80%
2006 5.00% 4.90%
2007 5.05% 5.00%
2008 5.10% 5.10%
2009 5.20% 5.20%
2010 5.30% 5.25%
2011 5.35% 5.30%
2012 5.40% 5.35%
2013 5.45% 5.40%
2014 5.50% 5.40%
2015 5.50% 5.45%
2016 5.55% 5.45%
2017 5.55% 5.45%
2018 5.55% 5.50%
2019 5.55% 5.50%
2020 5.60% 5.50%
2021 5.60% 5.50%
2022 5.60% 5.50%
2023 5.60% 5.50%
2024 5.60% 5.50%
2025 5.60% 5.50%
2026 5.60% 5.50%
2027 5.60% 5.50%
</TABLE>
The yield curve steepened and shifted upward at the short end, remained nearly
the same in the mid-range, and shifted marginally upward at the longer end, in
contrast to six months ago.
Performance Review: The Fund's Positive Performance Reflects Active Management
of Term Structure, Sector Weightings and Security Selection
During the period under review, the fund's Class A shares outperformed
their benchmark, the Lehman Brothers 15-Year Municipal Bond Index (the "Index").
The fund's Class B shares also performed well, although slightly below the
Index.
We are pleased to report that the fund's Class A shares outperformed most
of their peers. For the one-year period ended April 30, 1997, Class A shares
ranked in the top 10% of general municipal debt funds (20 out of 231) based on
total return, according to Lipper Analytical Services, Inc. The fund's Class B
shares were not in existence for the entire one-year period and were not
included in the ranking. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.)
- -------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
Class A Class B
------- -------
<S> <C> <C>
Total Return (based on net asset 2.57% 2.18%
value (NAV))
- --------------------------------------------------------------------------------
Return From Monthly Distributions 2.36% 1.97%
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.21% 0.21%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal 2.49% 2.49%
Bond Index
- --------------------------------------------------------------------------------
NAV (as of 4/30/97) $14.40 $14.40
- --------------------------------------------------------------------------------
NAV Change +$0.03 +$0.03
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
As always, we did not make any bets on the direction of interest rates, but
rather kept the fund's duration in line with the Index, occasionally using
municipal and Treasury futures contracts to manage sector allocation and
duration.
. The portfolio's structure is "credit-barbelled," emphasizing high-quality
bonds with maturities of 20 to 30 years on the long end of the yield curve and
lower quality bonds with four- to 10-year maturities on the short end of the
curve. This strategy allows us to extract extra yield from the shorter end of
the market while maintaining higher quality on the more interest-rate-sensitive
long end of the market. However, during the period, we regularly adjusted the
credit and term structure to take advantage of changing market conditions.
. During the period, we employed several strategies using municipal and/or
treasury futures contracts. These trades are designed to exploit relative
pricing discrepancies between different markets, and are not designed to incur
additional interest rate risk. The fund stood at a 100% municipal bond weighting
(no Treasury or municipal contracts) at the end of the reporting period,
indicating attractive opportunities across the length of the municipal yield
curve.
. The fund's performance also benefited from our extensive credit analysis.
Our research helped us identify specific investment opportunities, such as
"story" bonds. These securities are often misunderstood or incorrectly valued,
but can have unique security structures and attractive yield potential.
Portfolio Composition and Investment Strategies:
Emphasis on Revenue Bonds
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Revenue Bonds 44.1%
Insured Revenue Bonds 35.4%
Insured General Obligations 20.5%
</TABLE>
* The percentages shown are of total portfolio investments that have settled
and include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of April 30, the fund held a 79.5% position in a combination of insured and
uninsured revenue bonds, overweighted compared with the Index (53.9%). (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. As of April 30, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 20.5% versus 45.6%. Though the fund's total
GO allocation of 20.5% was down from 29.8% six months ago, the GO category is
now exclusively
- -------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- -------------------------------------------------------------------------------
weighted in insured GOs. Security-specific investment opportunities and the
relative cheapness of bond insurance for issuers enable the fund to purchase
higher yielding insured GOs without sacrificing quality.
. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. VRDNs fell
from 7.6% to 4.4% of the portfolio. The 4.4% VRDN allocation consists of 3.0%
GOs and 1.4% Revenue-Backed VRDNs.
. Credit Quality. During the period, the fund's average credit quality has
remained double-A. The fund's credit quality maintained a "barbell" structure,
with higher quality securities at the long end of the yield curve and lower
quality securities (but still investment grade) at the short end, though there
have been slight increases in the double-A and single-A categories. As of April
30, 59.8% of the fund was invested in triple-A-rated securities, down from 70.5%
six months ago, while double-A- and single-A-rated securities were increased to
14.4% and 9.8% from 9.3% and 1.8%, respectively. We continued to maintain a
position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 16.0% of the portfolio, down
slightly from 18.4%. We used extensive credit research to identify specific
securities that offered higher yields than average triple-B-rated securities,
but still were of sound credit quality. The triple-B-rated position benefited
the fund's performance during the period by enabling us to lock in above-market
yields and providing greater price appreciation potential relative to the
market. Each of these positions is monitored carefully, and we will remain
vigilant for any changes in their credit quality.
Market Outlook
Our long-term outlook for municipal bond supply is essentially neutral, as
rates are at high levels compared with one year ago. As a result, the current
rate environment encourages neither supply (low rates bring refinancing) nor
demand (high rates attract buyers). At this point, the municipal market does not
perceive any real threats from the federal budget accord. Without any
fundamental problems in view for tax-exempts, we are left with technical forces
as the key driver in relative market performance.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the period
under review, the fund's Class A and B shares paid out distributions of $0.34
and $0.32 per share, respectively. The fund intends to distribute substantially
all of its investment company tax-exempt and taxable income, as required by tax
law.
We value your investment in the Goldman Sachs Municipal Income Fund and we
look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Municipal Income Fund
May 30, 1997
- -------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--95.6%
Arizona--7.6%
Maricopa County MFH IDA (A)
$1,795,000 5.85% 01/01/08 $1,824,546
Maricopa County Unified School District No. 41 GO (FSA)
(AAA/Aaa)
2,500,000 6.25 07/01/15 2,618,500
- --------------------------------------------------------------------
$4,443,046
- --------------------------------------------------------------------
California--3.4%
Contra Costa Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $2,014,700
- --------------------------------------------------------------------
Colorado--4.3%
Englewood MFH RB (BBB)/(d)/
$2,500,000 6.65% 12/01/26 $2,495,575
- --------------------------------------------------------------------
Connecticut--3.6%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $2,107,780
- --------------------------------------------------------------------
Florida--6.7%
Escambia County Housing Authority, Single Family
Multi-County (FNMA/GNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $1,460,070
Santa Rosa Bay Bridge Authority RB (BBB-)
2,500,000 6.25 07/01/28 2,472,900
- --------------------------------------------------------------------
$3,932,970
- --------------------------------------------------------------------
Illinois--14.6%
Chicago Midway Airport RB (MBIA)(AAA/Aaa)
$2,500,000 5.50% 01/01/10 $2,498,800
Lake County Unified School District No. 116 GO (FSA)
(AAA/Aaa)
2,000,000 7.60 02/01/14 2,423,180
1,525,000 6.10 02/01/16 1,555,988
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,104,080
- --------------------------------------------------------------------
$8,582,048
- --------------------------------------------------------------------
Indiana--7.0%
Indiana Bond Bank for Hendricks County RB (AA-)/(b)/
$1,420,000 6.00% 02/01/12 $1,472,540
Indiana Transportation Airport Series A RB (AAA/Aaa)
2,500,000 6.00 11/01/11 2,618,025
- --------------------------------------------------------------------
$4,090,565
- --------------------------------------------------------------------
Kentucky--1.8%
Nelson County Industrial Building RB for Mabex
Universal Corp. Project (A3)
$1,000,000 6.50% 04/01/05 $1,060,850
- --------------------------------------------------------------------
Louisiana--4.3%
South Louisiana Port RB for Cargill Corp. (Aa3)
$2,500,000 5.85% 04/01/17 $2,499,950
- --------------------------------------------------------------------
Maine--1.2%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 675,000 6.80% 12/01/07 $ 721,177
- --------------------------------------------------------------------
Missouri--3.6%
St. Louis Municipal Finance Leasehold RB (A/Aa3)
$2,100,000 5.30% 07/15/02 $2,128,854
- --------------------------------------------------------------------
Nevada--3.1%
Washoe County GO (MBIA)(AAA/Aaa)
$2,000,000 5.00% 06/01/17 $1,822,080
- --------------------------------------------------------------------
New York--3.4%
Syracuse IDA RB (AA)
$2,000,000 5.13% 10/15/02 $1,992,580
- --------------------------------------------------------------------
North Dakota--3.5%
Mercer County PCRB for Basin Electric & Power 2nd
Series (AMBAC) (AAA/Aaa)/(d)/
$2,000,000 6.05% 01/01/19 $2,051,720
- --------------------------------------------------------------------
Ohio--1.0%
Cuyahoga County for Rock & Roll Hall of Fame RB (BBB)
$ 600,000 5.45% 12/01/05 $ 594,018
- --------------------------------------------------------------------
Oklahoma--4.0%
Holdenville IDA RB (BBB/Baa)
$1,245,000 5.95% 07/01/02 $1,279,001
Tulsa County Public Facilities RB (A-)
1,000,000 6.60 11/01/08 1,070,250
- --------------------------------------------------------------------
$2,349,251
- --------------------------------------------------------------------
Pennsylvania--3.5%
Bethlehem School District GO Bond (MBIA)(AAA/Aaa)
$2,000,000 6.00% 03/01/16 $2,035,940
- --------------------------------------------------------------------
South Carolina--2.5%
Piedmont Municipal Power Agency RB (MBIA)(AAA/Aaa)
$1,465,000 5.50% 01/01/10 $1,461,718
- --------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations(continued)
Tennessee--2.6%
McMinnville Housing Authority RB (A2)
$1,550,000 6.00% 10/01/09 $ 1,551,240
- --------------------------------------------------------------------
Texas--5.2%
Denison Water & Sewer RB (AMBAC)(AAA/Aaa)
$1,000,000 5.50% 09/01/09 $ 1,014,700
East Texas Criminal Justice Facilities Financing Corp.
RB (AMBAC) (AAA/Aaa)
2,000,000 5.75 11/01/09 2,035,100
- --------------------------------------------------------------------
$ 3,049,800
- --------------------------------------------------------------------
Washington--8.7%
Chelan County Public Utility RB (MBIA)(AAA/Aaa)
$2,500,000 6.35% 07/01/28 $ 2,586,650
Washington State Public Power Supply System Series A RB
(AMBAC)(AAA/Aaa)
2,500,000 5.70 07/01/11 2,491,850
- --------------------------------------------------------------------
$ 5,078,500
- --------------------------------------------------------------------
Total Debt Obligations
(Cost $55,481,930) $ 56,064,362
- --------------------------------------------------------------------
Short-Term Obligations--5.0%
Alabama--0.7%
Phenix City IDA RB (Toronto Dominion LOC)(AA)/(a)/
$ 400,000 5.05% 05/01/97 $ 400,000
- --------------------------------------------------------------------
New York--3.4%
New York GO (Kredietbank LOC)(AA-)/(a)/
$2,000,000 4.45% 05/01/97 $ 2,000,000
- --------------------------------------------------------------------
Texas--0.9%
Sabine River PCRB (Union Bank of Switzerland
LOC)(AA+)/(a)/
$ 500,000 5.55% 05/01/97 $ 500,000
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $2,900,000) $ 2,900,000
- --------------------------------------------------------------------
Total Investments
(Cost $58,381,930/(c)/) $58,964,362
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value $739,962
exceeds cost
Gross unrealized loss for investments in which cost (157,530)
exceeds value
- --------------------------------------------------------------------
Net unrealized gain $582,432
- --------------------------------------------------------------------
</TABLE>
/(a)/ Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/(b)/ When-issued security.
/(c)/ The amount stated also represents aggregate cost for federal income
tax purposes.
/(d)/ Portions of these securities are being segregated for when-issued
securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Abbreviations:
<S> <C>
AMBAC --Insured by American Municipal
Bond Assurance Corp.
FNMA --Insured by Federal National
Mortgage Association
FSA --Financial Security Assurance Co.
GNMA --Insured by Government National
Mortgage Association
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $64,429,737, $235,754,262 and $58,381,930) $64,142,538 $232,215,706 $58,964,362
Cash, at value 94,169 324,863 90,406
Receivables:
Investment securities sold 1,004,854 -- --
Interest 587,522 3,982,620 1,009,894
Forward foreign currency exchange contracts -- 2,735,490 --
Fund shares sold 664,318 373,902 93,800
Variation margin 6,413 -- --
Foreign tax withheld -- 87,755 --
Deferred organization expenses, net 14,677 -- 21,390
Other assets 63,375 3,239 9,208
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 66,577,866 239,723,575 60,189,060
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 10,549,108 8,691,808 1,387,075
Forward foreign currency exchange contracts -- 1,125,990 --
Fund shares repurchased 23,074 332,497 10,350
Income distribution 81,478 7,496 92,940
Investment adviser fees 10,999 82,520 19,312
Administration fees -- 28,132 7,242
Authorized dealer service fees 10,285 38,021 9,984
Distribution fees 1,290 30,045 169
Accrued expenses and other liabilities 19,056 98,644 12,103
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,695,290 10,435,153 1,539,175
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 56,393,312 222,342,678 58,551,259
Accumulated undistributed net investment income 53,331 6,196,133 60,331
Accumulated net realized loss on investment transactions (287,837) (989,524) (544,137)
Accumulated net realized foreign currency gain -- 3,713,328 --
Net unrealized gain (loss) on investments and futures (276,230) 682,535 582,432
Net unrealized loss on translation of assets and liabilities denominated
in foreign currencies -- (2,656,728) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $55,882,576 $229,288,422 $58,649,885
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:/(a)/
Class A $14.10 $14.59 $14.40
Class B $14.11 $14.58 $14.40
Institutional -- $14.58 --
Service -- $14.59 --
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Class A 3,754,506 11,765,253 4,031,092
Class B 208,089 75,162 42,867
Institutional -- 3,870,161 --
Service -- 6,466 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 3,962,595 15,717,042 4,073,959
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $14.76, $15.28 and $15.08 for Government Income, Global Income
and Municipal Income, respectively. At redemption, Class B shares are
subject to a contingent deferred sales charge, assessed on the amount
equal to the lesser of the current net asset value or the original
purchase price of the shares.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Operations
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $ 1,346,191 $ 7,675,570 $1,514,540
- ----------------------------------------------------------------------------------------------------------------------------------
Total income 1,346,191 7,675,570 1,514,540
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 98,534 915,292 109,080
Administration fees 29,560 183,102 40,904
Authorized dealer service fees 49,266 235,877 68,174
Distribution fees 51,745 237,238 69,406
Custodian fees 31,954 76,892 20,721
Transfer agent fees 42,728 53,004 44,706
Professional fees 30,344 40,805 29,494
Registration fees 13,207 28,146 14,522
Amortization of deferred organization expenses 9,321 -- 8,700
Trustee fees 332 2,324 553
Other 6,659 23,235 6,641
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 363,650 1,795,915 412,901
Less--expenses reimbursable and fees waived by Goldman Sachs (261,399) (513,953) (179,441)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 102,251 1,281,962 233,460
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income 1,243,940 6,393,608 1,281,080
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions (102,548) 3,647,163 384,465
Futures transactions 19,662 -- 96,288
Foreign currency related transactions -- 3,669,694 --
Net change in unrealized gain (loss) on:
Investments (363,801) (4,182,327) (408,697)
Futures (63,631) -- --
Translation of assets and liabilities denominated in foreign currencies -- (1,445,970) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, futures and foreign
currency transactions (510,318) 1,688,560 72,056
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 733,622 $ 8,082,168 $1,353,136
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Net of $94,607 in foreign withholding tax for the Global Income Fund.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
-------------------------------------------
<S> <C> <C> <C>
From operations:
Net investment income $ 1,243,940 $ 6,393,608 $1,281,080
Net realized gain (loss) from investment transactions (82,886) 3,647,163 480,753
Net realized gain from foreign currency related transactions -- 3,669,694 --
Net change in unrealized gain (loss) on investments and futures (427,432) (4,182,327) (408,697)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- (1,445,970) --
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 733,622 8,082,168 1,353,136
- -------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,217,324) (5,196,561) (1,272,366)
Class B (26,616) (15,612) (8,714)
Institutional Class -- (1,688,968) --
Service Class -- (559) --
Net realized gain on investment transactions
Class A (157,412) -- --
Class B (1,780) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,403,132) (6,901,700) (1,281,080)
- -------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 32,392,263 19,707,735 10,342,628
Reinvestment of dividends and distributions 1,137,480 4,631,079 756,256
Cost of shares repurchased (7,815,079) (49,406,305) (5,043,455)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 25,714,664 (25,067,491) 6,055,429
- -------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 25,045,154 (23,887,023) 6,127,485
Net assets:
Beginning of period 30,837,422 253,175,445 52,522,400
- -------------------------------------------------------------------------------------------------------------------------------
End of period $ 55,882,576 $ 229,288,422 $58,649,885
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income $ 53,331 $ 6,196,133 $ 60,331
- -------------------------------------------------------------------------------------------------------------------------------
Summary of share transactions:
Shares sold 2,285,678 1,345,225 716,106
Reinvestment of dividends and distributions 80,099 316,808 52,251
Shares repurchased (550,966) (3,368,115) (349,613)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 1,814,811 (1,706,082) 418,744
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
--------------------------------------------
<S> <C> <C> <C>
From operations:
Net investment income $ 1,900,328 $ 15,455,369 $ 2,420,375
Net realized gain from investment transactions 47,581 9,268,666 1,239,690
Net realized loss from foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on investments and futures (257,605) 54,149 (513,085)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,690,304 27,534,625 3,146,980
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,898,372) (22,455,377) (2,418,570)
Class B (3,324) (3,052) (1,805)
Institutional Class -- (4,050,770) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,901,696) (26,509,199) (2,420,375)
- ---------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 8,922,548 39,747,372 6,389,765
Reinvestment of dividends and distributions 1,614,587 16,968,046 1,484,778
Cost of shares repurchased (8,990,920) (82,019,748) (9,875,982)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 1,546,215 (25,304,330) (2,001,439)
- ---------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 1,334,823 (24,278,904) (1,274,834)
Net assets:
Beginning of year 29,502,599 277,454,349 53,797,234
- ---------------------------------------------------------------------------------------------------------------------------------
End of year $ 30,837,422 $ 253,175,445 $ 52,522,400
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income $ 53,331 $ 6,704,225 $ 60,331
- ---------------------------------------------------------------------------------------------------------------------------------
Summary of share transactions:
Shares sold 624,626 2,811,314 449,496
Reinvestment of dividends and distributions 112,977 1,198,568 104,201
Shares repurchased (628,175) (5,784,097) (694,794)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 109,428 (1,774,215) (141,097)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end, management
investment company. Included in this report are the financial statements for the
Goldman Sachs Government Income Fund (Government Income), the Goldman Sachs
Global Income Fund (Global Income) and the Goldman Sachs Municipal Income Fund
(Municipal Income), collectively, "the Funds" or individually a "Fund."
Government Income and Municipal Income are diversified portfolios whereas Global
Income is a non-diversified portfolio. As of April 30, 1997, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. Effective May 1, 1997, the Trust was reorganized from a
Massachusetts business trust to a Delaware business trust and various
operational changes were approved, including updating certain investment
restrictions and amending the management contracts.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations for
which accurate market quotations are readily available are valued on the basis
of quotations furnished by a pricing service or provided by dealers in such
securities. Portfolio securities for which accurate market quotations are not
readily available are valued based on yield equivalents, pricing matrix or other
sources, under valuation procedures established by the Trust's Board of
Trustees. Short-term debt obligations maturing in sixty days or less are valued
at amortized cost.
B. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account principal prepayment
experience and estimates of future principal prepayments. Certain mortgage
security paydown gains and losses are taxable as ordinary income. Such paydown
gains and losses increase or decrease taxable ordinary income available for
distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
For Municipal Income, market premiums on other long-term debt securities are
amortized to interest income while for Global Income, market discounts on other
long-term debt securities are accreted to interest income.
C. Foreign Currency Translations
- --------------------------------
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized and unrealized gain (loss) on foreign currency transactions
will represent: (i) foreign exchange
- -------------------------------------------------------------------------------
22
<PAGE>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
gains and losses from the sale and holdings of foreign currencies and
investments; (ii) gains and losses between trade date and settlement date on
investment securities transactions and forward exchange contracts; and (iii)
gains and losses from the difference between amounts of interest recorded and
the amounts actually received.
D. Forward Foreign Currency Exchange Contracts
- ----------------------------------------------
Global Income may enter into forward foreign exchange contracts for the purchase
or sale of a specific foreign currency at a fixed price on a future date as a
hedge or cross-hedge against either specific transactions or portfolio
positions. Global Income may also purchase and sell forward contracts to seek to
increase total return. All commitments are "marked-to-market" daily at the
applicable translation rates and any resulting unrealized gains or losses are
recorded in the Fund's financial statements. The Fund records realized gains or
losses at the time the forward contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
E. Mortgage Dollar Rolls
- ------------------------
Government Income and Global Income may enter into mortgage "dollar rolls" in
which the Fund sells securities in the current month for delivery and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund loses the right to receive principal and interest paid on the
securities sold but benefits to the extent of any price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
F. Option Accounting Principles
- -------------------------------
The Funds may purchase or write call and put options to hedge against changes in
security prices. When call or put options are written, an amount equal to the
premium received is recorded as a liability in the Statement of Assets and
Liabilities which is subsequently marked-to-market to reflect the current value
of the written option. Upon the purchase of a call option or a protective put
option, the premium paid is recorded as an investment, and subsequently
marked-to-market to reflect the current market value of the option. If a closing
transaction has been entered into, a gain or loss may be realized on the written
or purchased option. When options expire, the premium received from a written
option is treated as a realized gain while the cost of a purchased option is
treated as a realized loss. If an option is exercised, the premium paid or
received will be offset against the proceeds on the sale or the purchase cost of
the underlying security to determine realized gains or losses. Gains and losses
are reported in the Statement of Operations.
Certain risks arise upon entering into options contracts. The risk in
writing a call option is that the Fund gives up the opportunity to profit if the
underlying security's market value increases beyond the exercise price and the
option is exercised. The risk in writing a put option is that the Fund may
realize a loss if the market price of an underlying security declines and the
option is exercised. A premium must be paid for purchased options regardless of
whether or not the option is exercised. The Fund also has the risk of not being
able to enter into a closing transaction if a liquid secondary market does not
exist.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices,
- -------------------------------------------------------------------------------
23
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
currency exchange rates (in the case of Global Income) or to seek to increase
total return.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Payments for futures contracts ("variation margin") are paid or received by the
Funds daily, dependent on the daily fluctuations in the value of the contracts,
and are recorded for financial reporting purposes, as unrealized gains or
losses. When contracts are closed, the Funds realize a gain or loss equal to the
difference between the value of the futures contract to sell and the value of
the futures contract to buy. Gains and losses are reported in the Statement of
Operations.
The use of futures contracts involve, to varying degrees, elements of
market and counterparty risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities. Changes in the value of the futures
contract may not directly correlate with changes in the value of the underlying
securities decreasing the effectiveness of the Funds' hedging strategies
potentially resulting in a loss.
H. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute
substantially all investment company tax-exempt and taxable income to its
shareholders each year. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial
reporting purposes is determined in accordance with income tax rules. Therefore,
the source of a portfolio's distributions may be shown in the accompanying
financial statements as either from or in excess of net investment income or net
realized gain on investment transactions, or from paid-in capital, depending on
the type of book/tax differences that may exist.
The Funds, at their most recent tax year-ends (October 31, 1996 for Global
Income and December 31, 1996 for Government Income and Municipal Income) had
approximately the following amounts of capital loss carryforwards for U.S.
federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ---------------- --------------
<S> <C> <C>
Global Income $4,471,734 2004
Municipal Income $ 702,691 2004
</TABLE>
I. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
J. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are generally allocated to the portfolios based on each
portfolio's relative average net assets for the period.
Class A and Class B shareholders of the Funds bear all expenses and fees
relating to their respective distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. Transfer
agent fees are subject to separate arrangements for each class. Shareholders of
Service shares bear all expenses and fees paid to service organizations for
their services with respect to such shares as well as other expenses (subject to
expense limitations) which are directly attributable to such shares.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as each Fund's investment adviser
pursuant to Investment Advisory Agreements. Goldman Sachs Asset Management
International ("GSAM International"), an affiliate of Goldman Sachs, acts as
subadviser under a Subadvisory Agreement for Global Income. Under the Investment
Advisory and Subadvisory Agreements, GSAM and GSAM International, subject to the
general supervision of the Trust's Board of Trustees, manage the Funds'
portfolios. As compensation for the services rendered pursuant to the Investment
Advisory Agreements and the assumption of the expenses related thereto, GSAM is
entitled to a fee, computed daily and
- -------------------------------------------------------------------------------
24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
payable monthly at an annual rate equal to .50%, .25% and .40% of average daily
net assets of Government Income, Global Income and Municipal Income,
respectively. As compensation for the services rendered pursuant to the
Subadvisory Agreement, GSAM International is entitled to a subadvisory fee from
Global Income of .50% of the average daily net assets.
GSAM serves as each Fund's administrator pursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreement, GSAM is entitled to
a fee, computed daily and payable monthly at an annual rate equal to .15% of
each Fund's average daily net assets.
GSAM has voluntarily agreed to limit certain of the Funds' expenses
(excluding advisory, administration, distribution and authorized dealer service
fees, taxes, interest, brokerage, litigation, indemnification and other
extraordinary expenses and with respect to Global Income, transfer agent fees)
to the extent such expenses exceed .00%, .06% and .05% per annum of Government
Income, Global Income and Municipal Income, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to
a Distribution Agreement and as such may receive a portion of the sales load
imposed on the sale of Fund shares. During the period ended April 30, 1997,
Goldman Sachs retained approximately $134,700, $46,600 and $40,300 of sales
loads related to sales of Government Income, Global Income and Municipal Income,
respectively.
The Trust, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% and .75% of each Fund's average
daily net assets attributable to Class A and Class B shares, respectively. The
Trust, on behalf of each Fund, has adopted an Authorized Dealer Service Plan
(the "Service Plan") pursuant to which Goldman Sachs and Authorized Dealers are
compensated for providing personal and account maintenance services. Each Fund
pays a fee under its Service Plan equal, on an annual basis, up to .25% of the
average daily net assets attributable to the Class A and Class B shares. Goldman
Sachs also serves as the Transfer Agent of the Funds for a fee.
For the six months ended April 30, 1997, the advisors, administrators and
distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
<TABLE>
<CAPTION>
Waivers
-------------------------------
Reimburse-
Admin- Class A Reimburse- ment
Fund Advisor istrator 12b-1 ment Outstanding
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government
Income $49 $30 $48 $134 $24
Global
Income 378 -- 38 98 --
Municipal
Income --- -- 68 111 9
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such
waivers and limitations in the future at their discretion.
For the six months ended April 30, 1997, Government Income and Municipal
Income incurred commissions expense of approximately $877 and $500 respectively,
in connection with futures contracts entered into with Goldman Sachs. At April
30, 1997, Goldman Sachs owes approximately $6,400 to Government Income related
to variation margin on futures contracts.
As of May 1, 1997 each Fund's advisory and administration agreements were
combined into a single management agreement encompassing the same services and
fee structure. The investment adviser for Global Income changed from GSAM to
GSAM International.
4. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, Global Income participates in a $50,000,000
committed, unsecured revolving line of credit facility. Both facilities
- -------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
are to be used solely for temporary or emergency purposes. Under the most
restrictive arrangement, each Fund must own securities having a market value in
excess of 300% of the total bank borrowings. The interest rate on borrowings is
based on the federal funds rate. The committed facility also requires a fee to
be paid based on the amount of the commitment which has not been utilized. For
the period ended April 30, 1997, the Funds did not have any borrowings under
these facilities.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for the
six months ended April 30, 1997, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and agency
obligations $89,868,153 $31,460,469 $ --
- --------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 2,626,912 251,582,253 52,647,833
- --------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 66,314,796 46,245,813 --
- --------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and agency
obligations) 2,926,850 234,275,222 50,202,452
- --------------------------------------------------------------------
</TABLE>
At April 30, 1997, Global Income had outstanding forward foreign currency
exchange contracts, both to purchase and sell foreign currencies as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Value on
Foreign Currency Settlement Current Unrealized
Purchase Contracts Date Value (Loss)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Finnish Markka
Expiring 7/10/97 $ 5,769,651 $ 5,743,713 $ (25,938)
Norwegian Krone
Expiring 7/18/97 6,967,220 6,931,393 (35,827)
- ----------------------------------------------------------------------------
Total Foreign Currency
Purchase Contracts $12,736,871 $12,675,106 $ (61,765)
- ----------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
Expiring 6/16/97 $ 19,731,038 $ 19,370,358 $ 360,680
British Pound Sterling
Expiring 5/15/97 22,990,248 22,842,002 148,246
Deutschemark
Expiring 5/23/97 9,189,539 9,098,874 90,665
Expiring 7/10/97 5,769,651 5,746,603 23,048
French Franc
Expiring 7/22/97 19,223,491 18,986,663 236,828
Italian Lira
Expiring 5/23/97 14,576,014 14,452,635 123,379
Japanese Yen
Expiring 7/24/97 46,975,472 46,670,841 304,631
Spanish Peseta
Expiring 6/11/97 5,856,184 5,819,307 36,877
Swedish Krona
Expiring 6/12/97 10,186,641 9,919,416 267,225
Swiss Franc
Expiring 5/23/97 240,202 240,493 (291)
Expiring 5/23/97 11,211,600 11,103,780 107,820
- ----------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $165,950,080 $164,250,972 $1,699,108
- ----------------------------------------------------------------------------
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
At April 30, 1997, Global Income had sufficient cash and/or securities to
cover any commitments under these contracts.
Global Income has recorded a "Receivable for forward foreign currency
exchange contracts" and "Payable for forward foreign currency exchange
contracts" resulting from open and closed but not settled forward foreign
currency exchange contracts of $2,735,490 and $1,125,990 respectively, in the
accompanying Statement of Assets and Liabilities. Included in the "Receivable
and Payable for forward foreign currency exchange contracts" are $1,036,091 and
$1,063,934 respectively, related to forward contracts closed but not settled as
of April 30, 1997.
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the six months ended April 30, 1997 is as follows:
<TABLE>
<CAPTION>
Government Income Global Income Municipal Income
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 2,087,525 $29,588,339 1,091,068 $15,982,653 687,045 $9,922,452
Reinvestment of dividends and
distributions 78,520 1,115,153 240,916 3,522,418 51,831 750,177
Shares repurchased (543,006) (7,702,748) (3,237,001) (47,484,511) (345,221) (4,979,641)
--------------------------------------------------------------------------------------
1,623,039 23,000,744 (1,905,017) (27,979,440) 393,655 5,692,988
--------------------------------------------------------------------------------------
Class B shares
Shares sold 198,153 2,803,924 65,331 958,124 29,061 420,176
Reinvestment of dividends and
distributions 1,579 22,327 715 10,428 420 6,079
Shares repurchased (7,960) (112,331) (8,487) (124,059) (4,392) (63,814)
--------------------------------------------------------------------------------------
191,772 2,713,920 57,559 844,493 25,089 362,441
--------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 182,398 2,673,084 -- --
Reinvestment of dividends and
distributions -- -- 75,139 1,097,674 -- --
Shares repurchased -- -- (122,627) (1,797,735) -- --
--------------------------------------------------------------------------------------
-- -- 134,910 1,973,023 -- --
--------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 6,428 93,874 -- --
Reinvestment of dividends and
distributions -- -- 38 559 -- --
Shares repurchased -- -- -- -- -- --
--------------------------------------------------------------------------------------
-- -- 6,466 94,433 -- --
--------------------------------------------------------------------------------------
Net increase (decrease) 1,814,811 $25,714,664 (1,706,082)$(25,067,491) 418,744 $6,055,429
=====================================================================================-
</TABLE>
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Global Income Municipal Income
- --------------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 607,156 $8,675,868 1,089,521 $15,545,777 431,736 $6,139,212
Reinvestment of dividends and
distributions 112,752 1,611,387 947,846 13,419,614 104,074 1,482,976
Shares repurchased (626,797) (8,971,389) (5,376,065) (76,216,894) (694,685) (9,874,431)
--------------------------------------------------------------------------------------
93,111 1,315,866 (3,338,698) (47,251,503) (158,875) (2,252,243)
--------------------------------------------------------------------------------------
Class B shares
Shares sold 17,470 246,680 18,628 265,053 17,760 250,553
Reinvestment of dividends and
distributions 225 3,200 119 1,708 127 1,802
Shares repurchased (1,378) (19,531) (1,144) (16,373) (109) (1,551)
--------------------------------------------------------------------------------------
16,317 230,349 17,603 250,388 17,778 250,804
--------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 1,703,165 23,936,542 -- --
Reinvestment of dividends and
distributions -- -- 250,603 3,546,724 -- --
Shares repurchased -- -- (406,888) (5,786,481) -- --
--------------------------------------------------------------------------------------
-- -- 1,546,880 21,696,785 -- --
--------------------------------------------------------------------------------------
Net increase (decrease) 109,428 $1,546,215 (1,774,215)$(25,304,330) (141,097) $(2,001,439)
======================================================================================
</TABLE>
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
7. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Funds' custodian.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSAM, transfer uninvested cash balances into joint accounts, the
daily aggregate balance of which is invested in one or more repurchase
agreements. The underlying securities for the repurchase agreements are U.S.
Treasury and agency obligations. At April 30, 1997, Government Income had an
undivided interest in the repurchase agreement in the following joint account
which equaled $11,100,000 in principal amount. At April 30, the repurchase
agreements held in this joint account, along with the corresponding underlying
securities (including the type of security, market value, interest rate and
maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns & Co., dated 4/30/97, repurchase price
$680,103,889 (GNMA: $59,497,211, 7.50%-9.00%,
12/15/21-12/15/26; FNMA: $267,568,394, 5.50%,
02/01/09-04/01/27; FHLMC: $373,405,594, 5.50%-7.50%,
2/01/98-4/01/27)
$680,000,000 5.50% 5/01/97 $680,000,000
Nomura Securities International, Inc. dated 4/30/97,
repurchase price $300,045,833 (FNMA: $182,812,268,
5.94%-8.01%, 7/22/97-5/11/05; FHLMC: $38,631,543,
6.02%-6.75%, 1/28/00-12/04/01, FCSB: $49,581,430,
6.05%-6.25%, 5/10/99-12/03/99, SLMA: $29,222,430,
6.00%, 1/16/01)
300,000,000 5.50 5/01/97 300,000,000
Credit Suisse First Boston, dated 4/30/97, repurchase
price $52,307,845 (U.S. Treasury Bill: $53,475,803,
2/05/98)
52,300,000 5.40 5/01/97 52,300,000
- --------------------------------------------------------------------
Total Joint Repurchase Agreement Account $1,032,300,000
- --------------------------------------------------------------------
</TABLE>
9. Other
As of April 30, 1997, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 16% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
28
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions/(a)/ transactions operations income transactions
--------------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997-Class A shares $14.36 $0.46 $(0.20) -- $0.26 $(0.45) $(0.07)
1997-Class B shares 14.37 0.40 (0.19) -- 0.21 (0.40) (0.07)
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 14.47 0.92 (0.11) -- 0.81 (0.92) --
1996-Class B shares/(c)/ 14.11 0.41 0.26 -- 0.67 (0.41) --
1995-Class A shares 13.47 0.94 1.00 -- 1.94 (0.94) --
1994-Class A shares 14.90 0.85 (1.28) -- (0.43) (0.85) (0.12)
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares 14.32 0.56 0.58 -- 1.14 (0.56) --
GLOBAL INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares $14.53 $0.25 $(0.07) $0.28 $0.46 $(0.40) --
1997-Class B shares 14.53 0.36 (0.02) 0.08 0.42 (0.37) --
1997-Institutional shares 14.52 0.42 (0.02) 0.10 0.50 (0.44) --
1997-Service shares/(i)/ 14.69 0.10 0.02 (0.09) 0.03 (0.13) --
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 14.45 0.71 0.62 0.18 1.51 (1.43) --
1996-Class B shares/(c)/ 14.03 0.34 0.41 0.11 0.86 (0.36) --
1996-Institutional shares 14.45 1.15 0.32 0.10 1.57 (1.50) --
1995-Class A shares 13.43 0.89 0.92 0.15 1.96 (0.94) --
1995-Institutional shares/(f)/ 14.09 0.22 0.34 0.06 0.62 (0.26) --
1994-Class A shares 15.07 0.84 (1.37) (0.12) (0.65) (0.22) (0.16)
1993-Class A shares 14.69 0.85 1.07 (0.42) 1.50 (0.85) (0.27)
1992-Class A shares 14.60 1.14 0.45 (0.36) 1.23 (1.14) --
For the Period August 2, 1991/(d)/through October 31,
- -----------------------------------------------------------------
1991-Class A shares 14.55 0.25 0.23 (0.19) 0.29 (0.24) --
<CAPTION>
Distributions to shareholders
-----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(b)/
-----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997-Class A shares -- -- -- $(0.52) $(0.26) $14.10 1.83%/(g)/
1997-Class B shares -- -- -- (0.47) (0.26) 14.11 1.43/(g)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares -- -- -- (0.92) (0.11) 14.36 5.80
1996-Class B shares/(c)/ -- -- -- (0.41) 0.26 14.37 4.85/(g)/
1995-Class A shares -- -- -- (0.94) 1.00 14.47 14.90
1994-Class A shares (0.02) (0.01) -- (1.00) (1.43) 13.47 (2.98)
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares -- -- -- (0.56) 0.58 14.90 8.03/(g)/
GLOBAL INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares -- -- -- $(0.40) $0.06 $14.59 3.22%/(g)/
1997-Class B shares -- -- -- (0.37) 0.05 14.58 2.94/(g)/
1997-Institutional shares -- -- -- (0.44) 0.06 14.58 3.50/(g)/
1997-Service shares/(i)/ -- -- -- (0.13) (0.10) 14.59 0.21/(g)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares -- -- -- (1.43) 0.08 14.53 11.05
1996-Class B shares/(c)/ -- -- -- (0.36) 0.50 14.53 6.24/(g)/
1996-Institutional shares -- -- -- (1.50) 0.07 14.52 11.55
1995-Class A shares -- -- -- (0.94) 1.02 14.45 15.08
1995-Institutional shares/(f)/ -- -- -- (0.26) 0.36 14.45 4.42/(g)/
1994-Class A shares -- -- (0.61) (0.99) (1.64) 13.43 (4.49)
1993-Class A shares -- -- -- (1.12) 0.38 15.07 10.75
1992-Class A shares -- -- -- (1.14) 0.09 14.69 8.77
For the Period August 2, 1991/(d)/through October 31,
- ---------------------------------------------------------------------
1991-Class A shares -- -- -- (0.24) 0.05 14.60 2.00
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Net Ratio of
Ratio of net assets net
net investment at end Ratio of investment
expenses income Portfolio of expenses income
to average to average turnover period to average to average
net assets net assets rate/(h)/ (in 000s) net assets net assets
--------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997-Class A shares 0.50%/(e)/ 6.34%/(e)/ 182.25%/(g)/ $52,946 1.83%/(e)/ 5.01%/(e)/
1997-Class B shares 1.25/(e)/ 5.37/(e)/ 182.25/(g)/ 2,937 2.33/(e)/ 4.29/(e)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 0.50 6.42 485.09 30,603 1.89 5.03
1996-Class B shares/(c)/ 1.25/(e)/ 5.65/(e)/ 485.09 234 2.39/(e)/ 4.51/(e)/
1995-Class A shares 0.47 6.67 449.53 29,503 2.34 4.80
1994-Class A shares 0.11 6.06 654.90 14,452 2.86 3.31
For the Period February 10, 1993/(d)/through October 31,
- -----------------------------------------------------------------
1993-Class A shares 0.00/(e)/ 4.87/(e)/ 725.41/(g)/ 12,860 4.00/(e)/ 0.87/(e)/
GLOBAL INCOME FUND
- ---------------------------------------------------------------------------------------------------------------
For the Period Ended April 30,
- -----------------------------------------------------------------
1997-Class A shares 1.17%/(e)/ 5.12%/(e)/ 136.72%/(g)/ $171,668 1.60%/(e)/ 4.69%/(e)/
1997-Class B shares 1.71/(e)/ 4.73/(e)/ 136.72/(g)/ 1,095 2.10/(e)/ 4.34/(e)/
1997-Institutional shares 0.65/(e)/ 5.64/(e)/ 136.72/(g)/ 56,431 1.04/(e)/ 5.25/(e)/
1997-Service shares/(i)/ 1.15/(e)/ 5.85/(e)/ 136.72/(g)/ 94 1.54/(e)/ 5.46/(e)/
For the Years Ended October 31,
- -----------------------------------------------------------------
1996-Class A shares 1.16 5.81 232.15 198,665 1.64 5.33
1996-Class B shares/(c)/ 1.70/(e)/ 5.16/(e)/ 232.15 256 2.14/(e)/ 4.72/(e)/
1996-Institutional shares 0.65 6.35 232.15 54,254 1.11 5.89
1995-Class A shares 1.29 6.23 265.86 245,835 1.58 5.94
1995-Institutional shares/(f)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.28 5.73 343.74 396,584 1.53 5.48
1993-Class A shares 1.30 5.78 313.88 675,662 1.55 5.53
1992-Class A shares 1.37 7.85 270.75 588,893 1.62 7.60
For the Period August 2, 1991/(d)/through October 31,
- -----------------------------------------------------------------
1991-Class A shares 0.38/(g)/ 1.72/(g)/ 34.22/(g)/ 388,744 0.44/(g)/ 1.66/(g)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(a)/ Distributions to shareholders
------------------------------------------------------------- ------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions/a/ transactions operations income transactions
---------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares $14.37 $0.34 $0.03 -- $0.37 $(0.34) --
1997-Class B shares 14.37 0.28 0.03 -- 0.31 (0.28) --
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares 14.17 0.65 0.20 -- 0.85 (0.65) --
1996-Class B shares/(c)/ 14.03 0.27 0.34 -- 0.61 (0.27) --
1995-Class A shares 13.08 0.67 1.09 -- 1.76 (0.67) --
1994-Class A shares 14.64 0.73 (1.51) -- (0.78) (0.73) (0.05)
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares 14.32 0.22 0.32 -- 0.54 (0.22) --
<CAPTION>
Distributions to shareholders
----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(b)/
------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares -- -- -- $(0.34) $0.03 $14.40 2.57%/(g)/
1997-Class B shares -- -- -- (0.28) 0.03 14.40 2.18/(g)/
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares -- -- -- (0.65) 0.20 14.37 6.13
1996-Class B shares/(c)/ -- -- -- (0.27) 0.34 14.37 4.40/(g)/
1995-Class A shares -- -- -- (0.67) 1.09 14.17 13.79
1994-Class A shares -- -- -- (0.78) (1.56) 13.08 (5.51)
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares -- -- -- (0.22) 0.32 14.64 3.73/(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Net Ratio of
Ratio of net assets net
net investment at end Ratio of investment
expenses income Portfolio of expenses income
to average to average turnover period to average to average
net assets net assets rate/(h)/ (in 000s) net assets net assets
------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Period Ended April 30,
- ---------------------------------------------------------------------
1997-Class A shares 0.85%/(e)/ 4.70%/(e)/ 90.46%/(g)/ $58,033 1.51%/(e)/ 4.04%/(e)/
1997-Class B shares 1.60/(e)/ 3.92/(e)/ 90.46/(g)/ 617 2.01/(e)/ 3.51/(e)/
For the Years Ended October 31,
- ---------------------------------------------------------------------
1996-Class A shares 0.85 4.58 344.13 52,267 1.55 3.88
1996-Class B shares/(c)/ 1.60/(e)/ 3.55/(e)/ 344.13 255 2.05/(e)/ 3.10/(e)/
1995-Class A shares 0.76 4.93 335.55 53,797 1.49 4.20
1994-Class A shares 0.45 5.28 357.54 47,373 1.55 4.18
For the Period July 20, 1993/(d)/ through October 31,
- ---------------------------------------------------------------------
1993-Class A shares 0.00/(e)/ 5.15/(e)/ 99.99/(g)/ 30,166 2.42/(e)/ 2.73/(e)/
</TABLE>
- ---------------------------
/(a)/ Includes the balancing effect of calculating per share amounts.
/(b)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions, a complete redemption of the
investment at the net asset value at the end of period and no sales
charge. Total return would be reduced if a sales charge for Class A
shares or a contingent deferred sales charge for Class B shares were
taken into account.
/(c)/ Class B shares commenced operations on May 1, 1996.
/(d)/ Commencement of operations.
/(e)/ Annualized.
/(f)/ Institutional shares commenced operations on June 1, 1995.
/(g)/ Not annualized.
/(h)/ Includes the effect of mortgage dollar roll transactions for the
Government Income Fund.
/(i)/ Service Class shares commenced operations on March 12, 1997.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Semiannual Report is authorized for distribution to prospective investors
only when preceded or accompanied by a Goldman Sachs Trust Prospectus which
contains facts concerning the Fund's objectives and policies, management,
expenses and other information.
- --------------------------------------------------------------------------------
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
John P. McNulty
Mary P. McPherson
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser,
Distributor and Transfer Agent
FISARRET
The Goldman Sachs
Fixed Income Funds
- --------------------------------------------------------------------------------
Semiannual Report
April 30, 1997
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders
- -------------------------------------------------------------------------------
Dear Shareholders:
A return of robust economic growth during the period under review fueled
fears of higher inflation, which pushed Treasury yields higher across the
maturity spectrum. In this semiannual report, we will review the performance of
the Goldman Sachs Fixed Income Funds for the six-month period ended April 30,
1997, as well as provide a brief overview of the U.S. economy and the bond
market. We are pleased to note that during the period, the Goldman Sachs Fixed
Income Funds performed well compared with their peers.
Economic Activity Rebounded, Led by Consumer Spending
After a sluggish third quarter, the pace of economic growth strengthened
during the period. During November and December, consumer spending rebounded,
the trade deficit narrowed and industrial production climbed significantly. As a
result, fourth-quarter real Gross Domestic Product (GDP) growth was 3.8%
(annualized), up from 2.1% in the prior quarter.
Economic activity continued to gain momentum during the first quarter of
1997, with real GDP surging 5.8%, the largest jump in a decade. Signs of
strength were led by a sharp increase in consumer spending, which resulted in
solid sales gains for automobile manufacturers and retailers. In addition,
upbeat reports on factory orders and inventories, construction outlays and labor
market conditions all pointed towards economic acceleration. Despite the growth
spurt, reported inflation remained surprisingly mild during the period.
Furthermore, several economic reports for April came in at the low end of
consensus expectations, which suggested that the economy could moderate during
the second quarter.
The Bond Market Rallied, Then Fell as Inflation Fears Reemerged
The U.S. fixed income market came under pressure during the period under
review. In November, bonds performed well in anticipation of a continued
slowdown in U.S. economic growth. However, the market experienced a reversal in
December when better-than-expected economic data, in particular, robust
employment figures, triggered a sell-off and drove interest rates higher. In
early February, bond prices briefly rebounded, but later faltered as it became
increasingly likely that the U.S. Federal Reserve would raise short term
interest rates in March. By the end of March, the yield on the benchmark 30-year
Treasury bond rose above the psychologically important 7% threshold. Despite the
lackluster performance of the U.S. bond market for the period as a whole, a
sharp rebound at the end of April helped bonds recoup part of their earlier
losses.
The Fed Raised the Federal Funds Rate in March
In March 1997, the Fed raised the federal funds rate by 25 basis points to
5.50%. Though there were few signs of actual inflation, the Fed tightening was
prompted by the economy's pervasive strength. The Fed's action was its first
since a quarter-point cut in January 1996.
During the period under review, the yield curve shifted higher across all
maturities. The yield on six-month Treasury bills rose from 5.26% on October 31,
1996 to approximately 5.52% on April 30, 1997. For the same period, the yield on
the 30-year U.S. Treasury bond rose more dramatically, climbing from 6.64% to
6.95%.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Table of Contents
<S> <C>
Market Overview 1
Goldman Sachs Adjustable Rate Government Fund 3
Goldman Sachs Short Duration Government Fund 9
Goldman Sachs Short Duration Tax-Free Fund 14
Goldman Sachs Core Fixed Income Fund 20
Financial Statements 28
Notes to Financial Statements 32
Financial Highlights 39
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
1
<PAGE>
- -------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
10/31/96 4/30/97
<S> <C> <C>
3-Month 5.14% 5.23%
6-Month 5.26% 5.52%
1 5.40% 5.89%
2 5.73% 6.27%
3 5.86% 6.40%
5 6.07% 6.57%
10 6.34% 6.71%
15 6.64% 6.95%
</TABLE>
Source: Bloomberg, L.P.
The yield curve shifted upward across all maturities and steepened sharply at
the short end.
Outlook: Strengthening Economic Growth May
Trigger Further Preemptive Rate Hikes
Despite reports of economic moderation and minimal price acceleration, the
economy's broad-based fundamental strength and resilient equity market make
additional Fed rate increases likely this year. Goldman Sachs' economists
believe that the speed and extent of Fed tightening will depend in large part on
the emergence of conclusive signs that the economy is nearing maximum capacity,
rather than immediate evidence of increased inflationary pressures.
In conclusion, we thank you for your support of the Goldman Sachs Fixed
Income Funds and we look forward to continuing our relationship.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
May 30, 1997
- -------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Adjustable Rate Government Fund seeks a high level
of current income consistent with low volatility of principal. The portfolio
ordinarily invests substantially all of its assets in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, with
primary emphasis on adjustable rate mortgage securities (ARMs). Under normal
interest rate conditions, the fund's duration is expected to be in a range
approximately equal to that of a six-month to one-year U.S. Treasury security.
Special Events
As of March 27, 1997, the fund opened a new share class (Service). In
addition, effective May 1, 1997, the name of the GS Adjustable Rate Government
Fund was changed to the Goldman Sachs Adjustable Rate Government Fund. The
fund's objective and investment focus remain the same.
ARM Market Performed Well, Buoyed by Low Volatility and Strong Investor Demand
The ARM market performed well during the period under review, supported by
low volatility and stable prepayments. In addition, investor interest in the
sector increased as opportunities in short-duration alternatives diminished. In
combination, these factors drove ARM spreads approximately 15 basis points
tighter over the period.
Performance Review
During the six-month period ended April 30, the fund's Institutional,
Administration and Class A shares all outperformed the six-month U.S. Treasury
bill and the one-year U.S. Treasury bill. (The fund's duration as of April 30
was 0.7 years, in between that of the six-month and the one-year U.S. Treasury
bill.) The fund's positive performance was due to the tightening of yield
spreads between ARMs and Treasuries, as well as the incremental yield of ARMs
over similar-duration Treasuries.
The fund also performed well compared with its peers. For the 12 months
ended April 30, 1997, the fund's Institutional shares ranked 11th out of 47
adjustable rate mortgage funds based on total return, as tracked by Lipper
Analytical Services, Inc. (Lipper does not rank the fund's Administration,
Service and Class A shares. Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.)
We are pleased to announce that for the three- and five-year periods ended
April 30, 1997, the fund's Institutional shares were rated "five stars" (out of
1,193 taxable bond funds) and "four stars" (out of 641 taxable bond funds),
respectively, according to Morningstar, Inc., an independent rating agency. In
addition, as of April 30, Morningstar rated the fund's Administration shares
"five stars" for the one-year period (out of 1,709 taxable bond funds) and "four
stars" (out of 1,193 taxable bond funds) for the three-year period./1/
- ------------------------------------------------
/1/Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received "five
stars" for the one-year period and were rated among 1,709 taxable bond funds.
The Morningstar ratings apply only to the fund's Institutional and
Administration shares; the fund's Class A and Service shares have not been
rated. Class A and Service shares are subject to additional fees and expenses
which may have the effect of lowering performance and may affect any future
Morningstar rating. Morningstar rates each fund against its peers in the same
category. In all, there are four Morningstar categories (domestic equity,
international equity, taxable bond and municipal). Morningstar ratings range
from five stars (highest) to one star (lowest). Funds with five-star ratings are
in the top 10% of their category, four-star ratings in the next 22.5%, three
stars the next 35%, two stars the next 22.5% and one star the lowest 10% of
their categories.
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
6-Month 1-Year
Institu- Adminis- Treasury Treasury
tional tration Class A Service* Bill Bill
------ ------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Return 3.28% 3.16% 3.16% 0.74% 2.65% 2.56%
(based on net
asset value)
- --------------------------------------------------------------------------------
Return From 2.97% 2.85% 2.85% 0.20% NA NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From 0.31% 0.31% 0.31% 0.54% NA NA
Price
Appreciation
- --------------------------------------------------------------------------------
NAV (4/30/97) $9.86 $9.86 $9.86 $9.86 NA NA
- --------------------------------------------------------------------------------
NAV Change +$0.03 +$0.03 $0.03 $0.02 NA NA
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period. Performance and net asset value
(NAV) change are from its inception date on 3/27/97.
Portfolio Composition and Investment Strategies
Portfolio composition remained similar compared with six months ago, with
the exception of a slight reduction in collateralized mortgage obligations
(CMOs) and an increase in repurchase agreements/cash equivalents.
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
ARMs 85.8%
SBA Floaters 7.4%
Repos/Cash Equivalents 4.8%
CMOs 2.0%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. ARMs. As of April 30, 1997, the fund's primary investment continued to be
in ARMs, which accounted for 85.8% of the portfolio. We emphasized seasoned,
fully indexed one-year Constant Maturity Treasury (CMT) securities that were
issued prior to 1990, which are attractive because of their lower prepayment
risk. (Seasoned issues are less likely to be impacted by prepayments than newly
issued mortgages because homeowners who did not refinance in earlier periods of
lower rates are generally less likely to refinance in the future.)
. SBA Floaters. The portfolio's position in securities backed by Small
Business Administration (SBA) loans was 7.4%, approximately the same as six
months ago. The sector offered incremental yield over similar-duration
Treasuries and increased fund diversification.
. CMOs. We reduced the portfolio's CMO allocation to 2.0%, down from 3.5%
last October. Within the sector, the fund's largest holding was a 1.1% position
in super floaters. Because super floaters are generally considered to be higher
risk than conventional floaters, we use them selectively in seeking to enhance
fund performance. The remainder of the CMO position (0.9%) was invested in a
variety of other structures.
. Duration. We seek excess return over similar-duration U.S. Treasuries
through our sector weightings and specific security selection rather than
attempting to make interest rate predictions. Therefore, we manage the fund's
duration to approximate that of the Index, partly through the use of futures. As
of April 30, the fund's duration was 0.7 years, unchanged from six months ago.
Credit Quality. The fund invests exclusively in securities issued by the U.S.
government, its agencies or instrumentalities, which are considered to be of the
highest credit quality.
Market Outlook
Despite some suggestion of economic moderation, we continue to believe that
interest rates are likely to move higher during the balance of the year. This
expectation is
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
- --------------------------------------------------------------------------------
predicated on the economy's broad-based fundamental strength, as well as the
Fed's well-publicized commitment to monetary discipline.
As of the end of the period, we have a neutral outlook for the ARM sector.
ARMs are currently trading at fair value, reflecting a stable prepayment
outlook. Seasoned one-year CMT ARMs remain attractive as a core holding due to
their prepayment stability in a falling rate environment and reduced cap risk in
a rising rate environment.
Distribution Policy
During the six-month period ended April 30, 1997, the fund's
Institutional, Administration and Class A shares distributed $0.29, $0.28 and
$0.28 per share, respectively. From their inception on March 27 through April
30, the fund's Service shares paid out $0.05 per share.
The fund distributes substantially all of its investment company taxable
income. The dividend is set at the start of each month, based on the income the
fund is expected to generate. However, because the fund invests primarily in
mortgage securities that are subject to prepayments, we cannot precisely predict
the amount of principal and interest that a portfolio will receive. Therefore,
at times a portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy has not affected the management of
the fund or significantly affected its NAV per share.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
Goldman Sachs Adjustable Rate Government Fund
May 30, 1997
- --------------------------------------------------------------------------------
5
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--94.4%
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a)--25.6%
$ 2,499,665 7.41% 07/01/18 $ 2,603,551
1,337,640 7.57 12/01/18 1,390,932
10,052,878 7.45 05/01/19 10,420,411
19,024,919 7.65 11/01/19/(b)/ 19,952,383
4,828,320 7.75 05/01/20 5,061,431
17,560,720 7.50 06/01/20/(b)/ 18,260,339
36,305,075 7.77 02/01/22/(b)/ 38,097,820
6,736,255 7.27 06/01/22 6,940,632
3,743,219 7.48 08/01/22 3,889,430
6,343,944 7.55 09/01/22 6,616,543
5,798,265 7.29 09/01/22 5,961,312
16,426,906 7.65 11/01/22 17,181,558
9,544,724 7.68 06/01/24 10,002,584
3,422,929 7.32 02/01/28 3,543,279
1,677,210 7.68 07/01/30 1,756,089
- -------------------------------------------------------------------------------
$ 151,678,294
- -------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association (FNMA)(a)--53.9%
$ 1,626,928 7.45% 04/01/03 $ 1,648,729
1,063,451 7.81 11/01/14 1,116,453
671,988 7.60 12/01/15 696,771
5,800,505 6.72 03/01/17 5,911,063
3,475,919 7.56 03/01/17 3,625,279
11,078,486 7.04 04/01/17 11,476,093
734,378 7.51 11/01/17 764,216
4,070,446 6.49 03/01/18 4,114,976
755,256 7.67 05/01/18 781,101
1,196,229 7.88 05/01/18 1,250,167
1,291,177 7.32 06/01/18/(c)/ 1,326,271
7,811,611 7.50 06/01/18 8,172,898
4,895,608 7.48 07/01/18 5,117,428
6,964,915 7.61 07/01/18 7,297,907
5,963,754 7.27 08/01/18 6,190,198
3,775,708 7.75 08/01/18 3,964,493
3,424,816 7.60 10/01/18 3,584,275
6,244,935 7.49 11/01/18 6,486,927
1,919,120 7.39 12/01/18 1,992,296
12,663,766 7.67 12/01/18/(b)/ 13,296,954
3,245,589 7.37 06/01/19 3,366,779
4,222,057 7.31 07/01/19 4,376,415
1,572,328 7.40 07/01/19 1,632,768
1,466,614 7.35 08/01/19 1,513,589
4,212,924 7.63 09/01/19 4,404,485
2,660,817 7.31 01/01/20 2,761,848
2,845,244 7.79 03/01/20 2,987,506
8,236,162 7.39 07/01/20 8,548,889
4,385,557 7.67 02/01/21 4,600,713
4,953,699 7.40 04/01/21 5,140,998
69,652,900 7.65 09/01/21/(b)/ 72,928,676
5,721,530 7.10 01/01/22 5,920,639
20,957,781 7.66 02/01/22/(b)/ 21,972,976
13,609,253 7.80 06/01/22 14,266,989
645,000 7.56 08/01/22 661,628
2,036,342 7.73 08/01/22 2,137,202
29,003,668 7.67 09/01/22/(b)/ 30,449,210
1,821,772 7.57 02/01/23 1,868,464
272,046 6.23 12/01/23 268,986
15,812,397 7.56 04/01/25 16,501,660
16,515,667 7.59 09/01/25 17,302,804
3,390,319 7.41 08/01/27 3,523,830
2,373,397 7.43 10/01/27 2,466,102
1,077,506 7.09 07/01/29 1,111,350
- -------------------------------------------------------------------------------
$ 319,529,001
- -------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association (GNMA)(a)--3.9%
$ 1,430,321 7.00% 03/20/16 $ 1,462,732
1,877,843 7.13 08/20/17 1,929,784
975,525 7.13 08/20/18 1,004,186
6,329,270 7.00 02/20/21 6,492,439
3,551,234 6.50 01/20/22 3,624,282
4,539,525 7.13 04/20/22 4,679,978
3,724,927 7.00 03/20/23 3,816,299
- -------------------------------------------------------------------------------
$ 23,009,700
- -------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(a)--7.3%
$ 1,395,750 7.00% 10/25/14 $ 1,435,878
2,310,178 7.00 02/25/15 2,370,450
2,799,672 7.00 04/25/15 2,871,428
1,880,379 7.00 05/25/15 1,928,573
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Adjustable Rate Small Business Administration
(SBA)(continued)
$ 1,022,753 7.00% 08/25/15 $ 1,055,992
1,661,578 7.00 09/25/15 1,709,348
2,041,631 7.00 10/25/15 2,094,591
1,059,044 6.62 09/25/16 1,070,302
4,076,904 6.62 07/25/17 4,121,505
4,036,805 6.62 08/25/17 4,080,967
2,744,035 6.62 08/25/17 2,774,055
1,756,376 6.62 08/25/17 1,775,590
3,752,990 6.62 09/25/17 3,794,048
1,761,608 6.62 10/25/17 1,781,144
1,774,313 6.62 10/25/17 1,793,990
8,582,508 6.62 02/25/18 8,677,688
- -------------------------------------------------------------------------------
$ 43,335,549
- -------------------------------------------------------------------------------
Collateralized Mortgage Obligations--3.7%
Adjustable Rate CMOs/(a)/ --1.8%
FNMA Remic Trust 1990-145, Class A
$ 10,348,000 6.58% 12/25/20 $ 10,437,510
- -------------------------------------------------------------------------------
$ 10,437,510
- -------------------------------------------------------------------------------
Inverse Floater/(a)/--0.0%
FNMA Remic Trust 1991-91, Class S
$ 138,928 8.55% 07/25/98 $ 149,631
- -------------------------------------------------------------------------------
$ 149,631
- -------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only/(a)/--0.0%
FNMA Remic Trust 1992-157, Class SA
$ 1,384,066/(d)/ 55.35% 03/25/04 $ 86,712
- -------------------------------------------------------------------------------
$ 86,712
- -------------------------------------------------------------------------------
Inverse IOette--0.1%
FHLMC Series 1164, Class O
$ 33,045/(d)/ 19.07% 11/15/06 $ 431,596
- -------------------------------------------------------------------------------
$ 431,596
- -------------------------------------------------------------------------------
IOette--0.1%
FNMA Remic Trust 1990-145, Class B
$ 25,428/(d)/ 10.00% 12/25/20 $ 850,208
- -------------------------------------------------------------------------------
$ 850,208
- -------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--0.6%
FHLMC Series 1645, Class B
$ 2,956,606 5.50% 01/15/08 $ 2,730,573
FNMA Remic Trust 1990-65, Class U
185,451 9.50 11/25/06 185,160
FNMA Remic Trust 1991-37, Class E
838,752 8.50 04/25/05 839,801
- -------------------------------------------------------------------------------
$ 3,755,534
- -------------------------------------------------------------------------------
Super Floater CMOs/(a)/ --1.1%
FNMA Remic Trust 1992-157, Class FA
$ 6,813,861 2.16% 03/25/04 $ 6,632,817
- -------------------------------------------------------------------------------
$ 6,632,817
- -------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 22,344,009
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $557,420,929) $ 559,896,552
- -------------------------------------------------------------------------------
Repurchase Agreement--6.2%
Joint Repurchase Agreement Account
$ 36,700,000 5.49% 05/01/97/(b)/ $ 36,700,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $36,700,000) $ 36,700,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $594,120,929)/(e)/ $ 596,596,552
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long (Short)(f) Month Gain (Loss)
- ---------------------------- ---------------- ----------------- -------------
<S> <C> <C> <C>
1-Month Libor 110 May 1997 $(20,500)
1-Month Libor 115 June 1997 21,563
Euro Dollars 325 June 1997 (210,188)
Euro Dollars 285 September 1997 (104,813)
Euro Dollars 145 December 1997 (50,000)
Euro Dollars 10 March 1998 (14,500)
Euro Dollars (20) December 1998 (14,000)
Euro Dollars 10 June 1999 (18,000)
Euro Dollars 20 September 1999 (33,000)
5 Year U.S. Treasury Notes 64 June 1997 (5,781)
10 Year U.S. Treasury Notes (281) June 1997 70,063
------------
$(379,156)
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 3,264,098
Gross unrealized loss for investments in which cost
exceeds value (925,961)
- -------------------------------------------------------------------------------
Net unrealized gain $ 2,338,137
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Adjustable Rate Government Fund (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(b)/ Portions of these securities are being segregated for futures margin
requirements and when-issued securities.
/(c)/ When-issued security.
/(d)/ Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(e)/ The aggregate cost for federal income tax purposes is $594,258,415.
/(f)/ Each Euro dollar contract represents $1,000,000 in notional par value.
Each 1-month Libor contract represents $3,000,000 in notional par value.
Each 5-Year and 10-year U.S. Treasury Note contract represents $100,000
in notional par value. The total notional amount and market value are
$1,524,500,000 and $281,048,344 respectively. The determination of
notional amounts and market value and presented here are indicative only
of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Short Duration Government Fund's primary objective is to
provide a high level of current income by investing in a portfolio that consists
of securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including mortgage-backed securities as well as repurchase
agreements collateralized by such instruments. Secondarily, the fund may, in
seeking current income, also consider the potential for capital appreciation.
Under normal interest rate conditions, the fund's duration is expected to be
within one-half year of its benchmark, the two-year U.S. Treasury security.
Special Events
Effective May 1, 1997, the name of the GS Short Duration Government Fund
was changed to the Goldman Sachs Short Duration Government Fund. In addition, to
accommodate different clients' needs and preferences, the fund added two new
share classes as of May 1: Class A shares, which have a front-end load but no
contingent deferred sales charge (on amounts less than $1 million), and Class B
shares, which are subject to a contingent deferred sales charge but no up-front
sales charge. The fund's investment focus remains the same.
Performance Review
During the six-month period ended April 30, the fund's Institutional,
Administration and Service shares all outperformed their benchmark, the two-year
U.S. Treasury security. Despite a slight decline in net asset value (NAV) due to
the backup in interest rates, the fund's positions in collateralized mortgage
obligations (CMOs) and adjustable rate mortgage (ARM) securities significantly
contributed to performance.
The fund performed very well relative to its peers. For the 12-month period
ended April 30, 1997, the fund's Institutional and Administration shares ranked
third and fifth, respectively, out of 97 short-intermediate U.S. government
funds based on total return, according to Lipper Analytical Services, Inc. In
addition, the fund's Service shares ranked within the top 20% (14th out of 97)
for the same time period. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.) In addition, the fund's Institutional shares were rated "four stars"
(out of 641 taxable bond funds) by Morningstar, Inc., an independent rating
agency, for the five years ended April 30./1/
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on net 2.67% 2.55% 2.42%
asset value)
- -------------------------------------------------------------------------------
Return From Monthly 3.39% 3.27% 3.14%
Distributions
- -------------------------------------------------------------------------------
Return From Price -0.72% -0.72% -0.72%
Depreciation
- -------------------------------------------------------------------------------
Total Return of Two-Year 2.09% 2.09% 2.09%
U.S. Treasury
- -------------------------------------------------------------------------------
NAV (4/30/97) $9.76 $9.78 $9.75
- -------------------------------------------------------------------------------
NAV Change -$0.07 -$0.07 -$0.07
- -------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received "four
stars" for both the three- and one-year periods and were rated among 1,193 and
1,709 taxable bond funds for the three- and one-year periods, respectively. The
Morningstar ratings apply only to the funds' Institutional shares; the fund's
Administration and Service shares have not been rated. The Administration and
Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates each fund against its peers in the same category. In all,
there are four Morningstar categories (domestic equity, international equity,
taxable bond and municipal). Morningstar ratings range from five stars (highest)
to one star (lowest). Funds with five-star ratings are in the top 10% of their
category, four-star ratings in the next 22.5%, three stars the next 35%, two
stars the next 22.5% and one star the lowest 10% of their categories.
- -------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
Portfolio Composition and Investment Strategies
The most significant changes in the portfolio's sector composition
during the period were a reduction in U.S. Treasuries in favor of CMOs and a new
position in agency debentures.
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
CMOs 61.8%
ARMS 19.0%
Fixed Rate Mortgage Pass-Throughs 9.7%
Agency Debentures 4.8%
U.S. Treasuries 3.6%
Repos/Cash Equivalents 1.1%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. CMOs. CMOs accounted for 61.8% of the portfolio, up from 56.9% six
months ago. The CMO sector performed very well during the period, bolstered by
low volatility and strong investor demand. CMOs were particularly attractive to
investors because they offered substantial yield over similar-duration Treasury
and non-Treasury alternatives. Within the sector, the portfolio's positions
included sequential-pay/support CMOs (24.5%) and planned amortization class
(PAC) CMOs (21.2%). These securities were short duration issues that offered
relatively predictable cash flows.
. ARMs. As of April 30, the fund's allocation to ARMs was 19.0%, unchanged
from last October. We emphasized seasoned, fully indexed one-year Constant
Maturity Treasury (CMT) securities that were issued prior to 1990, which are
attractive because of their lower prepayment risk. (Seasoned issues are less
likely to be impacted by prepayments than newly issued mortgages because
homeowners who did not refinance in earlier periods of lower rates are generally
less likely to refinance in the future.)
. Fixed Rate Mortgage Pass-Throughs. The fixed rate mortgage pass-through
sector accounted for 9.7% of the portfolio, up from 7.2% six months ago. We
continued to favor the sector because of its attractive yield enhancement
potential.
. Agency Debentures. We established a new 4.8% position in agency debentures,
which are bonds issued by agencies of the U.S. government. This sector offered
incremental yield over Treasuries and added to portfolio diversification.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. During the
period, we sold more than three-quarters of the fund's Treasury allocation in
favor of other sectors that offered better relative value. By April 30, the
fund's position in the sector was down to 3.6%, while repurchase agreements/cash
equivalents were 1.1%, unchanged from six months ago.
. Issuer Composition. The portfolio's mortgage-backed security composition by
issuer was 47.6% in Federal National Mortgage Association (FNMA) issues, 37.0%
in Federal Home Loan Mortgage Corporation (FHLMC) issues and 5.8% in Government
National Mortgage Association (GNMA) issues.
. Credit Quality. The fund invests exclusively in securities issued by the
U.S. government and its agencies or instrumentalities.
. Prudent Use of Derivatives. The fund's CMO position included several
securities typically considered to be
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
lower risk derivatives. These included sequential-pay/support CMOs and PAC CMOs
(24.5% and 21.2% of the portfolio, respectively), as noted previously, and a
9.0% allocation in CMO floaters (whose coupons reset upward when interest rates
rise). The fund also held a 2.8% position in super floaters (whose coupons reset
higher than conventional floaters when rates rise), a 2.1% position in inverse
floaters (whose coupons reset in the opposite direction of interest rates), and
small positions in PAC interest-only (IO) and inverse IO securities. We invest
in these higher risk derivatives only when we believe such securities will
enhance returns without incurring undue risk. These positions contributed to the
fund's positive performance along with the other CMO securities. In addition, we
used futures as a tool to help manage the portfolio's duration.
Market Outlook
Our outlook is cautious for CMOs: the sector is now trading at fair spreads
relative to equal-duration Treasuries and does not appear to offer significant
tightening potential. Despite the lack of general value, we continue to look for
issues within the CMO market that offer favorable investment characteristics
that are not fully valued by the market. In the ARM market, seasoned one-year
CMT ARMs remain attractive as a core holding relative to other ARM sectors.
Distribution Policy
During the six-month period under review, the fund's Institutional,
Administration and Service shares paid out distributions of $0.33, $0.32 and
$0.30 per share, respectively. The fund distributes substantially all of its
investment company taxable income, as required by tax law.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Short Duration Government Fund
May 30, 1997
- -------------------------------------------------------------------------------
11
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations--90.0%
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a)--13.8%
$ 1,862,421 7.38% 08/01/17/(b)/ $ 1,928,183
1,799,630 7.58 12/01/18/(b)/ 1,871,327
7,952,048 7.77 02/01/22/(b)/ 8,344,720
2,036,342 7.73 08/01/22/(b)/ 2,137,202
- -------------------------------------------------------------------------------
$ 14,281,432
- -------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association (FNMA)(a)--11.6%
$ 306,024 9.00% 12/01/97 $ 307,489
2,894,069 6.50 04/01/03/(b)/ 2,853,696
812,321 6.00 01/01/14 762,436
2,961,367 6.00 03/01/14/(b)/ 2,771,662
2,552,281 7.81 11/01/14/(b)/ 2,679,487
2,569,866 7.58 08/01/22 2,636,117
- -------------------------------------------------------------------------------
$ 12,010,887
- -------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (FNMA)--3.2%
$ 504,862 6.00% 10/01/08 $ 484,981
1,032,431 6.00 06/01/09 991,774
1,949,537 6.00 10/01/09/(b)/ 1,878,671
- -------------------------------------------------------------------------------
$ 3,355,426
- -------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--61.4%
Inverse Floater(a)--3.0%
FHLMC Series 1296, Class J
$ 890,613 12.15% 07/15/99 $ 954,683
FHLMC Series 1325, Class C
944,285 6.83 07/15/97 943,086
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 9.27 05/25/99 1,217,824
- -------------------------------------------------------------------------------
$ 3,115,593
- -------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.2%
FHLMC Series 1684, Class JD
$ 2,524,793/(c)/ 3.72% 08/15/20 $ 170,222
FNMA Remic Trust 1993-110, Class SC
2,010,905/(c)/ 3.52 04/25/19 74,564
- -------------------------------------------------------------------------------
$ 244,786
- -------------------------------------------------------------------------------
Planned Amortization - Accrual Bond--1.2%
FHLMC Series 1560, Class X
$ 1,245,394 6.00% 11/15/16 $ 1,234,885
- -------------------------------------------------------------------------------
Planned Amortization Class (PAC) CMOs--21.9%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,937,180
FHLMC Series 1684, Class F
5,000,000 5.75 08/15/20/(b)/ 4,756,650
FNMA Remic Trust 1992-138, Class C
2,375,000 6.00 12/25/18/(b)/ 2,351,986
FNMA Remic Trust, Series 1997-9, Class B
4,000,000 6.50 10/25/22/(b)/ 3,850,040
FNMA Series 1991-31, Class PJ
3,000,000 6.55 10/25/20 2,920,290
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09/(b)/ 5,982,420
- -------------------------------------------------------------------------------
$ 22,798,566
- -------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--1.3%
FHLMC Series 1552, Class JE
$ 7,308,380/(c)/ 7.00% 02/15/14 $ 313,822
FHLMC Series 1587, Class HA
9,090,222/(c)/ 6.50 10/15/08 1,032,104
- -------------------------------------------------------------------------------
$ 1,345,926
- -------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.4%
FNMA Remic Trust 1992-198, Class K
$ 34,647/(c)/ 12.81% 12/25/15 $ 370,318
- -------------------------------------------------------------------------------
Regular Floater CMOs(a)--8.8%
FHLMC Series 1296, Class I
$ 2,493,715 5.16% 07/15/97/(b)/ $ 2,462,544
FHLMC Series 1325, Class B
2,219,071 6.38 07/15/97/(b)/ 2,219,759
FHLMC Series 1684, Class JC
2,524,793 5.28 08/15/20/(b)/ 2,472,706
FNMA Remic Trust 1993-110, Class FC
2,010,905 5.48 04/25/19/(b)/ 1,987,639
- -------------------------------------------------------------------------------
$ 9,142,648
- -------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--24.6%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,046,860
FHLMC Series 1645, Class B
4,927,677 5.50 01/15/08/(b)/ 4,550,956
FNMA Remic Trust 1988-12, Class A
3,743,398 10.00 02/25/18/(b)/ 3,973,692
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Government Fund (continued)
April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
FNMA Remic Trust 1988-12, Class B
$ 2,955,314 4.74% 02/25/18/(b)/ $ 2,840,796
FNMA Remic Trust 1989-12, Class X
1,588,415 10.00 12/25/14 1,642,024
FNMA Remic Trust 1989-18, Class B
1,051,388 9.50 01/25/04 1,081,279
FNMA Remic Trust 1989-59, Class H
3,840,291 7.75 10/25/18/(b)/ 3,882,265
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,351,960
FNMA Series 1989-34, Class E
2,113,584 9.85 08/25/14/(b)/ 2,176,992
- -------------------------------------------------------------------------------
$ 25,546,824
- -------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 63,799,546
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $93,441,725) $ 93,447,292
- -------------------------------------------------------------------------------
Agency Debentures--4.7%
Sri Lanka Aid/(a)/
$ 5,000,000 6.06% 02/21/16/(b)/ $ 4,928,150
- -------------------------------------------------------------------------------
Total Agency Debentures
(Cost $4,925,000) $ 4,928,150
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--3.6%
United States Treasury Notes
$ 3,800,000 5.63% 11/30/00/(b)/ $ 3,696,678
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $3,672,738) $ 3,696,678
- -------------------------------------------------------------------------------
Repurchase Agreement--0.6%
Joint Repurchase Agreement Account
$ 600,000 5.49% 05/01/97/(b)/ $ 600,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $600,000) $ 600,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $102,639,463)/(d)/ $ 102,672,119
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts
Long Unrealized
Type (Short)/(e)/ Settlement Month Gain (Loss)
- ----------------------------- --------------- ----------------- ---------------
<S> <C> <C> <C>
1-Month Libor 14 June 1997 $2,625
1-Month Libor 15 May 1997 (4,125)
Euro Dollars 56 June 1997 (12,525)
Euro Dollars 53 September 1997 30,525
Euro Dollars 55 December 1997 21,750
Euro Dollars 45 March 1998 (23,125)
Euro Dollars 40 June 1998 (35,500)
Euro Dollars 35 September 1998 (15,250)
5 Year U.S. Treasury Notes (71) June 1997 (1,109)
2 Year U.S. Treasury Notes 71 June 1997 (53,250)
10 Year U.S. Treasury Notes (131) June 1997 101,500
U.S. Long Term Bond (4) June 1997 11,843
---------------
$23,359
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value exceeds
cost $ 554,824
Gross unrealized loss for investments in which cost exceeds
value (522,168)
- -------------------------------------------------------------------------------
Net unrealized gain $ 32,656
- -------------------------------------------------------------------------------
</TABLE>
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(b)/ Portions of these securities are being segregated for futures margin
requirements.
/(c)/ Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/ The amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/ Each Euro Dollar contract represents $1,000,000 in notional par value.
Each 1-Month Libor contract represents $3,000,000 in notional par value.
Each 2-Year U.S. Treasury Note contract represents $200,000 in notional
par value. Each 5-Year and 10-Year U.S. Treasury Note and each U.S. Long
Term Bond contract represents $100,000 in notional par value. The total
notional amount and market value are $405,800,000 and $109,850,675,
respectively. The determination of notional amounts and market value as
presented here are indicative only of volume of activity and not a
measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Short Duration Tax-Free Fund seeks to provide a high
level of current income exempt from regular federal income tax, consistent with
relatively low principal volatility, through investments in investment-grade
municipal securities. Under normal interest rate conditions, the fund's duration
will be within one-half year of its benchmark, the Lehman Brothers Three-Year
Municipal Bond Index. The fund's approximate interest rate sensitivity is
comparable to that of a three-year bond.
Special Event
The fund's name was changed to Goldman Sachs Short Duration Tax-Free Fund
from GS Short Duration Tax-Free Fund on May 1, 1997. In addition, Class A and
Class B shares have been added to the existing Institutional, Administration and
Service shares. The fund's focus and investment objective remain the same.
A Strong, Stable Municipal Bond Market
The municipal market has remained at relatively rich levels compared with
the taxable market since the end of 1996, as light primary and secondary supply
has been consumed easily by stable demand. The average price of a three-year
municipal bond (as calculated from data provided by Municipal Market Data, an
independent municipal market information provider) declined approximately 1.25%,
while yields rose from 4.15% on October 31, 1996 to 4.60% on April 30, 1997.
Supply increased throughout most of the period, though it remained light
compared with historical averages. In November, municipal bond issuance was up
30% versus the prior three-month average. As is typical, increased supply
continued in early December due to the approaching year-end. The 1997 new issue
supply has followed historical early-month patterns, with January and February
supply well below annual averages (slightly more than $10 billion each month)
and March and April supply closer to normal levels ($13 to $14 billion).
Demand from individual investors (who control approximately two-thirds of
municipal bond ownership either through mutual funds or direct investment)
remained stable, but not strong, as long-term municipal yields were below the
psychologically significant 6% level. While yields have not yet cracked that
barrier, President Clinton's reelection and the loss of Republican momentum have
put talk of tax reform and talk of significant changes in the tax-exempt status
of municipal bonds on the back burner, comforting some of the investors
concerned about the market. In addition, the emergence of "nontraditional"
buyers during April has helped support the long end of the market.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
4/30/97 10/31/96
<S> <C> <C>
1998 3.85% 3.90%
1999 4.40% 4.15%
2000 4.60% 4.30%
2001 4.70% 4.40%
2002 4.80% 4.50%
2003 4.85% 4.60%
2004 4.90% 4.70%
2005 4.95% 4.80%
2006 5.00% 4.90%
2007 5.05% 5.00%
2008 5.10% 5.10%
2009 5.20% 5.20%
2010 5.30% 5.25%
2011 5.35% 5.30%
2012 5.40% 5.35%
2013 5.45% 5.40%
2014 5.50% 5.40%
2015 5.50% 5.45%
2016 5.55% 5.45%
2017 5.55% 5.45%
2018 5.55% 5.50%
2019 5.55% 5.50%
2020 5.60% 5.50%
2021 5.60% 5.50%
2022 5.60% 5.50%
2023 5.60% 5.50%
2024 5.60% 5.50%
2025 5.60% 5.50%
2026 5.60% 5.50%
2027 5.60% 5.50%
</TABLE>
The yield curve steepened and shifted upward at the short end, remained nearly
the same in the mid-range, and shifted marginally upward at the longer end, in
contrast to six months ago.
Performance Review
The performance of the fund's Institutional shares exceeded the benchmark,
the Lehman Brothers Three-Year Municipal Bond Index (the "Index"), for the
six-month period ended April 30, 1997. The Administration and Service shares
also performed well, but lagged the benchmark.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- -------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on 1.91% 1.79% 1.56%
net asset value)
- -------------------------------------------------------------------------------
Return From 2.11% 1.99% 1.86%
Monthly Distributions
- -------------------------------------------------------------------------------
Return From Price -0.20% -0.20% - 0.30%
Depreciation
- -------------------------------------------------------------------------------
Lehman Brothers 3-Year 1.83% 1.83% 1.83%
Municipal Bond Index
- -------------------------------------------------------------------------------
NAV (as of 4/30/97) $9.94 $9.94 $9.94
- -------------------------------------------------------------------------------
NAV Change -$0.02 -$0.02 -$0.03
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
14
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
The fund's positive performance during the period was primarily due to our
emphasis on higher yielding revenue bonds, as well as successful selection of
specific securities and relative value trades. As always, we did not make any
bets on the direction of interest rates, but rather kept the fund's duration in
line with the Index, occasionally using Treasury futures to actively manage
sector allocation.
In our search for incremental yield, we focused on three types of bonds.
The first category was relatively generic, highly liquid securities; the second
included slightly less liquid issues such as insured hospital bonds and
letter-of-credit-backed debt; and the last area was "story" bonds, such as
uninsured hospital and electric utility issues and multifamily housing revenue
bonds, whose value is often unrecognized by the market because they are unique
or generally not well understood. We identified attractive investment
opportunities for the third category through our extensive credit analysis. One
example of this is our purchase of an A-rated hospital bond that our credit
analysis indicated would likely be defeased with the purchase of Treasury
securities placed in an escrow account, thereby significantly enhancing the
credit quality of the security. Our analysis proved correct and the fund
benefited from the appreciation associated with the higher quality.
We are pleased to report that the fund's Institutional shares ranked third
out of 28 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the one-year period ended April 30, 1997 based on
total return. (Lipper did not rank the fund's Administration and Service shares.
Please note that Lipper rankings do not take sales charges into account and that
past performance is not a guarantee of future results.) In addition, as of April
30, 1997, the fund's Institutional and Administration shares were awarded a
"four-star" rating for the three-year period (out of 1,257 municipal bond funds)
by Morningstar, Inc. For the one-year period, the Institutional shares received
a "five-star" rating (out of 1,746 municipal bond funds)./1/
Portfolio Composition and Investment Strategies:
Emphasis on Revenue Bonds
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Revenue Bonds 56.1%
Insured Revenue Bonds 28.1%
Pre-Refunded Bonds 7.8%
Insured General Obligations 6.8%
Variable Rate Demand Notes 1.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ------------------------------------------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. For the one-year period, the Administration
shares received four stars and were rated among 1,746 municipal bond funds. Ten
percent of the funds receive the five-star rating. The Morningstar rating
applies only to the fund's Institutional and Administration shares; the fund's
Service shares have not been rated. Service shares are subject to additional
fees that may have the effect of lowering performance and may affect any future
Morningstar rating. Morningstar rates funds against their peers in the same
category. In all, there are four Morningstar categories (domestic equity,
international equity, taxable bond and municipal bond). Morningstar ratings
range from five stars (highest) to one star (lowest). Funds with five-star
ratings are in the top 10% of their category, four-star ratings in the next
22.5%, three stars the next 35%, two stars the next 22.5% and one star the
lowest 10% of their categories.
- -------------------------------------------------------------------------------
15
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- -------------------------------------------------------------------------------
. Revenue Bonds. As of April 30, the portfolio's combined position in insured
and uninsured revenue bonds was significantly overweighted compared with the
Index, 84.2% versus 31.7%. We increased the portfolio's total revenue bond
allocation from 79.7% six months ago because our emphasis on credit analysis
enabled us to identify attractive revenue bonds that offered higher incremental
yield than was available from general obligation bonds. (Revenue bonds pay
interest and principal out of a specific revenue stream, such as sales taxes,
hospital charges, tolls, electric rates and airport fees.)
. Pre-refunded Bonds. Over the course of the year, we re-established the
fund's holdings in pre-refunded bonds to 7.8% from zero. The Index weighting of
pre-refunded bonds was 18.0%.
. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 6.8% of the
portfolio, down from 15.6% six months ago. The allocation as of April 30 was
significantly underweighted versus the Index's 50.2%. GOs are backed by the
general taxing power of a municipality and are typically higher credit quality
but lower yielding than revenue bonds.
. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash equivalents
that we use to manage the portfolio's excess liquidity. VRDNs represented 1.3%
of the fund, down from 4.7% six months ago.
. Duration. As of April 30, the fund's duration was effectively in line with
that of the Index at 2.7 years.
. Credit Quality. During the year, the fund's credit quality allocations
shifted. We continued the trend from the last reporting period by reducing the
portfolio's allocation in triple-A-rated GOs, shifting in favor of
double-A-rated revenue bonds. This allowed us to maintain the fund's targeted
double-A-rated average credit quality and liquidity while achieving higher
overall yields. We structured the portfolio's credit quality allocation like a
"barbell," emphasizing higher credit quality securities in the four- to
five-year maturity range and lower quality securities in the one- to three-year
maturity range. As of April 30, 42.7% of the portfolio was invested in
triple-A-rated bonds, while double-A- and single-A-rated securities accounted
for 30.2% and 27.1%, respectively.
Market Outlook
Our long-term outlook for municipal bond supply is essentially neutral, as
rates are at high levels compared with one year ago. As a result, the current
rate environment encourages neither supply (low rates bring refinancing) nor
demand (high rates attract buyers). At this point, the municipal market does not
perceive any real threats from the federal budget accord. Without any
fundamental problems in view for tax-exempts, we are left with technical forces
as the key driver in relative market performance.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
six-month period ended April 30, 1997, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.21,
$0.20 and $0.19 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- -------------------------------------------------------------------------------
16
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
- -------------------------------------------------------------------------------
We value your continued confidence in the Goldman Sachs Short Duration
Tax-Free Fund and look forward to reporting on the fund's progress in the coming
year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Short Duration Tax-Free Fund
May 30, 1997
- -------------------------------------------------------------------------------
17
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations--99.7%
Alabama--2.6%
Selma, AL IDB for International Paper Co. PCRB (A-/A3)
$ 1,000,000 4.15% 07/15/08 $ 1,000,000
- -------------------------------------------------------------------------------
Arizona--2.8%
Mesa, Arizona IDA Health Care Facilities (AAA/Aaa)
$ 1,000,000 7.50% 01/01/04 $ 1,055,940
- -------------------------------------------------------------------------------
Arkansas--3.5%
West Memphis, AK Public Utility System RB (MBIA) (AAA/Aaa)
$ 1,310,000 5.25% 12/01/00 $ 1,333,816
- -------------------------------------------------------------------------------
Connecticut--6.6%
Connecticut State Housing Mortgage Revenue Town Colony Project (NR/Aa3)
$ 1,000,000 5.00% 04/01/08 $ 1,000,260
Connecticut State Residential Recovery Authority, Series A RB (AA-/NR)
1,500,000 5.60 11/15/99 1,542,945
- -------------------------------------------------------------------------------
$ 2,543,205
- -------------------------------------------------------------------------------
District of Columbia--2.7%
DC Ref Series A (Big 1) Tcc (AAA/Aaa)
$ 1,000,000 7.70% 06/01/98 $ 1,032,600
- -------------------------------------------------------------------------------
Georgia--5.1%
Burke County, GA Development Authority Oglethorpe Power Corp. (A/A3)/(a)/
$ 2,000,000 4.35% 01/01/01 $ 1,961,500
- -------------------------------------------------------------------------------
Illinois--9.4%
Chicago, IL GO (MBIA) (AAA/Aaa)
$ 1,500,000 5.40% 10/31/00 $ 1,533,405
Illinois Health Facilities Authority Highland Park Hospital, Series A
(AAA/Aaa)
1,000,000 5.20 10/01/01 1,003,770
Illinois Housing Development Authority, Series 1991 A (A+/A1)
1,000,000 7.90 07/01/99 1,057,620
- -------------------------------------------------------------------------------
$ 3,594,795
- -------------------------------------------------------------------------------
Louisiana--2.7%
Louisiana Offshore Deepwater Port Authority Term B RB (A/Baa1)
$ 1,000,000 5.85% 09/01/00 $ 1,030,880
- -------------------------------------------------------------------------------
Maryland--4.2%
Maryland State Health and Higher Educational Facilities Authority
GO(A-/NR)/(c)/
$ 1,600,000 5.50% 01/01/02 $ 1,600,000
- -------------------------------------------------------------------------------
Michigan--3.6%
Wayne Charter County, MI Airport (AAA/Aaa)
$ 1,250,000 6.75% 12/01/19 $ 1,371,775
- -------------------------------------------------------------------------------
Missouri--7.1%
Kansas City Municipal Assistance Corp. (AAA/Aaa)
$ 1,000,000 5.88% 10/15/00 $ 1,036,930
St. Louis, MO Municipal Finance Corp., Series A (A/Aa3)
1,655,000 5.30 07/15/02 1,677,740
- -------------------------------------------------------------------------------
$ 2,714,670
- -------------------------------------------------------------------------------
New York--11.8%
Clifton Park, NY Water Authority System, Series A (AAA/Aaa)
$ 1,500,000 6.38% 10/01/11 $ 1,630,695
New York City Municipal Assistance Corp., Series 62 (AA-/Aa2)
1,500,000 5.50 07/01/08 1,503,885
Syracuse, NY IDA RB (AA/NR)
1,365,000 4.60 10/15/98 1,371,020
- -------------------------------------------------------------------------------
$ 4,505,600
- -------------------------------------------------------------------------------
Oklahoma--5.3%
Southern Oklahoma Memorial Hospital RB (A/A)/(a)/
$ 2,000,000 5.60% 02/01/00 $ 2,048,159
- -------------------------------------------------------------------------------
Pennsylvania--8.9%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB (FGIC)
(AAA/Aaa)
$ 1,500,000 5.75% 06/15/00 $ 1,545,870
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,859,850
- -------------------------------------------------------------------------------
$ 3,405,720
- -------------------------------------------------------------------------------
Tennessee--3.9%
Clarksville, TN Public Building Authority (AA/NR)
$ 1,500,000 4.75% 12/01/00 $ 1,499,940
- -------------------------------------------------------------------------------
Texas--3.9%
Memorial Villages, TX Water Authority (NR/Aa)
$ 1,435,000 7.00% 09/01/00 $ 1,497,968
- -------------------------------------------------------------------------------
Virginia--4.7%
Petersburg, VA Hospital Authority RB GO (NR/A)
$ 1,760,000 5.50% 07/01/99 $ 1,795,658
- -------------------------------------------------------------------------------
Washington--4.2%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$ 1,500,000 7.20% 07/01/02 $ 1,608,840
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Short Duration Tax-Free Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Wisconsin--2.6%
Oshkosh, WI Water Rev., Series C (NR/MIG1)/(b)/
$ 1,000,000 4.88% 01/01/00 $ 998,090
- --------------------------------------------------------------------------------
Wyoming--4.1%
Uinta County, WY School District Series A (FSA) (AAA/Aaa)
$ 1,500,000 6.88% 06/01/00 $ 1,593,570
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $38,115,334) $ 38,192,726
- --------------------------------------------------------------------------------
Short-Term Obligations--3.9%
New York City Municipal Water Finance Authority, Series A (A-1+/VMIG1)
$ 1,300,000 4.25% 05/01/97 $ 1,300,000
- --------------------------------------------------------------------------------
Wisconsin State Health Facilities Authority (A-1+/VMIG1)
200,000 4.50 05/01/97 200,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,500,000) $ 1,500,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $39,615,334)/(d)/ $ 39,692,726
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 140,632
Gross unrealized loss for investments in which cost
exceeds value (63,240)
- --------------------------------------------------------------------------------
Net unrealized gain $ 77,392
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Investment Abbreviations:
<S> <C>
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Board
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
/(a)/ Portions of these securities are being segregated for when-issued
securities.
/(b)/ When-issued securities.
/(c)/ Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next reset interest dates.
/(d)/ The amount stated also represents aggregate cost for federal income tax
purposes.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund
- -------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Core Fixed Income Fund seeks to achieve a total
return consisting of capital appreciation and income that exceeds the total
return of its benchmark, the Lehman Brothers Aggregate Bond Index (the "Index"),
through a diversified portfolio of fixed income securities. The fund may invest
in U.S. Treasury, agency, corporate, mortgage-backed and asset-backed
securities, as well as in a limited amount of non-dollar-denominated fixed
income securities. While the fund's performance will be measured against the
Index, the portfolio is not required to hold the same securities or match the
sector weightings of the Index. Every security in the portfolio must be rated at
least investment grade by an independent rating agency or be considered to be of
equivalent quality by Goldman Sachs Asset Management at the time it is
purchased. The fund's approximate interest rate sensitivity is expected to be
comparable to that of a five-year bond.
Special Events
Effective May 1, 1997, the name of the GS Core Fixed Income Fund was
changed to the Goldman Sachs Core Fixed Income Fund. In addition, to accommodate
different clients' needs and preferences, the fund added two new share classes
as of May 1: Class A shares, which have a front-end load but no contingent
deferred sales charge (on amounts less than $1 million), and Class B shares,
which are subject to a contingent deferred sales charge but no up-front sales
charge. The fund's objective and investment focus remain the same.
Performance Review
We are pleased to report that the fund's Institutional and Administration
shares outperformed the Index during the period under review. The fund's
positive performance was primarily due to its overweighting in non-Treasury
sectors compared with the Index. Specifically, mortgage-backed securities and
corporate bonds were the most significant contributors to performance, and
asset-backed securities and emerging market debt also performed very well. The
fund's Service shares achieved positive results, but slightly lagged the
benchmark.
The fund performed well compared with its peers. For the three-year period
ended April 30, 1997, the fund's Institutional shares were rated "four stars"
(out of 1,193 taxable bond funds) by Morningstar, Inc., an independent rating
agency./1/
During the period, the net asset value (NAV) of the fund's Institutional,
Administration and Service shares each fell $0.14 due to rising interest rates.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1996 - April 30, 1997
- --------------------------------------------------------------------------------
Institutional Administration Service
------------- -------------- -------
<S> <C> <C> <C>
Total Return (based on 1.87% 1.75% 1.63%
net asset value)
- --------------------------------------------------------------------------------
Return From Monthly 3.30% 3.18% 3.06%
Distributions
- --------------------------------------------------------------------------------
Return From Price -1.43% -1.43% -1.43%
Depreciation
- --------------------------------------------------------------------------------
Total Return of Lehman 1.70% 1.70% 1.70%
Brothers Aggregate
Bond Index
- --------------------------------------------------------------------------------
NAV (as of 4/30/97) $9.71 $9.70 $9.72
- --------------------------------------------------------------------------------
NAV Change -$0.14 -$0.14 -$0.14
- --------------------------------------------------------------------------------
</TABLE>
- -----------------------------------------
/1/Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 4/30/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and 10-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received "four
stars" for the one-year period and were rated among 1,709 taxable bond funds.
The Morningstar ratings apply only to the fund's Institutional shares; the
fund's Administration and Service shares have not been rated. The Administration
and Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates each fund against its peers in the same category. In all,
there are four Morningstar categories (domestic equity, international equity,
taxable bond and municipal). Morningstar ratings range from five stars (highest)
to one star (lowest). Funds with five-star ratings are in the top 10% of their
category, four-star ratings in the next 22.5%, three stars the next 35%, two
stars the next 22.5% and one star the lowest 10% of their categories.
- -------------------------------------------------------------------------------
20
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
Portfolio Composition and Investment Strategies
Portfolio Composition as of April 30, 1997*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Corporate Bonds 26.7%
Fixed Rate Mortgage Pass-Throughs 20.5%
U.S. Treasuries 17.1%
ABSs 13.2%
CMOs 13.2%
Emerging Market Debt 4.7%
Repos/Cash Equivalents 2.3%
Other Foreign Debt 2.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Corporate Bonds. Corporate bonds were the largest allocation at 26.7% of the
portfolio, overweighted compared with the Index (18.0%). The sector performed
well during the period as the healthy economy caused spreads to tighten across
subsectors. The fund's best performers were industrials, which included selected
cable issues that benefited from positive earnings trends (e.g., Time Warner,
Inc. and Tele-Communications, Inc.), as well as specific finance issues that
fared well due to continuing industry consolidation. We underweighted utilities
due to the regulatory and competitive pressures affecting that industry.
Fixed Rate Mortgage Pass-Throughs. The fund was underweighted in fixed rate
mortgage pass-throughs relative to the Index, 20.5% versus 29.9%. During the
period, the sector was supported by a combination of favorable trends, including
low volatility, range-bound interest rates, tight yield spreads on alternative
sectors, and light issuance of corporate and asset-backed securities (ABS).
After the sector rallied and became more fully priced, we trimmed the fund's
allocation in favor of securities that offered greater relative value.
During the period, we occasionally used mortgage dollar rolls to benefit
from short-term supply and demand imbalances in the mortgage settlement process.
(Mortgage dollar rolls refer to transactions that involve selling mortgage
securities owned by the fund and simultaneously contracting to buy back similar
mortgage securities with the same coupon on a specified future date -- usually
one month forward.) At all times, we "cover" the mortgage dollar rolls by
keeping cash or liquid assets equal to the dollar amount of the forward
commitment in a segregated account with the fund's custodian.
. U.S. Treasuries. We significantly underweighted U.S. Treasuries relative to
the Index, 17.1% compared with 44.5%, to emphasize sectors that offered greater
return potential.
. Asset-Backed Securities. As of April 30, the fund's ABS position was 13.2%,
approximately the same weighting as six months ago. Though negative credit
events among selected credit card and sub-prime auto lenders raised investor
uncertainty during the period, investor interest remained broad-based, ratings
held firm and, relative to similarly rated spread products, ABSs continued to
offer attractive yield enhancement opportunities.
. CMOs. The fund's collateralized mortgage obligation (CMO) holdings performed
very well and significantly contributed to the fund's performance. During the
period, CMOs enjoyed strong demand from yield-seeking investors who found the
sector particularly compelling relative to other high-quality alternatives. As
of the end of the period, CMOs were a 13.2% allocation, up from 9.8% last
October. This increase was primarily in sequential-pay/support CMOs, which
accounted for 8.8% of the portfolio, while the balance was invested in planned
- -------------------------------------------------------------------------------
21
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
amortization class (PAC) CMOs (3.3%) and floaters (1.1%). Sequential-pay/support
CMOs, PAC CMOs and floaters are typically considered to be lower risk derivative
securities.
. Emerging Market Debt. As of April 30, 4.7% of the portfolio was invested in
emerging market debt. Our strategy in the sector is to control exposure by
stressing high-credit-quality, short-duration bonds. We continued to emphasize
Latin American issuers because structural and economic reforms in this region
are helping improve credit fundamentals. During the period, the fund held bonds
from Chile, Colombia, Mexico and the Andean region development bank, as well as
Indonesia. The sector also benefited from substantial global liquidity, which
has helped support the credit-sensitive areas of the lower grade bond markets.
. Other Foreign Debt. During the period, we initiated a 2.3% position in a
10-year, fully hedged Australian government bond that offered attractive
incremental yield over U.S. Treasuries, as well as potential price appreciation
should Australian interest rates decline as we expect.
. Agency Debentures. We sold the fund's allocation to agency debentures (1.5%
as of October 31, 1996) because their risk/reward profile indicated that we were
not being adequately compensated for holding the position.
. Duration. As always, we seek to add incremental return over the Index
through sector weighting and individual security selection rather than
attempting to predict the direction of interest rates. Therefore, we manage the
fund's duration to approximate that of the Index, partly through the use of
financial futures. As of April 30, the fund's duration was in line with the
Index at 4.6 years.
. Credit Quality. As of April 30, 39.7% of the portfolio was invested in
government and agency securities, 21.3% was invested in triple-A-rated
securities, 3.4% was invested in double-A-rated securities and 12.6% was
invested in single-A-rated securities. Triple-B-rated securities (20.7%) and
repurchase agreements/cash equivalents (2.3%) make up the remainder of the
portfolio.
Market Outlook
Though indications of economic moderation emerged in April, the economy's
fundamental strength remains intact, which leads us to believe that interest
rates will move higher during the balance of the year.
In terms of specific fixed income sectors, we have a neutral view of the
corporate market. While we anticipate no near-term deterioration in the
fundamental state of the economy, we are concerned that a series of Fed
tightenings may cause spreads to widen slightly in the near term. In the
mortgage-backed security market, spreads relative to Treasuries have remained
impressively resilient. Nonetheless, mortgage technicals may come under pressure
due to a potential increase in supply as the housing market accelerates during
the summer. We expect the portfolio's allocation to the ABS market to remain
stable in the near future, as it has become more challenging to identify
unrecognized value within the sector, particularly among the higher quality
issues that we tend to emphasize. Finally, we are optimistic regarding the
performance prospects of the emerging market debt sector, as credit trends
continue to improve and global liquidity remains plentiful. In the near future,
Latin America is likely to remain the fund's geographic focus; however, we will
actively seek attractive investment opportunities in other regions to increase
fund diversification.
- -------------------------------------------------------------------------------
22
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
Distribution Policy
During the six-month period under review, the fund's Institutional,
Administration and Service shares distributed $0.32, $0.31 and $0.30 per share,
respectively. Dividends are declared daily and paid on a monthly basis. As
required by tax law, the fund distributes substantially all of its investment
company taxable income.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Mark A. Van Wyk
Mark A. Van Wyk
Portfolio Managers
Goldman Sachs Core Fixed Income Fund
May 30, 1997
- -------------------------------------------------------------------------------
23
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds--25.4%
Finance Bonds--9.8%
BankAmerica Corp.
$ 200,000 6.03% 05/17/99 /(a)/ $ 205,042
300,000 7.75 07/15/02 305,466
Capital One Bank
600,000 6.66 02/03/00 593,580
400,000 6.88 04/24/00 399,284
800,000 6.58 04/17/01 780,976
500,000 6.60 08/20/01 487,010
Conseco Finance
170,000 8.70 11/15/26 169,252
Conseco Inc.
340,000 10.50 12/15/04 394,101
Continental Bank N.A.
525,000 11.25 07/01/01 551,565
Countrywide Funding Corp.
125,000 6.08 07/14/99 123,531
250,000 8.43 11/16/99 259,772
250,000 7.75 08/10/01 257,025
375,000 8.00 12/15/26 354,994
First U.S.A. Bank
160,000 6.13 10/30/97 159,872
Meditrust, Inc.
390,000 7.82 09/10/26 400,082
Mic Finance Trust
360,000 8.38 02/01/27 353,495
Phoenix RE Capital Trust
165,000 8.85 02/01/27 164,594
Security Pacific Corp.
995,000 11.50 11/15/00 /(a)/ 1,133,693
Signet Banking Corp.
240,000 9.63 06/01/99 252,629
Taubman Realty Group
480,000 8.00 07/30/01 489,811
Washington Real Estate Investment Trust
120,000 7.13 08/13/03 118,458
- -------------------------------------------------------------------------------
$ 7,954,232
- -------------------------------------------------------------------------------
Industrial Bonds--14.4%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 515,949
Continental Airlines, Inc.
339,989 7.75% 07/02/14 348,451
553,994 8.56 07/02/14 590,857
Edison Mission Energy Funding Corp.
170,564 6.77 09/15/03 168,785
Ford Capital Corp.
300,000 9.50 07/01/01 326,253
Ford Motor Corp.
300,000 7.00 09/25/01 300,474
General Motors Acceptance Corp.
275,000 7.63 03/09/98 277,989
200,000 7.13 05/10/00 201,840
375,000 9.63 12/15/01 412,492
H + T Master Trust
550,000 8.18 08/15/02 550,000
Harrahs Operations, Inc.
300,000 8.75 03/15/00 301,500
Hertz Corp.
400,000 7.00 07/15/03 391,260
Mitchell Energy and Dev. Corp.
310,000 9.25 01/15/02 328,758
Northwest Airlines Corp.
163,540 8.26 03/10/06 170,804
567,358 8.97 01/02/15 588,117
NWCG Holding Crp
680,000 7.05 06/15/99 586,786
Panamerican Beverage Co.
130,000 8.13 04/01/03 133,416
RJR Nabisco Inc.
175,000 8.00 07/15/01 172,440
550,000 8.63 12/01/02 548,218
Tele-Communications, Inc.
100,000 7.13 02/02/98 100,396
300,000 8.25 01/15/03 304,011
1,135,000 6.27 09/15/03 1,132,912
50,000 6.82 09/15/10 49,846
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,690,128
350,000 9.63 05/01/02 384,776
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds(continued)
Industrial Bonds(continued)
Time Warner, Inc. (continued)
$ 400,000 7.98% 08/15/04 $ 406,440
U.S. Air Inc.
553,242 6.76 04/15/08 528,761
USI American Holdings Corp.
150,000 7.25 12/01/06 145,070
- -------------------------------------------------------------------------------
$ 11,656,729
- -------------------------------------------------------------------------------
Utility Bonds--1.1%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 326,215
Salton Sea Funding
580,000 7.02 05/30/00 580,922
- -------------------------------------------------------------------------------
$ 907,137
- -------------------------------------------------------------------------------
Total Corporate Bonds
(Cost $20,576,762) $ 20,518,098
- -------------------------------------------------------------------------------
Asset-Backed Securities--14.1%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 /(a)/ $ 157,232
Asset Securitization Corp., Series 1996, Class A1
600,000 6.88 11/13/26 /(a)/ 591,398
Asset Securitization Corp., Series 4, Class A
900,000 7.49 04/14/27 914,800
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
177,654 5.80 06/15/02 176,876
Discover Card Master Trust 1996-4, Class A
1,910,000 6.06 10/16/13 /(a)/ 1,942,222
Discover Card Master Trust 1996-4, Class B
1,100,000 6.24 10/16/13 1,108,250
DVI Equipment Lease Trust Series 1996-1, Class A
1,011,139 6.55 07/10/04 1,006,286
General Motors Acceptance Corp. Series 1995, Class A
69,659 7.15 03/15/00 70,203
Navistar Financial Trust, Series 1995-A, Class A2
214,878 6.55 11/20/01 215,549
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
245,032 6.85 06/15/01 247,048
Premier Auto Trust Series 1995-1, Class A4
123,449 7.85 09/04/98 123,680
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 80,625
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20% 02/16/06 667,250
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 565,983
Sears Credit Account Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 302,718
Standard Credit Card Master Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 714,422
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,120,694
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 910,683
World Financial Tower B Series 1996, Class B
498,093 6.91 09/01/13 483,679
- -------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $11,543,903) $ 11,399,598
- -------------------------------------------------------------------------------
Emerging Market Debt--4.4%
Bancoldex
$ 60,000 8.63% 06/02/00 $ 61,372
BCO De Colombia
110,000 8.63 06/02/00 112,516
Bridas Corp.
110,000 12.50 11/15/99 118,581
Empresa Col Petroleos
900,000 7.25 07/08/98 903,438
Financiera Energy Nacional
50,000 9.38 06/15/06 50,504
90,000 9.38 06/15/06 94,271
Instituto de Fomento Industrial
140,000 8.38 07/29/01 141,558
130,000 8.38 07/29/01 131,447
Republic of Colombia
30,000 7.13 05/11/98 30,139
Republic of Croatia
210,000 7.00 02/27/02 204,091
Sampoerna International
120,000 8.38 06/15/06 120,164
United Mexican States
180,000 7.56 08/06/01 181,940
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Emerging Market Debt(continued)
United Mexican States (continued)
$ 650,000 7.62% 08/06/01 $ 657,007
YPF Sociedad Anonima
633,003 7.50 10/26/02 637,687
118,531 7.00 10/26/02 118,835
- -------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $3,558,558) $ 3,563,550
- -------------------------------------------------------------------------------
Government Bonds--3.0%
Australia Commonwealth
AUD 2,400,000 7.50% 07/15/05 $ 1,845,509
Province of Quebec
$ 520,000 13.25 09/15/14 611,666
- -------------------------------------------------------------------------------
Total Government Bonds
(Cost $2,524,905) $ 2,457,175
- -------------------------------------------------------------------------------
Mortgage Backed Obligations--31.9%
Bear Stearns Mortgage Securities, Inc.
$ 2,045,784 6.50% 03/28/09/(a)/ $ 1,883,062
Federal Home Loan Mortgage Corp. (FHLMC)
1,000,000 7.00 TBA-15 Yr./(b)/ 990,938
1,245,394 6.00 11/15/16 1,234,885
1,000,000 6.35 03/25/18 976,870
Federal National Mortgage Association (FNMA)
1,000,000 6.50 TBA-7 Yr./(b)/ 981,560
1,000,000 7.00 TBA-30 Yr./(b)/ 968,750
4,500,000 7.50 TBA-30 Yr./(b)/ 4,466,250
500,000 6.25 07/25/18 486,875
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24/(a)/ 1,771,240
Government National Mortgage Association (GNMA)
3,000,000 7.50 TBA-30 Yr./(b)/ 2,973,750
3,000,000 8.00 TBA-30 Yr./(b)/ 3,040,290
335,213 8.00 02/15/17 344,240
30,057 7.00 11/15/22 29,296
362,778 7.00 12/15/22 353,592
596,838 7.00 12/15/22 581,726
184,742 7.00 01/15/23 179,892
787,526 7.50 03/15/23 785,313
779,931 7.00 05/15/23 759,457
120,766 7.50 08/15/23 120,427
39,068 7.00 11/15/23 38,042
JP Morgan Commercial Mortgage Finance Corp., Series 1997-C4
1,000,000 7.32% 12/26/28 997,227
Morgan Stanley Capital Commercial Mortgage, Inc. Series 1997-C1
900,000 7.46 05/15/06 912,375
Prudential Home Mortgage Securities Corp. 1992-39 A8
1,000,000 7.11 12/25/07 860,550
- -------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $25,637,886) $ 25,736,607
- -------------------------------------------------------------------------------
Sovereign Credit--0.4%
State of Israel
$ 370,000 6.38% 12/15/05 $ 343,748
- -------------------------------------------------------------------------------
Total Sovereign Credit
(Cost $346,061) $ 343,748
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--17.0%
United States Treasury Bonds
$ 330,000 8.75% 05/15/17 $ 390,070
550,000 8.88 08/15/17/(a)/ 657,938
2,230,000 8.75 05/15/20 2,656,488
120,000 7.88 02/15/21/(a)/ 131,174
2,240,000 7.63 02/15/25 2,402,400
United States Treasury Interest-Only Stripped Securities/(c)/
2,250,000 6.99 08/15/09 966,893
350,000 7.04 11/15/10 136,808
United States Treasury Notes
4,000,000 6.88 08/31/99 4,044,360
280,000 5.63 11/30/00 272,387
590,000 7.88 11/15/04/(a)/ 630,380
United States Treasury Principal-Only Stripped Securities/(d)/
40,000 5.78 11/15/97 38,781
410,000 6.81 11/15/04/(a)/ 247,566
5,730,000 7.22 05/15/20 1,119,356
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,742,043) $ 13,694,601
- -------------------------------------------------------------------------------
Yankee Bonds--0.3%
Korea Electric Power
$ 263,790 7.40% 04/01/16 $ 265,088
- -------------------------------------------------------------------------------
Total Yankee Bonds
(Cost $255,077) $ 265,088
- -------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Core Fixed Income Fund (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase Agreement--20.1%
Joint Repurchase Agreement Account/(a)/
$ 16,200,000 5.49% 05/01/97 $ 16,200,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $16,200,000) $ 16,200,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $94,385,195)/(e)/ $ 94,178,465
- -------------------------------------------------------------------------------
Futures contracts open at April 30, 1997 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(f) Month Gain (Loss)
- ---------------------------- -------------- ----------------- -------------
Euro Dollars 5 June 1997 $4,250
Euro Dollars 8 September 1997 (2,338)
Euro Dollars 5 December 1997 (1,000)
Euro Dollars 5 June 1998 (2,250)
5 Year U.S. Treasury Notes 10 June 1997 (2,828)
10 Year U.S. Treasury Notes 17 June 1997 (12,750)
U.S. Long Term Bond (14) June 1997 42,682
-------------
$25,766
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $382,996
Gross unrealized loss for investments in which cost
exceeds value (704,905)
- ------------------------------------------------------------------------------
Net unrealized loss $(321,909)
- --------------------------------------------------------------------------------
</TABLE>
/(a)/Portions of these securities are being segregated for open TBA purchases,
mortgage dollar rolls, and futures.
/(b)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally + / -2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(c)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/The interest rate disclosed for these securitites represents effective
yields to maturity.
/(e)/The aggregate cost for federal income tax purposes is $94,500,374.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and each U.S. Long Term Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $27,100,000 and $9,088,344, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Adjustable
Rate Short Duration
Government Government
Fund Fund
--------------------------------------
<S> <C> <C>
Assets:
Investments in securities, at value (cost $594,120,929, $102,639,463, $39,615,334
and $94,385,195, respectively) $ 596,596,552 $ 102,672,119
Cash 57,183 89,184
Receivables:
Investment securities sold 295,632 --
Interest 6,240,961 1,042,023
Forward foreign currency exchange contracts -- --
Fund shares sold 2,978,910 203,746
Variation margin -- --
Deferred organization expenses, net -- --
Other assets 64,048 50,879
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 606,233,286 104,057,951
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,032,523 109,251
Investment securities purchased 1,331,393 --
Fund shares repurchased 10,604,905 1,707
Investment adviser fees 191,592 34,620
Transfer agent fees 42,054 --
Authorized dealer service fees 6,616 --
Variation margin 87,000 46,971
Accrued expenses and other liabilities 59,487 15,162
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 13,355,570 207,711
- ------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 643,684,171 117,737,007
Accumulated undistributed (distributions in excess of) net investment income (2,943,415) 599,277
Accumulated net realized loss on investment and futures transactions (49,959,507) (14,542,059)
Accumulated net realized foreign currency loss -- --
Net unrealized gain (loss) on investments and futures 2,096,467 56,015
Net unrealized gain on translation of assets and liabilities denominated in
foreign currencies -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net assets $ 592,877,716 $ 103,850,240
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:
Institutional shares $9.86 $9.76
Administration shares $9.86 $9.78
Service shares $9.86 $9.75
Class A shares (a) $9.86 --
- ------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Institutional shares 55,732,381 10,231,208
Administration shares 424,079 153,792
Service shares 2,171 258,644
Class A shares 3,960,437 --
- ------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value (unlimited
number of shares authorized) 60,119,068 10,643,644
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
---------------------------------
<S> <C> <C>
Assets:
Investments in securities, at value (cost $594,120,929, $102,639,463, $39,615,334
and $94,385,195, respectively) $ 39,692,726 $ 94,178,465
Cash 91,511 94,989
Receivables:
Investment securities sold 145,393 1,331,207
Interest 554,155 1,045,248
Forward foreign currency exchange contracts -- 34,692
Fund shares sold -- 60,750
Variation margin -- 6,750
Deferred organization expenses, net 10,458 41,206
Other assets 51,608 29,277
- -------------------------------------------------------------------------------------------------------------------------
Total assets 40,545,851 96,822,584
- -------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 18,312 43,289
Investment securities purchased 2,144,574 15,935,315
Fund shares repurchased 10,296 --
Investment adviser fees 11,244 26,250
Transfer agent fees 12,983 2,771
Authorized dealer service fees -- --
Variation margin -- --
Accrued expenses and other liabilities 31,430 30,169
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,228,839 16,037,794
- -------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 42,243,143 81,193,439
Accumulated undistributed (distributions in excess of) net investment income 90,133 36,949
Accumulated net realized loss on investment and futures transactions (4,093,656) (267,089)
Accumulated net realized foreign currency loss -- (32,353)
Net unrealized gain (loss) on investments and futures 77,392 (175,768)
Net unrealized gain on translation of assets and liabilities denominated in
foreign currencies -- 29,612
- -------------------------------------------------------------------------------------------------------------------------
Net assets $ 38,317,012 $ 80,784,790
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share:
Institutional shares $9.94 $9.71
Administration shares $9.94 $9.70
Service shares $9.94 $9.72
Class A shares (a) -- --
- -------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Institutional shares 3,738,166 7,565,340
Administration shares 11,363 638,323
Service shares 105,100 114,034
Class A shares -- --
- -------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value (unlimited
number of shares authorized) 3,854,629 8,317,697
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Maximum public offering price per share (NAV per share x 1.0152) for Class A
shares of GS Adjustable Rate Government Fund is $10.01.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Operations
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Adjustable Short
Rate Duration
Government Government
Fund Fund
-----------------------------------
<S> <C> <C>
Investment income:
Interest/(a)/ $ 19,521,515 $ 3,571,901
- -----------------------------------------------------------------------------------------------------------------------------------
Total income 19,521,515 3,571,901
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 1,196,772 259,279
Distribution fees 24,001 --
Authorized dealer service fees 24,001 --
Administration share fees 5,231 1,118
Service share fees 10 5,244
Transfer agent fees 143,729 --
Custodian fees 65,396 32,437
Professional fees 30,592 30,169
Registration fees 31,419 29,736
Amortization of deferred organization expenses -- --
Trustees' fees 5,754 990
Other 64,428 26,459
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,591,333 385,432
Less--Expenses reimbursable and fees waived by Goldman Sachs (215,722) (145,719)
- -----------------------------------------------------------------------------------------------------------------------------------
Net expenses 1,375,611 239,713
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 18,145,904 3,332,188
- -----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (301,736) 77,934
Futures transactions (575,601) (78,182)
Foreign currency related transactions -- --
Net change in unrealized gain (loss) on:
Investments 3,237,459 (594,540)
Futures (523,110) (9,522)
Translation of assets and liabilities denominated in foreign currencies -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 1,837,012 (604,310)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 19,982,916 $ 2,727,878
- -----------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
-----------------------------
<S> <C> <C>
Investment income:
Interest/(a)/ $ 846,820 $ 2,713,928
- --------------------------------------------------------------------------------------------------------------------------
Total income 846,820 2,713,928
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 72,141 152,651
Distribution fees -- --
Authorized dealer service fees -- --
Administration share fees 79 4,929
Service share fees 2,452 1,908
Transfer agent fees 7,214 15,265
Custodian fees 24,930 43,131
Professional fees 30,238 29,501
Registration fees 29,353 29,627
Amortization of deferred organization expenses 10,290 12,146
Trustees' fees 332 775
Other 15,581 8,570
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 192,610 298,503
Less--Expenses reimbursable and fees waived by Goldman Sachs (108,922) (119,934)
- --------------------------------------------------------------------------------------------------------------------------
Net expenses 83,688 178,569
- --------------------------------------------------------------------------------------------------------------------------
Net investment income 763,132 2,535,359
- --------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions 46,213 (11,091)
Futures transactions -- (15,366)
Foreign currency related transactions -- (32,353)
Net change in unrealized gain (loss) on:
Investments (125,032) (1,032,929)
Futures -- (72,450)
Translation of assets and liabilities denominated in foreign currencies -- 29,612
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions (78,819) (1,134,577)
- --------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 684,313 $ 1,400,782
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Net of $4,391 in foreign withholding tax for the Core Fixed Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Six Months Ended April 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Adjustable Short
Rate Duration
Government Government
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 18,145,904 $ 3,332,188
Net realized gain (loss) from investment and futures transactions (877,337) (248)
Net realized loss from foreign currency related transactions -- --
Net change in unrealized gain (loss) on investments and futures 2,714,349 (604,062)
Net change in unrealized gain on translation of assets and liabilities
denominated in foreign currencies -- --
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 19,982,916 2,727,878
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (16,997,708) (3,409,055)
Administration shares (118,601) (29,022)
Service shares (107) (65,458)
Class A shares (531,120) --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (17,647,536) (3,503,535)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 224,637,176 17,764,086
Reinvestment of dividends and distributions 10,493,073 2,378,322
Cost of shares repurchased (272,256,791) (17,534,072)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from shares transactions (37,126,542) 2,608,336
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (34,791,162) 1,832,679
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of period $ 627,668,878 $ 102,017,561
- ----------------------------------------------------------------------------------------------------------------
End of period $ 592,877,716 $ 103,850,240
- ----------------------------------------------------------------------------------------------------------------
Accumulated undistributed (distributions in excess of) net investment income $ (2,943,415) $ 599,277
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 22,833,196 1,813,884
Reinvestment of dividends and distributions 1,066,128 243,233
Shares repurchased (27,664,736) (1,793,383)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,765,412) 263,734
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 763,132 $ 2,535,359
Net realized gain (loss) from investment and futures transactions 46,213 (26,457)
Net realized loss from foreign currency related transactions -- (32,353)
Net change in unrealized gain (loss) on investments and futures (125,032) (1,105,379)
Net change in unrealized gain on translation of assets and liabilities
denominated in foreign currencies -- 29,612
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 684,313 1,400,782
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (743,379) (2,380,508)
Administration shares (1,285) (127,789)
Service shares (18,468) (23,664)
Class A shares -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (763,132) (2,531,961)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 15,143,248 8,630,772
Reinvestment of dividends and distributions 633,411 2,308,481
Cost of shares repurchased (12,937,480) (2,167,703)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from shares transactions 2,839,179 8,771,550
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase 2,760,360 7,640,371
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of period $ 35,556,652 $ 73,144,419
- ----------------------------------------------------------------------------------------------------------------
End of period $ 38,317,012 $ 80,784,790
- ----------------------------------------------------------------------------------------------------------------
Accumulated undistributed (distributions in excess of) net investment income $ 90,133 $ 36,949
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 1,519,494 880,108
Reinvestment of dividends and distributions 63,471 235,763
Shares repurchased (1,297,285) (220,518)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding 285,680 895,353
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Adjustable Short
Rate Duration
Government Government
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 37,031,818 $ 6,604,446
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519)
Administration shares (220,450) (2,548)
Service shares -- (14,792)
Class A shares (577,779) --
In excess of net investment income
Institutional shares (1,304,006) --
Administration shares (7,930) --
Class A shares (20,794) --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441
Reinvestment of dividends and distributions 18,181,648 4,153,816
Cost of shares repurchased (477,107,914) (47,993,112)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from shares transactions (52,339,892) (1,819,855)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469)
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of year $ 676,133,018 $ 103,760,030
- ----------------------------------------------------------------------------------------------------------------
End of year $ 627,668,878 $ 102,017,561
- ----------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed net investment income $ (3,441,783) $ 770,624
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467
Reinvestment of dividends and distributions 1,856,783 424,274
Shares repurchased (48,741,470) (4,905,357)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616)
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Short Core
Duration Fixed
Tax-Free Income
Fund Fund
--------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 1,786,304 $ 4,013,477
Net realized gain (loss) from investment and futures transactions 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures (396,071) (75,350)
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,721,871 3,684,707
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (1,766,892) (4,019,797)
Administration shares (2,032) (19,144)
Service shares (17,380) (5,349)
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- (450,016)
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,786,304) (4,494,306)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 22,248,684 21,976,567
Reinvestment of dividends and distributions 1,401,492 4,315,748
Cost of shares repurchased (46,918,400) (7,840,575)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from shares transactions (23,268,224) 18,451,740
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (23,332,657) 17,642,141
Net Assets:
- ----------------------------------------------------------------------------------------------------------------
Beginning of year $ 58,889,309 55,502,278
- ----------------------------------------------------------------------------------------------------------------
End of year $ 35,556,652 $ 73,144,419
- ----------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed net investment income $ 90,133 $ 33,551
- ----------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 2,233,482 2,244,430
Reinvestment of dividends and distributions 140,950 439,299
Shares repurchased (4,727,959) (811,075)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (2,353,527) 1,872,654
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end, management
investment company. Included in this report are the financial statements for the
Goldman Sachs Adjustable Rate Government Fund (Adjustable Rate Government),
Goldman Sachs Short Duration Government Fund (Short Duration Government),
Goldman Sachs Short Duration Tax-Free Fund (Short Duration Tax-Free) and Goldman
Sachs Core Fixed Income Fund (Core Fixed Income), collectively, ("the Funds") or
individually a ("Fund"). The Funds are diversified portfolios of the Trust
offering three classes of shares - Institutional shares, Administration shares
and Service shares. In addition, the Adjustable Rate Government Fund offers
Class A shares. Effective May 1, 1997, the Trust was reorganized from a
Massachusetts business trust to a Delaware business trust and various
operational changes were approved, including updating certain investment
restrictions and amending the management contracts. In addition, Short Duration
Government, Short Duration Tax-Free, and Core Fixed Income added two new share
classes, Class A and Class B, as of May 1.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations for
which accurate market quotations are readily available are valued on the basis
of quotations furnished by a pricing service or provided by dealers in such
securities. Portfolio securities for which accurate market quotations are not
readily available are valued based on yield equivalents, pricing matrix or other
sources, under valuation procedures established by the Trust's Board of
Trustees. Short-term debt obligations maturing in sixty days or less are valued
at amortized cost.
B. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on trade date. Realized gains and losses on
sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account actual principal
prepayment experience and estimates of future principal prepayments. Certain
mortgage security paydown gains and losses are taxable as ordinary income. Such
paydown gains and losses increase or decrease taxable ordinary income available
for distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
Market premiums resulting from the purchase of long-term debt securities are
amortized to interest income over the life of the security with a corresponding
decrease in the cost basis of that security for Short Duration Tax-Free. Market
discounts and market premiums on debt securities, other than mortgage backed
securities, are amortized to interest income over the life of the security with
a corresponding adjustment in the cost basis of that security for Core Fixed
Income Fund.
C. Foreign Currency Translations
- --------------------------------
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
- --------------------------------------------------------------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on foreign currency transactions
will represent: (i) foreign exchange gains and losses from the sale and holdings
of foreign currencies and investments; (ii) gains and losses between trade date
and settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
interest recorded and the amounts actually received.
D. Forward Foreign Currency Exchange Contracts
- ----------------------------------------------
Core Fixed Income may enter into forward foreign exchange contracts for the
purchase or sale of a specific foreign currency at a fixed price on a future
date as a hedge or cross-hedge against either specific transactions or portfolio
positions. Core Fixed Income may also purchase and sell forward contracts to
seek to increase total return. All commitments are "marked-to-market" daily at
the applicable translation rates and any resulting unrealized gains or losses
are recorded in the Fund's financial statements. The Fund records realized gains
or losses at the time the forward contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
E. Mortgage Dollar Rolls
- ------------------------
The Funds, with the exception of Short Duration Tax-Free, may enter into
mortgage "dollar rolls" in which the Fund sells securities in the current month
for delivery and simultaneously contracts with the same counterparty to
repurchase similar (same type, coupon and maturity) but not identical securities
on a specified future date. The Fund loses the right to receive principal and
interest paid on the securities sold. However, the Fund benefits to the extent
of any price received for the securities sold and the lower forward price for
the future purchase (often referred to as the "drop") or fee income plus the
interest earned on the cash proceeds of the securities sold until the settlement
date of the forward purchase. The Fund will hold and maintain in a segregated
account, until the settlement date, cash or liquid, high-grade debt securities
in an amount equal to the forward purchase price. For financial reporting and
tax reporting purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale.
F. Futures Contracts
- --------------------
The Funds may enter into futures transactions to hedge against changes in
interest rates, securities prices, currency exchange rates (in the case of Core
Fixed Income) or to seek to increase total return.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Payments for futures contracts ("variation margin") are paid or received by the
Funds daily, dependent on the daily fluctuations in the value of the contracts,
and are recorded for financial reporting purposes as unrealized gains or losses.
When contracts are closed, the Funds realize a gain or loss equal to the
difference between the value of the futures contract to sell and the value of
futures contract to buy. Gains and losses are reported in the Statement of
Operations.
The use of futures contracts involve, to varying degrees, elements of
market and counterparty risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities. Changes in the value of the futures
contract may not directly correlate with changes in the value of the underlying
securities. This risk may decrease the effectiveness of the Funds' hedging
strategies and potentially result in a loss.
G. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
H. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are generally allocated to the portfolios based on
each portfolio's relative average net assets for the period.
- --------------------------------------------------------------------------------
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
Shareholders of Administration shares and Service shares bear all expenses
and fees paid to service organizations for their services with respect to such
shares as well as other expenses (subject to expense limitations) which are
directly attributable to such shares. For the Adjustable Rate Government Fund,
shareholders of Class A shares bear all expenses and fees relating to the
distribution and authorized dealer service plans as well as other expenses which
are directly attributable to such shares.
I. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of its investment company taxable and tax-exempt income to its
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial
statement purposes as either from or in excess of net investment income or net
realized gain on investment transactions, or from capital, depends on the type
of book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
The Funds, at their most recent tax year-ends (October 31, 1996 for Core
Fixed Income and December 31, 1996 for Adjustable Rate Government, Short
Duration Government and Short Duration Tax-Free) had approximately the following
amounts of capital loss carryforward for U.S. federal tax purposes:
<TABLE>
<CAPTION>
Years of
Fund Amount Expiration
- ------------------------------------ ------------- -------------
<S> <C> <C>
Adjustable Rate Government $49,069,000 2000-2004
Short Duration Government $14,141,000 2002-2004
Short Duration Tax-Free $4,058,000 2002-2003
Core Fixed Income $77,000 2004
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by applicable laws or regulations.
3. Agreements
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman, Sachs &
Co. ("Goldman Sachs"), serves as the investment adviser for the Adjustable Rate
Government and Short Duration Government Funds pursuant to Investment Advisory
Agreements. Goldman Sachs Asset Management ("GSAM"), a separate operating
division of Goldman Sachs, serves as the investment adviser for the Short
Duration Tax-Free and Core Fixed Income Funds pursuant to Investment Advisory
Agreements. Under the Investment Advisory Agreements, the adviser, subject to
the general supervision of the Trust's Board of Trustees, manages the Funds'
portfolios and provides for the administration of the Funds' other affairs. As
compensation for the services rendered under the Investment Advisory Agreements
and the assumption of the expenses related thereto, the adviser is entitled to a
fee, computed daily and payable monthly at an annual rate equal to .40% of
average daily net assets of Adjustable Rate Government, Short Duration Tax-Free
and Core Fixed Income and .50% of average daily net assets of Short Duration
Government. Until further notice, GSFM has voluntarily agreed not to impose .10%
of its investment advisory fee for Short Duration Government.
The adviser has voluntarily agreed to limit certain of the Funds' expenses
(excluding investment advisory fees, taxes, interest, brokerage, litigation,
Administrative and Service Share fees, indemnification and other extraordinary
expenses and with respect to Adjustable Rate Government Class A shares,
distribution and authorized dealer service fees) to the extent that such
expenses exceed .05% per annum of each Fund's average daily net assets.
Goldman Sachs serves as Distributor of the shares of the Funds pursuant to
a Distribution Agreement and receives no compensation in this capacity with the
exception of Adjustable Rate Government Class A shares. During the period ended
April 30, 1997, Goldman Sachs retained approximately $110,300 of sales load
related to Class A shares. Goldman Sachs also serves as Transfer Agent of the
Funds for a fee.
The Trust, on behalf of Adjustable Rate Government, has adopted a
Distribution Plan (the "Plan") pursuant to Rule 12b-1 for the Class A shares.
Under the Plan, Goldman Sachs
- --------------------------------------------------------------------------------
34
<PAGE>
- --------------------------------------------------------------------------------
is entitled to receive a quarterly distribution fee equal, on an annual basis,
to .25% of the average daily net assets of Class A shares. Currently, Goldman
Sachs has agreed to voluntarily waive this distribution fee.
The Trust, on behalf of Adjustable Rate Government, has adopted a non-Rule
12b-1 Authorized Dealer Service Plan (the "Service Plan") pursuant to which
Goldman Sachs and Authorized Dealers are compensated for providing personal and
account maintenance services. Adjustable Rate Government pays a fee under the
Service Plan equal, on an annual basis, to .25% of its average daily net assets
attributable to Class A shares.
For the period ended April 30, 1997, the advisors and distributor have
voluntarily agreed to waive certain fees and reimburse other expenses as
follows(in thousands):
<TABLE>
<CAPTION>
Waivers
---------------
Reimburse-
Class A Reimburse- ment
Fund Advisor 12b-1 ment Outstanding
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustable Rate
Government -- $24 $192 $22
Short Duration
Government $52 -- 94 14
Short Duration
Tax-Free -- -- 109 28
Core Fixed
Income -- -- 120 28
</TABLE>
For the period ended April 30, 1997, Adjustable Rate Government, Short
Duration Government, and Core Fixed Income incurred commission expenses of
approximately $35,000, $8,500, and $900, respectively, in connection with
futures contracts entered into with Goldman Sachs. At April 30, 1997, Adjustable
Rate Government and Short Duration Government had approximately $87,000 and
$47,000, respectively, payable to Goldman Sachs related to variation margin on
futures contracts. Approximately $7,000 relating to variation margin was due to
Core Fixed Income from Goldman Sachs.
As of May 1, 1997, the Funds advisory agreements were changed to management
agreements encompassing the same services and fee structure.
4. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility to be used solely for temporary or emergency purposes. Under the
most restrictive arrangement, each fund must own securities having a market
value in excess of 300% of the total bank borrowings. The interest rate on the
borrowings is based on the federal funds rate. During the six months ended April
30, 1997, the Funds did not have any borrowings under this facility.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for the
six months ended April 30, 1997, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Short
Adjustable Rate Short Duration Duration Core Fixed
Government Government Tax-Free Income
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases of U.S.
Government and agency
obligations $ 150,343,674 $46,763,342 -- $115,895,051
- -----------------------------------------------------------------------------------------------
Purchases (excluding U.S.
Government and agency
obligations) -- -- $39,438,868 22,633,489
- -----------------------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 198,396,859 44,501,257 -- 118,193,576
- -----------------------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and agency
obligations) -- -- 35,970,076 12,305,124
- -----------------------------------------------------------------------------------------------
</TABLE>
At April 30, 1997, Core Fixed Income had an outstanding forward foreign
currency exchange contract, to sell foreign currency as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Value on
Foreign Currency Settlement Current Unrealized
Sell Contract Date Value Gain
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
Expiring 6/16/97 $ 1,897,856 $ 1,863,164 $ 34,692
- -----------------------------------------------------------------------------------------------
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered.
6. Administration and Service Plans
The Funds have adopted Administration and Service Plans. These plans allow for
Administration shares and Service shares, respectively, to compensate service
organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
7. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Funds' custodian.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSFM and GSAM or their affiliates, transfer uninvested cash
balances into a joint account, the daily aggregate balance of which is invested
in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of April 30, 1997, Adjustable Rate Government, Short Duration Government and
Core Fixed Income had undivided interests in the repurchase agreements in the
following joint account which equaled $36,700,000, $600,000 and $16,200,000,
respectively, in principal amount.
As of April 30, 1997, the repurchase agreement in the joint account along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity data) were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns & Co., dated 4/30/97, repurchase price $680,103,889 (GNMA:
$59,497,211, 7.50%-9.00%, 12/15/21-12/15/26; FNMA: $267,568,394, 5.50%-8.00%,
02/01/09-04/01/27; FHLMC: $373,405,594, 5.50%-7.50%, 2/01/98-4/01/27)
$680,000,000 5.50% 5/01/97 $680,000,000
Nomura Securities International, Inc. dated 4/30/97, repurchase price $300,045,833
(FNMA: $182,812,268, 5.94%-8.01%, 7/22/97-5/11/05; FHLMC: $38,631,543, 6.02%-
6.75%, 1/28/00-12/04/01, FCSB: $49,581,430, 6.05%-6.25%, 5/10/99-12/03/99,
SLMA: $29,222,430, 6.00%, 1/16/01)
300,000,000 5.50 5/01/97 300,000,000
Credit Suisse First Boston, dated 4/30/97, repurchase price $52,307,845 (U.S.
Treasury Bill: $53,475,803, 2/05/98)
52,300,000 5.40 5/01/97 52,300,000
- ---------------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $1,032,300,000
- ---------------------------------------------------------------------------------------
</TABLE>
9. Other Matters
As of April 30, 1997, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 33% of the
outstanding shares of the Short Duration Government Fund.
- --------------------------------------------------------------------------------
36
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10. Summary of Share Transactions
Share activity for the six months ended April 30, 1997 is as follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Short Duration Government
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 18,594,775 $182,930,563 1,584,839 $15,518,375
Reinvestment of dividends
and distributions 1,001,545 9,856,991 234,064 2,288,677
Shares repurchased (26,271,346) (258,542,996) (1,756,576) (17,174,153)
-------------------------------------------------------------
(6,675,026) (65,755,442) 62,327 632,899
-------------------------------------------------------------
Administration shares
Shares sold 105,099 1,034,098 136,265 1,337,724
Reinvestment of dividends
and distributions 5,632 55,427 2,467 24,158
Shares repurchased (72,390) (712,347) (10,477) (102,683)
-------------------------------------------------------------
38,341 377,178 128,255 1,259,199
-------------------------------------------------------------
Service shares
Shares sold 2,161 21,270 92,780 907,987
Reinvestment of dividends
and distributions 11 107 6,702 65,487
Shares repurchased (1) (10) (26,330) (257,236)
-------------------------------------------------------------
2,171 21,367 73,152 716,238
-------------------------------------------------------------
Class A shares
Shares sold 4,131,161 40,651,245 -- --
Reinvestment of dividends
and distributions 58,940 580,548 -- --
Shares repurchased (1,320,999) (13,001,438) -- --
-------------------------------------------------------------
2,869,102 28,230,355 -- --
-------------------------------------------------------------
Net increase (decrease) (3,765,412) $(37,126,542) 263,734 $2,608,336
==============================================================
<CAPTION>
Short Duration Tax-Free Core Fixed Income
-------------------------------------------------------------
Shares Dollars Shares Dollars
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 1,341,295 $13,363,572 212,032 $2,070,524
Reinvestment of dividends
and distributions 61,868 617,418 227,665 2,229,551
Shares repurchased (1,159,405) (11,559,759) (186,679) (1,835,467)
-------------------------------------------------------------
243,758 2,421,231 253,018 2,464,608
-------------------------------------------------------------
Administration shares
Shares sold 6,402 63,690 579,102 5,684,739
Reinvestment of dividends
and distributions 116 1,153 5,675 55,281
Shares repurchased -- -- (17,694) (174,314)
-------------------------------------------------------------
6,518 64,843 567,083 5,565,706
-------------------------------------------------------------
Service shares
Shares sold 171,797 1,715,986 88,974 875,509
Reinvestment of dividends
and distributions 1,487 14,840 2,423 23,649
Shares repurchased (137,880) (1,377,721) (16,145) (157,922)
-------------------------------------------------------------
35,404 353,105 75,252 741,236
-------------------------------------------------------------
Class A shares
Shares sold -- -- -- --
Reinvestment of dividends
and distributions -- -- -- --
Shares repurchased -- -- -- --
-------------------------------------------------------------
-- -- -- --
-------------------------------------------------------------
Net increase (decrease) 285,680 $2,839,179 895,353 $8,771,550
============================================================
</TABLE>
37
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
April 30, 1996
(unaudited)
- -------------------------------------------------------------------------------
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Short Duration Government
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 39,981,299 $391,363,204 4,072,082 $39,855,638
Reinvestment of dividends
and distributions 1,780,288 17,432,484 422,559 4,137,041
Shares repurchased (46,666,343) (456,776,795) (4,893,286) (47,875,174)
- ---------------------------------------------------------------------------------------------
(4,904,756) (47,981,107) (398,645) (3,882,495)
- ---------------------------------------------------------------------------------------------
Administration shares
Shares sold 148,981 1,457,872 33,251 326,101
Reinvestment of dividends
and distributions 9,641 94,420 207 2,032
Shares repurchased (138,609) (1,356,764) (7,921) (77,312)
- ---------------------------------------------------------------------------------------------
20,013 195,528 25,537 250,821
- ---------------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 188,134 1,837,702
Reinvestment of dividends
and distributions -- -- 1,508 14,743
Shares repurchased -- -- (4,150) (40,626)
- ---------------------------------------------------------------------------------------------
-- -- 185,492 1,811,819
- ---------------------------------------------------------------------------------------------
Class A shares
Shares sold 1,404,698 13,765,298 -- --
Reinvestment of dividends
and distributions 66,854 654,744 -- --
Shares repurchased (1,936,518) (18,974,355) -- --
- ---------------------------------------------------------------------------------------------
(464,966) (4,554,313) -- --
- ---------------------------------------------------------------------------------------------
Net increase (decrease) (5,349,709) $(52,339,892) (187,616) $(1,819,855)
=============================================================================================
<CAPTION>
Short Duration Tax-Free Core Fixed Income
- ---------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional shares
Shares sold 2,085,253 $20,777,050 2,094,833 $20,524,422
Reinvestment of dividends
and distributions 139,126 1,383,351 436,903 4,292,533
Shares repurchased (4,601,865) (45,664,878) (769,104) (7,431,360)
- ---------------------------------------------------------------------------------------------
(2,377,486) (23,504,477) 1,762,632 17,385,595
- ---------------------------------------------------------------------------------------------
Administration shares
Shares sold 10,672 105,302 106,074 1,029,912
Reinvestment of dividends
and distributions 203 2,017 1,847 17,883
Shares repurchased (10,644) (105,478) (36,681) (358,284)
- ---------------------------------------------------------------------------------------------
231 1,841 71,240 689,511
- ---------------------------------------------------------------------------------------------
Service shares
Shares sold 137,557 1,366,332 43,525 422,233
Reinvestment of dividends
and distributions 1,621 16,124 549 5,332
Shares repurchased (115,450) (1,148,044) (5,292) (50,931)
- ---------------------------------------------------------------------------------------------
23,728 234,412 38,782 376,634
- ---------------------------------------------------------------------------------------------
Class A shares
Shares sold -- -- -- --
Reinvestment of dividends
and distributions -- -- -- --
Shares repurchased -- -- -- --
- ---------------------------------------------------------------------------------------------
-- -- -- --
- ---------------------------------------------------------------------------------------------
Net increase (decrease) (2,353,527) $(23,268,224) 1,872,654 $18,451,740
=============================================================================================
</TABLE>
- -------------------------------------------------------------------------------
38
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
--------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. $9.83 $0.2971/(a)/ $0.0216/(a)/ -- $0.3187 $(0.2887) --
1997-Administration
Shares .............. 9.83 0.2844/(a)/ 0.0221/(a)/ -- 0.3065 (0.2765) --
1997-Service
Shares/(m)/ ......... 9.84 0.0527/(a)/ 0.0200/(a)/ -- 0.0727 (0.0527) --
1997-Class A Shares ...... 9.83 0.2766/(a)/ 0.0300/(a)/ -- 0.3066 (0.2766) --
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 9.77 0.5759/(a)/ 0.0772/(a)/ -- 0.6531 (0.5725) --
1996-Administration
Shares .............. 9.77 0.5489/(a)/ 0.0797/(a)/ -- 0.6286 (0.5489) --
1996-Class A Shares ...... 9.77 0.5481/(a)/ 0.0806/(a)/ -- 0.6287 (0.5489) --
1995-Institutional
Shares .............. 9.74 0.5630/(a)/ 0.0717/(a)/ -- 0.6347 (0.5759) --
1995-Administration
Shares .............. 9.74 0.5366/(a)/ 0.0737/(a)/ -- 0.6103 (0.5528) --
1995-Class A
Shares/(c)/.......... 9.79 0.2721/(a)/ (0.0090)/(a) / -- 0.2631 (0.2697) --
1994-Institutional
Shares .............. 10.00 0.4341/(a)/ (0.2455)/(a) / -- 0.1886 (0.4486) --
1994-Administration
Shares .............. 10.00 0.4211/(a)/ (0.2572)/(a) / -- 0.1639 (0.4239) --
1993-Institutional
Shares .............. 10.04 0.4397 (0.0376)/(d) / -- 0.4021 (0.4397) --
1993-Administration
Shares/(e)/.......... 10.02 0.2146 (0.0173)/(d) / -- 0.1973 (0.2146) --
1992-Institutional
Shares .............. 10.03 0.5599 (0.0029)/(d) / -- 0.5570 (0.5470) --
For the Period July 17, 1991/(g)/through October 31,
- ------------------------------------------------------
1991-Institutional
Shares .............. 10.00 0.1531 0.0322/(d)/ -- 0.1853 (0.1553) --
<CAPTION>
Distributions to shareholders
----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. -- -- -- $(0.2887) $0.0300 $9.86 3.28%/(f)/
1997-Administration
Shares .............. -- -- -- (0.2765) 0.0300 9.86 3.16/(f)/
1997-Service
Shares/(m)/ ......... -- -- -- (0.0527) 0.0200 9.86 0.74/(f)/
1997-Class A Shares ...... -- -- -- (0.2766) 0.0300 9.86 3.16/(f)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. (0.0206) -- -- (0.5931) 0.0600 9.83 6.86
1996-Administration
Shares .............. (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1996-Class A Shares ...... (0.0198) -- -- (0.5687) 0.0600 9.83 6.60
1995-Institutional
Shares .............. (0.0287) -- -- (0.6046) 0.0301 9.77 6.75
1995-Administration
Shares .............. (0.0275) -- -- (0.5803) 0.0300 9.77 6.48
1995-Class A
Shares/(c)/.......... (0.0134) -- -- (0.2831) (0.0200) 9.77 2.74/(f)/
1994-Institutional
Shares .............. -- -- -- (0.4486) (0.2600) 9.74 1.88
1994-Administration
Shares .............. -- -- -- (0.4239) (0.2600) 9.74 1.63
1993-Institutional
Shares .............. (0.0024) -- -- (0.4421) (0.0400) 10.00 4.13
1993-Administration
Shares/(e)/.......... (0.0027) -- -- (0.2173) (0.0200) 10.00 2.01/(f)/
1992-Institutional
Shares .............. -- -- -- (0.5470) 0.0100 10.04 6.12
For the Period July 17, 1991/(g)/through October 31
- ------------------------------------------------------
1991-Institutional Shares. -- -- -- (0.1553) 0.0300 10.03 2.14/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
---------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. 0.45%/(b)/ 6.08%/(b)/ 25.64% $549,611 0.51%/(b)/ 6.02%/(b)/
1997-Administration
Shares .............. 0.70/(b)/ 5.83/(b)/ 25.64 4,182 0.76/(b)/ 5.77/(b)/
1997-Service
Shares/(m)/ ......... 0.95/(b)/ 5.64/(b)/ 25.64 22 1.01/(b)/ 5.58/(b)/
1997-Class A Shares ...... 0.70/(b)/ 5.61/(b)/ 25.64 39,063 1.01/(b)/ 5.30/(b)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 0.45 5.85 52.36 613,149 0.51 5.79
1996-Administration
Shares .............. 0.70 5.59 52.36 3,792 0.76 5.53
1996-Class A Shares ...... 0.70 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares .............. 0.46 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares .............. 0.71 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares/(c)/.......... 0.69/(b)/ 5.87/(b)/ 24.12 15,203 1.01/(b)/ 5.55/(b)/
1994-Institutional
Shares .............. 0.46 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares .............. 0.71 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares .............. 0.45 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares/(e)/.......... 0.70/(b)/ 3.81/(b)/ 103.74 5,326 0.73/(b)/ 3.78/(b)/
1992-Institutional
Shares .............. 0.42 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g)through October 31,
- ------------------------------------------------------
1991-Institutional
Shares .............. 0.20/(b)/ 7.31/(b)/ 145.67/(b)/ 239,642 1.02/(b)/ 6.49/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. $9.83 $0.3287/(a)/ $(0.0700)/(a)/ -- $0.2587 $(0.3287) --
1997-Administration
Shares .............. 9.85 0.3175/(a)/ (0.0700)/(a)/ -- 0.2475 (0.3175) --
1997-Service Shares ...... 9.82 0.3043/(a)/ (0.0700)/(a)/ -- 0.2343 (0.3043) --
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. 9.82 0.6290/(a)/ 0.0136/(a)/ -- 0.6426 (0.6326) --
1996-Administration
Shares/(h)/.......... 9.86 0.3837/(a)/ 0.0003/(a)/ -- 0.3840 (0.3940) --
1996-Service
Shares/(i)/.......... 9.72 0.3134/(a)/ 0.1018/(a)/ -- 0.4152 (0.3152) --
1995-Institutional Shares. 9.64 0.6652/(a)/ 0.1666/(a)/ -- 0.8318 (0.6518) --
1995-Administration
Shares .............. 9.64 0.2384/(a)/ (0.0433)/(a)/ -- 0.1951 (0.2051) --
1994-Institutional Shares. 10.14 0.5628/(a)/ (0.4592)/(a)/ -- 0.1036 (0.5598) (0.0438)
1994-Administration
Shares .............. 10.14 0.5329/(a)/ (0.4539)/(a)/ -- 0.0790 (0.5352) (0.0438)
1993-Institutional Shares. 10.16 0.5627 (0.0135)/(d)/ -- 0.5492 (0.5627) --
1993-Administration
Shares/(e)/.......... 10.23 0.2725 (0.0900)/(d)/ -- 0.1825 (0.2725) --
1992-Institutional Shares. 10.22 0.6703 (0.0600)/(d)/ -- 0.6103 (0.6703) --
1991-Institutional Shares. 10.00 0.8020 0.2200/(d)/ -- 1.0220 (0.8020) --
1990-Institutional Shares. 10.07 0.8300 (0.0700)/(d)/ -- 0.7600 (0.8300) --
1989-Institutional Shares. 10.10 0.8800 -- -- 0.8800 (0.8800) --
For the Period August 15, 1988/(g)/through October 31,
- ---------------------------------------------------------------
1988-Institutional Shares. 10.00 0.1800 0.1000/(d)/ -- 0.2800 (0.1800) --
<CAPTION>
Distributions to shareholders
-----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. -- -- -- $(0.3287) $(0.0700) $9.76 2.67%/(f)/
1997-Administration
Shares .............. -- -- -- (0.3175) (0.0700) 9.78 2.55/(f)/
1997-Service Shares ...... -- -- -- (0.3043) (0.0700) 9.75 2.42/(f)/
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. -- -- -- (0.6326) 0.0100 9.83 6.75
1996-Administration
Shares/(h)/.......... -- -- -- (0.3940) (0.0100) 9.85 4.00/(f)/
1996-Service
Shares/(i)/.......... -- -- -- (0.3152) 0.1000 9.82 4.35/(f)/
1995-Institutional Shares. -- -- -- (0.6518) 0.1800 9.82 8.97
1995-Administration
Shares .............. -- -- -- (0.2051) (0.0100) 9.63/(h)/ 2.10
1994-Institutional Shares. -- -- -- (0.6036) (0.5000) 9.64 0.99
1994-Administration
Shares .............. -- -- -- (0.5790) (0.5000) 9.64 0.73
1993-Institutional Shares. (0.0065) -- -- (0.5692) (0.0200) 10.14 5.55
1993-Administration
Shares/(e)/.......... -- -- -- (0.2725) (0.0900) 10.14 1.74
1992-Institutional Shares. -- -- -- (0.6703) (0.0600) 10.16 6.24
1991-Institutional Shares. -- -- -- (0.8020) 0.2200 10.22 10.93
1990-Institutional Shares. -- -- -- (0.8300) (0.0700) 10.00 8.23
1989-Institutional Shares. -- -- (0.0300) (0.9100) (0.0300) 10.07 9.08
For the Period August 15, 1988/(g)/through October 31
- ---------------------------------------------------------------
1988-Institutional Shares. -- -- -- (0.1800) 0.1000 10.10 3.30/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
-----------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. 0.45%/(b)/ 6.44%/(b)/ 43.72% $99,824 0.73%/(b)/ 6.16%/(b)/
1997-Administration
Shares .............. 0.70/(b)/ 6.22/(b)/ 43.72 1,504 0.98/(b)/ 5.94/(b)/
1997-Service Shares ...... 0.95/(b)/ 5.94/(b)/ 43.72 2,522 1.23/(b)/ 5.66/(b)/
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. 0.45 6.44 115.45 99,944 0.71 6.18
1996-Administration
Shares/(h)/.......... 0.70/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/.......... 0.95/(b)/ 6.05/(b)/ 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional Shares. 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares .............. 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional Shares. 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares .............. 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional Shares. 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/.......... 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional Shares. 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional Shares. 0.45 8.25 155.44 158,848 0.79 7.91
1990-Institutional Shares. 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional Shares. 0.46 8.71 137.37 31,015 1.39 7.78+
For the Period August 15, 1988/(g)/through October 31
- ---------------------------------------------------------------
1988-Institutional Shares. 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ---------------------------------------------------------------
1997-Institutional Shares. $9.96 $0.2097/(a)/ $(0.0200)/(a)/ -- $0.1897 $(0.2097) --
1997-Administration
Shares ................ 9.96 0.1976/(a)/ (0.0200)/(a)/ -- 0.1776 (0.1976) --
1997-Service Shares....... 9.97 0.1852/(a)/ (0.0300)/(a)/ -- 0.1552 (0.1852) --
For the Year Ended October 31,
- ---------------------------------------------------------------
1996-Institutional Shares. 9.94 0.4192/(a)/ 0.0200/(a)/ -- 0.4392 (0.4192) --
1996-Administration
Shares ................ 9.94 0.3944/(a)/ 0.0200/(a)/ -- 0.4144 (0.3944) --
1996-Service Shares....... 9.95 0.3697/(a)/ 0.0200/(a)/ -- 0.3897 (0.3697) --
1995-Institutional Shares. 9.79 0.4235/(a)/ 0.1500/(a)/ -- 0.5735 (0.4235) --
1995-Administration
Shares ................ 9.79 0.3989/(a)/ 0.1500/(a)/ -- 0.5489 (0.3989) --
1995-Service Shares ...... 9.79 0.3744/(a)/ 0.1600/(a)/ -- 0.5344 (0.3744) --
1994-Institutional Shares. 10.23 0.3787/(a)/ (0.3575)/(a)/ -- 0.0212 (0.3787) (0.0825)
1994-Administration
Shares ................ 10.23 0.3537/(a)/ (0.3575)/(a)/ -- (0.0038) (0.3537) (0.0825)
1994-Service Shares/(j)/.. 9.86 0.0475/(a)/ (0.0700)/(a)/ -- (0.0225) (0.0475) --
1993-Institutional Shares. 9.93 0.3834 0.3000/(d)/ -- 0.6834 (0.3834) --
1993-Administration
Shares/(j)/............ 10.16 0.1555 0.0720/(d)/ -- 0.2275 (0.1555) --
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. 10.00 0.0341 (0.0700)/(d)/ -- (0.0359) (0.0341) --
<CAPTION>
Distributions to shareholders
---------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(k)/
----------------------------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------------------
1997-Institutional Shares. -- -- -- $(0.2097) $(0.0200) $9.94 1.91%/(f)/
1997-Administration
Shares ................ -- -- -- (0.1976) (0.0200) 9.94 1.79/(f)/
1997-Service Shares....... -- -- -- (0.1852) (0.0300) 9.94 1.56/(f)/
For the Year Ended October 31,
- -------------------------------------------------------------------
1996-Institutional Shares. -- -- -- (0.4192) 0.0300 9.96 4.50
1996-Administration
Shares ................ -- -- -- (0.3944) 0.0300 9.96 4.24
1996-Service Shares....... -- -- -- (0.3697) 0.0200 9.97 3.98
1995-Institutional Shares. -- -- -- (0.4235) 0.1500 9.94 5.98
1995-Administration
Shares ................ -- -- -- (0.3989) 0.1500 9.94 5.76
1995-Service Shares ...... -- -- -- (0.3744) 0.1600 9.95 5.59
1994-Institutional Shares. -- -- -- (0.4612) (0.4400) 9.79 0.17
1994-Administration
Shares ................ -- -- -- (0.4362) (0.4400) 9.79 (0.11)
1994-Service Shares/(j)/.. -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/
1993-Institutional Shares. -- -- -- (0.3834) 0.3000 10.23 7.03
1993-Administration
Shares/(j)/............ -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
-----------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------------------
1997-Institutional Shares. 0.45%/(b)/ 4.24%/(b)/ 99.59% $37,159 1.05%/(b)/ 3.64%/(b)/
1997-Administration
Shares ................ 0.70/(b)/ 4.03/(b)/ 99.59 113 1.30/(b)/ 3.43/(b)/
1997-Service Shares....... 0.95/(b)/ 3.77/(b)/ 99.59 1,045 1.55/(b)/ 3.17/(b)/
For the Year Ended October 31,
- -------------------------------------------------------------------
1996-Institutional Shares. 0.45 4.21 231.65 34,814 1.01 3.65
1996-Administration
Shares ................ 0.70 3.96 231.65 48 1.26 3.40
1996-Service Shares....... 0.95 3.74 231.65 695 1.51 3.18
1995-Institutional Shares. 0.45 4.31 259.52 58,389 0.77 3.99
1995-Administration
Shares ................ 0.70 4.14 259.52 46 1.02 3.82
1995-Service Shares ...... 0.95 3.87 259.52 454 1.27 3.55
1994-Institutional Shares. 0.45 3.74 354.00 83,704 0.61 3.58
1994-Administration
Shares ................ 0.70 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/.. 0.95/(b)/ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares. 0.41 3.70 404.60 115,803 1.06 3.05
1993-Administration
Shares/(j)/............ 0.70/(b)/ 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/through October 31,
- -------------------------------------------------------------------
1992-Institutional Shares. 0.05/(b)/ 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(n)/ Distributions to shareholders
------------------------------------------------------------- -----------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. $9.85 $0.3236 $(0.1403) $(0.0003) $0.1830 $(0.3230) --
1997-Administrative
Shares .............. 9.84 0.3108 (0.1398) (0.0003) 0.1707 (0.3107) --
1997-Service Shares ..... 9.86 0.2991 (0.1399) (0.0003) 0.1589 (0.2989) --
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 10.00 0.6448 (0.0704) -- 0.5744 (0.6438) (0.0806)
1996-Administrative
Shares/(l)/ ......... 9.91 0.4083 (0.0703) -- 0.3380 (0.4080) --
1996-Service
Shares/(l)/ ......... 9.77 0.3756 0.0898 -- 0.4654 (0.3754) --
1995-Institutional
Shares .............. 9.24 0.6423 0.7610 -- 1.4033 (0.6433) --
For the Period January 5, 1994/(g)/through October 31,
- ------------------------------------------------------
1994-Institutional Shares. 10.00 0.4648 (0.7617) -- (0.2969) (0.4648) --
<CAPTION>
Distributions to shareholders
-----------------------------------------------------------
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of Total
income transactions capital shareholders value period return/(k)/
------------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- -------------------------------------------------------
1997-Institutional
Shares .............. -- -- -- $(0.3230) $(0.1400) $9.71 1.87%/(f)/
1997-Administrative
Shares .............. -- -- -- (0.3107) (0.1400) 9.70 1.75/(f)/
1997-Service Shares ..... -- -- -- (0.2989) (0.1400) 9.72 1.63/(f)/
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares .............. -- -- -- (0.7244) (0.1500) 9.85 5.98
1996-Administrative
Shares/(l)/ ......... -- -- -- (0.4080) (0.0700) 9.84 3.56/(f)/
1996-Service
Shares/(l)/ ......... -- -- -- (0.3754) 0.0900 9.86 4.90/(f)/
1995-Institutional
Shares .............. -- -- -- (0.6433) 0.7600 10.00 15.72
For the Period January 5, 1994/(g)/through October 31,
- -------------------------------------------------------
1994-Institutional Shares. -- -- -- (0.4648) (0.7617) 9.24 (3.00)
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
----------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
to average to average turnover period to average to average
net assets net assets rate/(d)/ (in 000s) net assets net assets
------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30,
- ------------------------------------------------------
1997-Institutional
Shares .............. 0.45%/(b)/ 6.66%/(b)/ 174.52% $73,483 0.76%/(b)/ 6.35%/(b)/
1997-Administrative
Shares .............. 0.70/(b)/ 6.49/(b)/ 174.52 6,194 1.01/(b)/ 6.18/(b)/
1997-Service Shares ..... 0.95/(b)/ 6.22/(b)/ 174.52 1,108 1.26/(b)/ 5.91/(b)/
For the Year Ended October 31,
- ------------------------------------------------------
1996-Institutional
Shares .............. 0.45 6.51 414.20 72,061 0.83 6.13
1996-Administrative
Shares/(l)/ ......... 0.70/(b)/ 6.41/(b)/ 414.20 702 1.08/(b)/ 6.03/(b)/
1996-Service
Shares/(l)/ ......... 0.95/(b)/ 6.37/(b)/ 414.20 381 1.33/(b)/ 5.99/(b)/
1995-Institutional
Shares .............. 0.45 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994/(g)/through October 31,
- ------------------------------------------------------
1994-Institutional
Shares .............. 0.45/(b)/ 6.48/(b)/ 288.25 24,508 1.46/(b)/ 5.47/(b)/
</TABLE>
/(a)/ Calculated based on the average shares outstanding methodology.
/(b)/ Annualized.
/(c)/ Class A share activity commenced on May 15, 1995.
/(d)/ Includes the effect of mortgage dollar roll transactions.
/(e)/ Administration share activity commenced on April 15, 1993.
/(f)/ Not annualized.
/(g)/ Commencement of operations.
/(h)/ Short Duration Government Fund Administration shares were redeemed in full
on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
/(i)/ Service share activity commenced on April 10, 1996.
/(j)/ Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
/(k)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. For Class A shares only, total return would be reduced if a
sales charge were taken into account.
/(l)/ Administration and Service share activity commenced on February 28, 1996
and March 13, 1996 respectively.
/(m)/ Service share activity commenced on March 27, 1997.
/(n)/ Includes the balancing effect of calculating per share amounts.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
- -------------------------------------------------------------------------------
This Semiannual Report is authorized for distribution to prospective investors
only when preceded or accompanied by a Goldman Sachs Trust Prospectus which
contains facts concerning each Fund's objectives and policies, management,
expenses and other information.
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
John P. McNulty
Mary P. McPherson
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser,
Distributor and Transfer Agent
FISARINST
- ------------------------------------------------------------------------------
The Goldman Sachs
Fixed Income Funds
- ------------------------------------------------------------------------------
Semiannual Report
April 30, 1997
Goldman Sachs Adjustable Rate Government Fund
Goldman Sachs Short Duration Government Fund
Goldman Sachs Short Duration Tax-Free Fund
Goldman Sachs Core Fixed Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
- ------------------------------------------------------------------------------
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/1/
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
- ------------------------
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of a Fund's fiscal
year end.
1-A
<PAGE>
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-1
have a superior capacity for repayment. Notes bearing the designation P-2 have
a strong capacity for repayment.
2-A
<PAGE>
Description of Ratings of State and Municipal
Commercial Paper
---------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an original
maturity in excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
3-A
<PAGE>
AA: Bonds and debt rated AA have a very strong capacity to pay interest
and repay principal and differ from the higher rated issues only in small
degree.
A: Bonds and debt rated A have a very strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB: Bonds and debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB-rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
4-A
<PAGE>
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC-debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A plus sign (+) is added for those issues determined to possess
overwhelming safety characteristics. An SP-2 designation indicates a
satisfactory capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by Standard & Poor's is described as having a strong
degree of safety regarding timely payment.
5-A
<PAGE>
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issued carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable t the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity for
timely payment.
C: This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
FITCH INVESTORS SERVICE, L.P.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories
6-A
<PAGE>
are not significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated F-1+.
A: Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
PLUS (+) AND MINUS (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA, DDD, DD, or D Categories.
7-A
<PAGE>
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
8-A
<PAGE>
DUFF & PHELPS
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
BBB+, BBB, BBB-: Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
9-A
<PAGE>
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
DUFF 3: Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
DUFF 4: Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DUFF 5: Issuer failed to meet scheduled principal and/or interest
payments.
Notes: Bonds which are unrated may expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to
the risks of lower-rated bonds. The Fund is dependent on the
Investment Adviser's judgment, analysis and experience in the
evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
10-A
<PAGE>
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- - Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- - Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
11-A
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of
the interests of the firm and its clients.
INTEGRITY AND HONESTY ARE THE HEART OF OUR BUSINESS. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms, with
partners' capital of approximately $5.3 billion as of November 29, 1996.
. Thirty-four offices worldwide where professionals focus on identifying
financial opportunities.
. The number one underwriter of all international equity issues from (1993-
1996).*
. Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
. The number one lead manager of U.S. common stock offerings from (1989-
1996).*
. The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1996).
* Source: Securities Data Corporation. Ranking excludes REITS, Trusts and
-----------------------------------
Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Goldman Sachs takes Sears public (longest-standing client
relationship)
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 Goldman Sachs opens London office
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Goldman Sachs provides advisory services for the largest privatization
in the region of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
Goldman Sachs increases assets under management by 100% over 1996
3-B
