<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 March
1, 1998, 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
Investment Objectives and Policies B-4
Other Investments and Practices B-12
Investment Restrictions B-62
Management B-65
Portfolio Transactions B-81
Shares of the Trust B-85
Net Asset Value B-91
Taxation B-92
Performance Information B-104
Other Information B-120
Financial Statements B-121
Other Information Regarding Purchases B-121
Appendix A 1-A
Appendix B 1-B
The date of this Additional Statement is March 1, 1998.
<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") is an open-end Management Investment
Company. 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 Government Fund"), Goldman Sachs Core Fixed Income Fund ("Core
Fixed Income"), 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 34 other series of shares. Adjustable Rate Government Fund,
Core Fixed Income, 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 Fixed Income 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 Government 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
Fixed Income, 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 Government
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
B-3
<PAGE>
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, 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.
INVESTMENT OBJECTIVES AND POLICIES
ADJUSTABLE RATE GOVERNMENT FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Government 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 Government and Short Duration Government Funds 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 Government 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
B-4
<PAGE>
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 Government Fund
-------------------------------------
seeks to minimize net asset value fluctuations by investing primarily in
adjustable rate mortgage pass-through securities and other mortgage securities
with periodic interest rate resets, maintaining a maximum duration of two years
and a target duration equal to that of a six-month to one-year U.S. Treasury
security, and utilizing certain active management techniques to seek to hedge
interest rate risk. Short Duration Government Fund seeks to minimize net asset
value fluctuations by utilizing certain interest rate hedging techniques and by
maintaining a maximum duration of not more than three years. The duration
target of the Short Duration Government Fund is that of the 2-year U.S. Treasury
Security plus or minus .5 years. There is no assurance that these strategies
for the Adjustable Rate Government 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
B-5
<PAGE>
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 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
B-6
<PAGE>
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 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:
o 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;
o 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;
o 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
o Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
designed to provide this diversification.
B-7
<PAGE>
CORE FIXED INCOME
Core Fixed Income 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 Fixed Income 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.
Core Fixed Income's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fixed Income's return is likely to increase. Conversely, when interest
rates increase, Core Fixed Income'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 Fixed Income'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 Fixed Income than from shorter-term investments.
A number of investment strategies will be used to achieve the Core Fixed
Income'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
usually 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 Fixed Income will attempt to
----------------------------------
control its exposure to interest rate risk, including overall market exposure
and the spread risk of particular sectors
B-8
<PAGE>
and securities, through active portfolio management techniques. Core Fixed
Income'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 Fixed Income'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 Fixed Income's investment portfolio. In determining Core Fixed
Income's investment strategy and making market timing decisions, the Adviser
will have 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
managers 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.
B-9
<PAGE>
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 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
B-10
<PAGE>
its balance sheet, its ability to withstand economic downturns and its potential
to generate ample cash flow to service its debt. The ability to analyze
accurately 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 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
B-11
<PAGE>
rate risk: when interest rates increase, the value of fixed income securities
tends to decline.
OTHER INVESTMENTS OBJECTIVES 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 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) right of the issuer to
borrow from the Treasury (such as securities of Federal Home Loan Banks), (b)
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 (c) 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 invest in custodial receipts in respect of securities issued
or guaranteed as to principal and interest by the U.S. government, its agencies
instrumentalities, political
B-12
<PAGE>
subdivisions or authorities. Such custodial receipts evidence ownership of
future interest payments, principal payments or both on certain notes or bonds
issued or guaranteed as to principal and interest by the U.S. government, its
agencies, instrumentalities, political subdivisions or authorities. These
custodial receipts are known by various names, including "Treasury Receipts,"
"Treasury Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on
Treasury Securities" ("CATs"). For certain securities law purposes, custodial
receipts are not considered U.S. Government Securities.
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
Adjustable Rate, Short Duration Government, Core Fixed Income 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, if a Fund purchases Mortgaged Backed Securities
at a premium, a faster than expected prepayment rate will reduce both the market
value and the yield to maturity from those which were anticipated. A prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if a Fund purchases Mortgage-
Backed Securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce yield to maturity and market
values. To the extent that a Fund invests in Mortgage-Backed securities, its
investment adviser may seek to manage these
B-13
<PAGE>
potential risks by investing in a variety of Mortgage-Backed Securities and by
using certain hedging techniques.
Adjustable Rate Mortgage Loans ("ARMs"). ARMs generally provide for a
---------------------------------------
fixed initial mortgage interest rate for a specified period of time.
Thereafter, the interest rates (the "Mortgage Interest Rates") may be subject to
periodic adjustment based on changes in the applicable index rate (the "Index
Rate"). The adjusted rate would be equal to the Index Rate plus a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some mortgagors
may find difficult to make. However, certain ARMs may provide that the Mortgage
Interest Rate may not be adjusted to a rate above an applicable lifetime maximum
rate or below an applicable lifetime minimum rate for such ARM. Certain ARMs
may also be subject to limitations on the maximum amount by which the 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
B-14
<PAGE>
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost
of Funds, the National Median Cost of Funds, the one-month, three-month, six-
month or one-year London Interbank Offered Rate, the prime rate of a specific
bank or commercial paper rates. Some indices, such as the one-year constant
maturity Treasury rate, closely mirror changes in market interest rate levels.
Others, such as the 11th District Federal Home Loan Bank Cost of Funds index,
tend to lag behind changes in market rate levels and tend to be somewhat less
volatile. The degree of volatility in the market value of each Taxable Fund's
portfolio and therefore in the net asset value of each Taxable Fund's shares
will be a function of the length of the interest rate reset periods and the
degree of volatility in the applicable indices.
FIXED-RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans included
-------------------------
in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple interest
at fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed-Rate Mortgage Loans generally provide for monthly payments of
principal and interest in substantially equal installments for the term of 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.
B-15
<PAGE>
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may also
reduce the monthly payments due under such mortgage loan, change the rate
of interest, reduce the principal balance of the loan to the then-current
appraised value of the related mortgaged property, alter the mortgage loan
repayment schedule and grant priority of certain liens over the lien of the
mortgage loan. If a court relieves a borrower's obligation to repay
amounts otherwise due on a mortgage loan, the mortgage loan servicer will
not be required to advance such amounts, and any loss may be borne by the
holders of securities backed by such loans. In addition, numerous federal
and state consumer protection laws impose 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.
B-16
<PAGE>
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States. Ginnie Mae is authorized to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration ("FHA Loans"), or guaranteed by the Veterans Administration ("VA
Loans"), or by pools of other eligible mortgage loans. In order to meet its
obligations under any guarantee, Ginnie Mae is authorized to borrow from the
United States Treasury in an unlimited amount.
Fannie Mae Certificates. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the United States Congress. Each Fannie Mae
Certificate is issued and guaranteed by Fannie Mae and represents an undivided
interest in a pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool
consists of residential mortgage loans ("Mortgage Loans") either previously
owned by Fannie Mae or purchased by it in connection with the formation of the
Pool. The Mortgage Loans may be either conventional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. government agency) or Mortgage Loans that are
either insured by the 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 participation 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
B-17
<PAGE>
received on the underlying loans). Freddie Mac also guarantees to each
registered Certificate holder ultimate collection of all principal of the
related mortgage loans, without any offset or deduction, but does not,
generally, guarantee the timely payment of scheduled principal. The obligations
of Freddie Mac under its guaranty of Freddie Mac Certificates are obligations
solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one-to-four-family residential properties or
multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac
Certificate group may include whole loans, participation interests in whole
loans, undivided interests in whole loans and participations comprising another
Freddie Mac Certificate group.
Conventional Mortgage Loans. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-
rate mortgage loans with original terms to maturity of between five and thirty
years. Substantially all of these mortgage loans are secured by first liens on
one- to four-family residential properties or multi-family projects. Each
mortgage loan must meet the applicable standards set forth in the law creating
Freddie Mac or Fannie Mae. A Freddie Mac Certificate 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 both
--------------------------------
government guaranteed and privately issued 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
B-18
<PAGE>
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be 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.
These securities may be issued by U.S. government agencies and instrumentalities
such as Fannie Mae or sponsored enterprises such as Freddie Mac or, in the case
of Core Fixed Income, 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.
B-19
<PAGE>
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class Mortgage-Backed Securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed Mortgage-Backed Securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans
or the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to
B-20
<PAGE>
apply principal payments and prepayments of the Mortgage Assets to two or more
classes concurrently on a proportionate or disproportionate basis. These
simultaneous payments are taken into account in calculating the final
distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments
of the Mortgage Assets are then required to be applied to one or more other
classes of the Certificates. The scheduled principal payments for the PAC
Certificates generally have the highest priority on each payment date after
interest due has been paid to all classes entitled to receive interest
currently. Shortfalls, if any, are added to the amount payable on the next
payment date. The PAC Certificate payment schedule is taken into account in
calculating the final distribution date of each class of PAC. In order to
create PAC tranches, one or more tranches generally must be created that absorb
most of the volatility in the underlying Mortgage Assets. These tranches tend to
have market prices and yields that are much more volatile than other PAC
classes.
Stripped Mortgage-Backed Securities. The Taxable Funds may invest in
-----------------------------------
Stripped Mortgage-Backed Securities ("SMBS"), which are derivative multiclass
mortgage securities, issued or guaranteed by the U.S. government, its agencies
or instrumentalities. Core Fixed Income, 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. 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.
B-21
<PAGE>
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
Ratings. The ratings assigned by a rating organization to Mortgage Pass-
-------
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
Credit Enhancement. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things,
payment guarantees, letters of credit, pool insurance, subordination, or any
combination thereof.
Subordination; Shifting of Interest; Reserve Fund. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage 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
B-22
<PAGE>
certificates is intended to preserve the availability of the subordination
provided by the subordinate certificates. In addition, because the senior
certificate-holders in a shifting interest credit enhancement structure are
entitled to receive a percentage of principal prepayments which is greater than
their proportionate interest in the trust fund, the rate of principal
prepayments on the mortgage loans will have an even greater effect on the rate
of principal payments and the amount of interest payments on, and the yield to
maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due to them and
will protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event that the Reserve Fund is depleted before
the subordinated amount is reduced to zero, senior certificate-holders will
nevertheless have a preferential right to receive current distributions from the
mortgage pool to the extent of the then outstanding subordinated amount. Unless
otherwise specified, until the subordinated amount is reduced to zero, on any
distribution date any amount otherwise distributable to the subordinate
certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--- ----
all certificate-holders 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
B-23
<PAGE>
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
Asset-backed securities represent participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property, receivables
from revolving credit (credit card) agreements and other categories of
receivables. Such assets are securitiized through the use of trusts and special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation, or other credit enhancements may be present.
Core Fixed Income, 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. To the extent that a Fund
invests in asset-backed securities, the values of such Fund's portfolio
securities will vary with changes in market interest rates generally and the
differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by Mortgage-Backed Securities because asset-backed securities
generally do not have the benefit of a security
B-24
<PAGE>
interest in collateral that is comparable to Mortgage Assets. Credit card
receivables are generally unsecured and the debtors on such receivables are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set-off certain amounts owed
on the credit cards, thereby reducing the balance due. Automobile receivables
generally are secured, but by automobiles rather than residential real property.
Most issuers of automobile receivables permit the loan servicers to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the asset-backed securities. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that, in some cases, recoveries
on repossessed collateral may not be available to support payments on these
securities.
LOAN PARTICIPATIONS
The High Yield Fund may invest in loan participations. Such loans must be
to issuers in whose obligations the High Yield Fund may invest. A loan
participation is an interest in a loan to a U.S. or foreign company or other
borrower which is administered and sold by a financial intermediary. In a
typical corporate loan syndication, a number of lenders, usually banks (co-
lenders), lend a corporate borrower a specified sum pursuant to the terms and
conditions of a loan agreement. One of the co-lenders usually agrees to act as
the agent bank with respect to the loan.
Participation interests acquired by the High Yield Fund may take the form
of a direct or co-lending relationship with the corporate borrower, an
assignment of an interest in the loan by a co-lender or another participant, or
a participation in the seller's share of the loan. When the High Yield Fund
acts as co-lender in connection with a participation interest or when the High
Yield Fund acquires certain participation interests, the High Yield Fund will
have direct recourse against the borrower if the borrower fails to pay scheduled
principal and interest. In cases where the High Yield Fund lacks direct
recourse, it will look to the agent bank to enforce appropriate credit remedies
against the borrower. In these cases, the High Yield Fund may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Fund had purchased a direct obligation (such as commercial
paper) of such borrower. For example, in the event of the bankruptcy or
insolvency of the corporate borrower, a loan participation may be subject to
certain defenses by the borrower as a result of improper conduct by the agent
bank. Moreover, under the terms of the loan participation, the High Yield Fund
may be regarded as a creditor of the agent bank (rather than of the underlying
corporate borrower), so that the High Yield Fund may also be subject to the risk
that the agent bank may
B-25
<PAGE>
become insolvent. The secondary market, if any, for these loan participations is
limited and any loan participations purchased by the High Yield Fund will be
regarded as illiquid.
For purposes of certain investment limitations pertaining to
diversification of the High Yield Fund's portfolio investments, the issuer of a
loan participation will be the underlying borrower. However, in cases where the
High Yield Fund does not have recourse directly against the borrower, both the
borrower and each agent bank and co-lender interposed between the High Yield
Fund and the borrower will be deemed issuers of a loan participation.
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
B-26
<PAGE>
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."
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.
B-27
<PAGE>
CORPORATE DEBT OBLIGATIONS
Core Fixed Income 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.
Fixed income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions or
changing circumstances may weaken their issuers' capacity to pay interest and
repay principal. Medium to lower rated and comparable non-rated securities tend
to offer higher yields than higher rated securities with the same maturities
because the historical financial condition of the issuers of such securities may
not have been as strong as that of other issuers. Since medium to lower rated
securities generally involve greater risks of loss of income and principal than
higher rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Funds' investment
advisers will attempt to reduce these risks through portfolio diversification
and by analysis of each issuer and its ability to make timely payments of income
and principal, as well as broad economic trends and corporate developments.
TRUST PREFERREDS. The Government Income, Core Fixed Income, Global Income
----------------
and High Yield Funds may invest in trust preferred securities. A trust
preferred or capital security is a long dated bond (for example 30 years) with
preferred features. The preferred features are that payment of interest can be
deferred for a specified period without initiating a default event. From a
bondholder's viewpoint, the securities are senior in claim to standard preferred
but are junior to other bondholders. From the issuer's viewpoint, the
securities are attractive because their interest is deductible for tax purposes
like other types of debt instruments.
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-28
<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 IBCA, inc. 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
B-29
<PAGE>
subsequent to their acquisition will not affect cash income from such securities
but will be reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield Fixed-Income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace such
security with a lower-yielding security, resulting in
B-30
<PAGE>
a decreased return for investors. In addition, if the High Yield Fund
experiences unexpected net redemptions of the High Yield Fund's shares, it may
be forced to sell its higher-rated securities, resulting in a decline in the
overall credit quality of the High Yield Fund's portfolio and increasing the
exposure of the High Yield Fund to the risks of high yield securities. The High
Yield Fund may also incur additional expenses to the extent that it is required
to seek recovery upon a default in the payment of principal or interest on a
portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment grade
and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Fixed Income 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
B-31
<PAGE>
arising from possible financial difficulties of borrowers play an important part
in the operations of this industry.
Municipal Securities
Core Fixed Income, 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 Fixed
Income 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
B-32
<PAGE>
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 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 Fixed Income 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 Fixed Income, 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
B-33
<PAGE>
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 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 Fixed Income, 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.
B-34
<PAGE>
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 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
B-35
<PAGE>
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
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 Fixed Income 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 Fixed Income'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
B-36
<PAGE>
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 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 Fixed Income, 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.
B-37
<PAGE>
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 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
B-38
<PAGE>
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 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 Fixed Income, 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
B-39
<PAGE>
certain special considerations, including those set forth below, which are not
typically associated with investing in U.S. issuers. Investments in the
securities of foreign issuers usually involve currencies of foreign countries,
and since Core Fixed Income, High Yield and Global Income Funds may temporarily
hold funds in bank deposits in foreign currencies during completion of
investment programs, Core Fixed Income, 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. A Fund may be subject to currency exposure
independent of its securities positions.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad. To the extent that a
substantial portion of a Fund's total assets, adjusted to reflect the Fund's net
position after giving effect to currency transactions, is denominated or quoted
in the currencies of foreign countries, the Fund will be more susceptible to the
risk of adverse economic and political developments within those countries. A
Fund's net currency positions may expose it to risks independent of its
securities positions. In addition, if the payment declines in value against the
U.S. dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a comparable U.S.
company. Volume and liquidity in most foreign bond markets are less than in the
United States markets and securities of many foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Fixed
commissions on foreign securities exchanges are generally higher than negotiated
commissions on U.S. exchanges, although each Fund endeavors to achieve the most
favorable net results on its portfolio transactions. There is generally less
government supervision and regulation of securities markets and exchanges,
brokers, dealers and listed and unlisted 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.
B-40
<PAGE>
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 Fixed Income, High Yield Fund or
Global Income Fund is uninvested and no return is earned on such assets. The
inability of Core Fixed Income, 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
Fixed Income, High Yield Fund or Global Income Fund due to subsequent declines
in value of the portfolio securities, or, if Core Fixed Income, 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 Fixed Income 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 price accurately its portfolio securities or
to dispose of such securities at the times determined to be appropriate. The
risks associated with reduced liquidity may be particularly acute to the extent
that 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
B-41
<PAGE>
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 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.
B-42
<PAGE>
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 Fixed Income 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 Fixed Income may either accept or make delivery of the currency
specified in the contract or, at or prior to maturity, enter into a closing
purchase transaction involving the purchase or sale of an offsetting contract.
Closing purchase transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract.
B-43
<PAGE>
Global Income, High Yield or Core Fixed Income Incomes may enter into
forward foreign currency exchange contracts in several circumstances. First,
when Global Income, High Yield or Core Fixed Income 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 Fixed Income 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 Fixed Income 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 Fixed Income 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 Fixed Income Fund 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 Fixed Income may also
purchase and sell forward contracts to seek to increase total return when the
Advisers anticipate that the foreign currency will appreciate or depreciate in
value, but securities quoted or denominated in that currency do not present
attractive investment opportunities and are not held in a Fund's portfolio.
B-44
<PAGE>
Global Income, High Yield and Core Fixed Income 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 Fixed Income and High Yield Funds will not enter into a
forward contract with a term of greater than one year.
While Global Income, Core Fixed Income 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
Fixed Income 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 Fixed Income 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.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. Since a forward foreign currency exchange contract
is not guaranteed by an exchange or clearinghouse, a default on the contract
would deprive an Underlying Fund of unrealized profits or force the Fund to
cover its commitments for purchase or resale, if any, at the current market
price.
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-
B-45
<PAGE>
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 Fixed Income, Adjustable Rate, Government Income, Short Duration
Government, Global Income and High Yield Funds may enter into mortgage swaps and
Core Fixed Income 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. To the extent that the net amount payable under an
B-46
<PAGE>
interest rate, index or mortgage swap and the entire amount of the payment
stream payable by a Fund under a currency swap or an interest rate floor, cap or
collar is held in a segregated account consisting of cash or liquid assets the
Funds and their investment advisers believe that transactions do not constitute
senior securities under the Act and, accordingly, will not treat them as being
subject to a Fund's borrowing restrictions.
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 investment advisers, under the supervision of the Board of Trustees, are
responsible for determining and monitoring the liquidity of the Funds'
transactions in swaps, caps, floors and collars.
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 such Fund to sell specified securities
to the holder of the option at a specified price if the option is exercised at
any time before the expiration date. All call options written by a Fund are
covered, which means that such Fund will own the securities subject to the
option so long as the option is outstanding or such Fund will use the other
methods described below. The Fund's purpose in writing covered call options is
to realize greater income than would be realized on portfolio securities
transactions alone. However, a
B-47
<PAGE>
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. All put options written by a
Fund would be covered, which means that such Fund would have deposited with its
custodian cash or liquid assets with a value at least equal to the exercise
price of the put option. The purpose of writing such options is to generate
additional income for the Fund. However, in return for the option premium, each
Fund accepts the risk that it may be required to purchase the underlying
securities at a price in excess of the securities' market value at the time of
purchase.
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 Fixed Income 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
B-48
<PAGE>
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 options 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 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
B-49
<PAGE>
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 Fixed Income,
----------------------------------------------------
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
Fixed Income 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, Fixed Income and High Yield Funds may
purchase call options on currency to seek to increase total return when the
Advisers anticipate that the currency will appreciate in value, but the
securities denominated or quoted in that currency do not present attractive
investment opportunities and are not included in the Fund's portfolios.
A call option written by Core Fixed Income, 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 Fixed Income, 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;
B-50
<PAGE>
otherwise the Fund would realize either no gain or a loss on the purchase of the
call option.
Core Fixed Income, 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 Fixed
Income, 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.
In addition to using options for the hedging purposes described above, Core
Fixed Income, 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
Fixed Income 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 Fixed Income 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
Fixed Income 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 Fixed Income 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
Fixed Income 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 Fixed
Income 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
Fixed Income for the purpose of benefiting from a decline in the value of
currencies which it does not own. Global Income, High Yield and Core Fixed
Income 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
B-51
<PAGE>
Fixed Income 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 differential between two securities. Such transactions are referred
to as "yield curve" options. In contrast to other types of options, a yield
curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
A Fund may purchase or write yield curve options 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 the Fund 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 in an effort to increase current income
if, in the judgment of the Adviser, the Fund will be able to profit from
movements in the spread between the yields of the underlying securities. The
trading of yield curve options is subject to all of the risks associated with
the trading of other types of options. In addition, however, such options
present a risk of loss even if the yield of one of the underlying securities
remains constant, or if the spread moves in a direction or to an extent which
was not anticipated.
Yield curve options written by a Fund will 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 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
B-52
<PAGE>
securities or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing sale
transaction with respect to options it has purchased, it will have to exercise
the options in order to realize any profit and will incur transaction costs upon
the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
A Fund may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded over-the-counter with broker-dealers who
make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations.
Transactions by an Underlying Fund in options on securities and indices
will be subject to limitations established by each of the exchanges, boards of
trade or other trading facilities 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
or trade or other trading facilities or are held or written in one or more
accounts or through one of 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 or the Funds' investment advisers. An
exchange, board of trade or other trading facility may order the liquidation of
positions found to be in excess of these limits, and it may impose certain other
sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging
B-53
<PAGE>
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 Fixed Income 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 Fixed Income 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 Fixed Income, Global
Income and High Yield Funds may each seek to offset anticipated changes in the
value of a currency in which its portfolio securities, or securities that it
intends to purchase, are quoted or denominated by purchasing and selling futures
contracts on such currencies.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation
B-54
<PAGE>
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 Fixed Income, 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.
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,
B-55
<PAGE>
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 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
B-56
<PAGE>
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.
In addition to bona fide hedging definition, a CFTC regulation permits the
Funds to engage in other futures transactions if the aggregate initial margin
and premiums required to establish such positions in futures contracts and
options on futures do 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.
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government Securities. The only
futures contracts available to hedge a Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies. In
addition, it is not possible to hedge fully or protect against currency
fluctuations affecting the value of securities denominated in foreign currencies
because the value of such securities is likely to fluctuate as a result of
independent factors not related to currency fluctuations.
B-57
<PAGE>
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. 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
B-58
<PAGE>
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 rank senior
to common stocks in an issuer's capital structure and consequently entail less
risk than the issuer's common stock.
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 at an amount at least equal to the market value of the securities
loaned. A Fund would be required to have the right to call a loan and obtain the
securities loaned at any time on five days' notice. For the duration of a loan,
a Fund would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned and would also receive compensation
from investment of the collateral. A Fund would not have the right to vote any
securities having voting rights during the existence of the loan, but a Fund
would call the loan in anticipation of an important vote to be taken among
holders of the securities or the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovering, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the 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, it is
intended that the value of the securities loaned would 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, certain SMBS, municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted Securities, unless the
Board of Trustees determines, based upon a continuing review of the trading
markets for the specific Restricted Securities, that such Restricted
B-59
<PAGE>
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.
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 may
reflect a discount from the price at which such securities trade when they are
not restricted, since the restriction make 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 may also sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Funds may also 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 and liquid assets in an amount sufficient to meet the
purchase price. Alternatively, each Fund may enter into offsetting contracts
for the forward sale of other securities that it owns. Securities purchased or
sold on a when-issued or forward commitment basis involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date or
if the value of the security to be sold increases prior to the settlement date.
B-60
<PAGE>
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 or any of its affiliates 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 its affiliates.
The Core Fixed Income, 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
Fixed Income High Yield and Global Income Funds may invest in World Equity
Benchmark Shares ("WEB") 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 is maintained by each Fund's custodian. The repurchase
price may be higher than the purchase price, the difference being income to a
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to a Fund together with the repurchase price on repurchase. In
either case, the income to a Fund is unrelated to the interest rate on the
security subject to the repurchase agreement.
For purposes of the Act and, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event
of commencement of bankruptcy or insolvency proceedings with respect to the
seller of the security before repurchase of the security under a repurchase
agreement, a Fund may encounter delay and incur costs before being able to sell
the security. Such a
B-61
<PAGE>
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 following investment restrictions have been adopted by the Trust as
fundamental policies that cannot be changed without the affirmative vote of the
holders of a majority as defined in the Act of the outstanding voting securities
of the 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 Trust or a Fund present
at a meeting, if the holders of more than 50% of the outstanding shares of the
Trust or a Fund are present or represented by proxy or, (b) more than 50% of the
shares of the Trust or a Fund.
For the purposes of the limitations (except for the asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered
B-62
<PAGE>
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by, a Fund. With respect to the Tax Exempt Funds, the identification
of the issuer of a Municipal Security that is not a general obligation is made
by the Adviser based on the characteristics of the Municipal Security, the most
important of which is the source of funds for the payment of principal and
interest on such securities.
AS A MATTER OF FUNDAMENTAL POLICY, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
Government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in municipal securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other municipal securities. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations;
B-63
<PAGE>
(3) borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% of its total assets (including the amount borrowed), (b)
the Fund may, to the extent permitted by applicable law borrow up to
an additional 5% of its total assets for temporary purposes, (c) the
Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities, (d) the
Fund may purchase securities on margin to the extent permitted by
applicable law and (e) the Fund may engage 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 Fixed Income, 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 Fixed Income, 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; and
(8) issue senior securities to the extent such issuance would violate
applicable law.
Notwithstanding any other fundamental investment restriction or policy,
each Fund may invest some or all of its assets in a single open-end investment
company or series thereof with
B-64
<PAGE>
substantially the same fundamental investment objective, restrictions and
policies as the Fund.
In addition, to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of Shareholders.
A 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 (excluding
covered mortgage dollar rolls) exceed 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 55, 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.
B-65
<PAGE>
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Managing Director, Goldman Sachs since May 1996;
- ---------------------
President, MFS Retirement Services Inc., of Massachusetts Financial Services
prior thereto.
John P. McNulty,* Age 45, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
Mary P. McPherson, Age 62, 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 67, 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 68, 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 Director, Baker, Fentress & Co. (a closed-end non-diversified management
investment company) April 1992 to present.
Richard P. Strubel, Age 58, 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 48, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
B-66
<PAGE>
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since April 1, 1985; Manager,
- ---------
Shareholder Services for GSAM since November 1989.
James A. Fitzpatrick,* Age 33, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President of Goldman Sachs Asset Management since April 1997;
- ---------
Vice President and General Manager, First Data Corporation-Investor Services
Group prior thereto.
Scott M. Gilman,* Age 38, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990.
John M. Perlowski,* Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 37, 85 Broad Street, New York, New York 10004.
Secretary. General Counsel of the Mutual Funds Group of GSAM since December
- ---------
1997; Associate General Counsel of GSAM February 1994 to December 1997; Vice
President and Assistant General Counsel of Goldman Sachs since June 1992;
Counsel to the Funds Group, GSAM since June 1992; Partner, Hale and Dorr from
September 1991 to June 1992.
Howard B. Surloff,* Age 32, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Assistant General Counsel, Goldman Sachs Asset Management and
- ---------
Associate General Counsel to the Funds Group since December 1997; 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 32, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Assistant General Counsel, Goldman Sachs Asset Management
- --------------------
and Associate General Counsel to the Funds Group since December 1997; 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 34, 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 26, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman
- -------------------
B-67
<PAGE>
Sachs from January 1996 to Present. Secretary at Cleary, Gottlieb, Stein and
Hamilton from September 1990 to January 1994.
Kaysie P. Uniacke*, Age 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Managing Director, Goldman Sachs since December 1997; Vice
- -------------------
President and Senior Portfolio Manager, GSAM since 1988.
Elizabeth D. Anderson*, Age 28, 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 February 1, 1998,
the Trustees and officers as a group owned less than 1% of the outstanding
shares of beneficial interest of each Fund.
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, 1997:
Retirement Total
Pension or Benefits Compensation
Aggregate Accrued as from Goldman
Compensation Part of Sachs Trust
from the Trust's (including the
Funds/1/ Expenses Funds)/2/
--------------- ------------ ----------------
Name of Trustees
Ashok N. Bakhru $4,688 $0 $93,750
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
Mary P. McPherson 3,525 0 70,500
Alan A. Shuch 0 0 0
Jackson W. Smart 3,525 0 70,500
William H. Springer 3,525 0 70,500
Richard P. Strubel 3,525 0 70,500
- -------------------------
/1/ Reflects amount paid by Goldman Sachs Trust, a Delaware business trust,
during fiscal year ended October 31, 1997.
/2/ Goldman Sachs Trust consisted of 36 mutual funds, including eight fixed-
income Funds, on October 31, 1997.
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 Fixed
B-68
<PAGE>
Income pursuant to a management agreement. GSFM, One New York Plaza, New York,
New York 10004, serves as the investment adviser to Adjustable Rate Government
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 also 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 City,
Milan, Montreal, Osaka, Paris, Sao Paulo, Seoul, Shanghai, Singapore, Sydney,
Taipei, Tokyo, Toronto, Vancouver and Zurich. It has trading professionals
throughout the United States, as well as in London, Tokyo, Hong Kong and
Singapore. The active participation of Goldman Sachs in the world's financial
markets enhances its ability to identify attractive investments.
The 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, the Goldman Sachs Global 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 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
B-69
<PAGE>
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 $4.6
billion in tax-free securities in 1997, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
In structuring Adjustable Rate Government 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 Government 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 SMBS).
With respect to the Adjustable Rate Government Fund, Government Income
Fund, Short Duration Government Fund, High Yield Fund and Core Fixed Income
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
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and prepayment
B-70
<PAGE>
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 Government Fund,
Government Income Fund, Short Duration Government Fund and Core Fixed Income
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
B-71
<PAGE>
these services to third parties or using such services as a basis for trading
for its own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
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 the expectations of Goldman
Sachs' professionals expectations to produce an optimal currency and asset
allocation for the level of risk suitable for the Fund's investment objective
and criteria.
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. The
Management Agreements were most
B-72
<PAGE>
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 Management
Agreement was approved by the shareholders of Adjustable Rate Government 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 Fixed Income 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.
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:
Rate for Period or
Contractual Year Ended
Fund Rate* October 31, 1997
---- ---- ----------------
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .40% .40%
Core Fixed Income .40% .40%
High Yield .70% .65%
GSFM
Short Duration Government .50% .40%
Adjustable Rate Government .40% .40%
GSAMI .90% .59%
Global Income
_____________________
* With respect to the Government Income, Municipal Income and Global Income
Funds, a Management Agreement combining both advisory and administration
services (and subadvisory services in the case of Global Income Fund) was
adopted effective April 30, 1997. The Management Agreements for the other
Funds previously combined such services. The
B-73
<PAGE>
contractual rate set forth in the table is the rate payable under the
Management Agreements (and, in the case of Government Income, Municipal
Income and Global Income Funds, is identical to the aggregate advisory,
subadvisory and administration fee rate payable by such Funds under the
previously separate investment advisory, subadvisory and administration
agreements). For the fiscal year ended October 31, 1997, the annual rate
expressed is the combined advisory and administration fees paid (after
voluntary fee limitations).
For the fiscal years ended October 31, 1997, 1996 and 1995, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
1997 1996 1995
---- ---- ----
Adjustable Rate Government $2,293,118 $2,535,709 $2,947,492
Short Duration Government/1/ 422,632 411,360 517,091
Short Duration Tax-Free 144,157 169,796 260,970
Core Fixed Income 334,580 246,568 137,158
Global Income/2//5/ 1,415,050 1,117,226 706,460
Government Income/3//5/ 134,628 74,060 44,037
Municipal Income/4/ 320,868 211,283 154,707
High Yield/6/ 407,474 N/A N/A
_________________________
/1/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $528,290, $514,200 and $646,364
respectively, for such years.
/2/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of $0,
$837,920 and $1,412,921, respectively. If expense limitations had not been
in effect, Global Income Fund would have paid advisory and subadvisory fees
of $2,158,925 for the year ended October 31, 1997 and $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.
/3/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $350,034, $148,120 and $101,737 respectively,
for such years.
/4/ Had expense limitations not been in effect for the year ended October 31,
1995, Municipal Income Fund would have paid advisory fees of $200,207 for
the year.
/5/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
/6/ High Yield Fund commenced operations on August 1, 1997. Had expense
limitations not been in effect, High Yield Fund would have paid $438,819
for the period.
B-74
<PAGE>
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 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 both on a proprietary
basis and or 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
B-75
<PAGE>
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.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which the Advisers and/or their
affiliates are performing services or when position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods in
which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also possible.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Funds in certain emerging markets in which
limitations are imposed upon the
B-76
<PAGE>
aggregate amount of investment, in the aggregate or individual issuers, by
affiliated foreign investors.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income, High Yield and Core Fixed Income 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, ubject 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 Goldman Sachs or its affiliates to give advice to clients that
may cause these clients to take actions adverse to the interests of the client.
To the extent affiliated transactions are permitted, the Funds will deal with
Goldman Sachs and its affiliates on an arms-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit
B-77
<PAGE>
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 the Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
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 year ended October 31, 1995. No Class C Shares
were outstanding during the fiscal years ended October 31, 1995 and 1996.
Goldman Sachs retained approximately the following combined commissions on sales
of Class A, B and C Shares during the following periods:
1997 1996 1995
---- ---- ----
Adjustable Rate Government/1/ $ 156,000 $79,000 $40,000
Municipal Income/2/ 57,000 24,900 48,000
Government Income/2/ 193,000 17,300 22,000
Global Income/2/ 176,000 52,600 15,000
Short Duration Government/3/ 63,000 N/A N/A
Short Duration Tax-Free/3/ 6,000 N/A N/A
Core Fixed Income/3/ 14,000 N/A N/A
High Yield/3/ 3,194,000 N/A N/A
_____________________
/1/ The Adjustable Rate Government Fund does not offer Class B and C Shares.
B-78
<PAGE>
/2/ Prior to May 1, 1996 and August 15, 1997, the Municipal Income, Government
Income and Global Income Funds did not offer Class B and Class C Shares
respectively.
/3/ Prior to May 1, 1996 and August 15, 1997, Short Duration, Short Duration
Tax-Free, and Core Fixed Income Funds did not offer Class A and B and C
Shares, respectively. High Yield Fund commenced operations on August 1,
1997 with the exception of Class C Shares which commenced August 15, 1997.
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 assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs received fees for the fiscal years
ended October 31, 1997, 1996 and 1995 by each Fund then in existence as follows:
Fund 1997 1996 1995
- ---- ---- ---- ----
Adjustable Rate Government $272,449 $278,337 $306,662
Short Duration Government 77,989 0 0
Short Duration Tax-Free 61,185 16,980 26,098
Core Fixed Income 85,882 24,657 13,716
Global Income 106,886 121,212 106,764
Municipal Income 152,152 90,284 63,695
Government Income Fund 163,181 72,237 94,095
High Yield Fund/1/ 27,280 N/A N/A
________________________
/1/ High Yield Fund commenced operations on August 1, 1997.
The foregoing distribution and transfer agency agreements each provide that
Goldman Sachs may render similar services to others so long as the services each
provides thereunder to the Funds are not impaired thereby. Each such agreement
also provides that the Trust will indemnify Goldman Sachs against certain
liabilities.
B-79
<PAGE>
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser, the fees and expenses of
the Trust's custodian, transfer agent fees, brokerage fees and commissions,
filing fees for the registration or qualification of the Trust's shares under
federal or state securities laws, expenses of the organization of the Trust,
fees and expenses incurred by the Trust in connection with membership in
investment company organizations, taxes, interest, costs of liability insurance,
fidelity bonds or indemnification, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal, tax and auditing fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees in the case
of Global Income Fund and High Yield Fund and other extraordinary expenses) to
the following percentage of each Fund's average daily net assets:
Short Duration Government Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fixed Income 0.05%
Global Income Fund 0.06%
High Yield Fund 0.14%
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 years ended October 31, 1997,
B-80
<PAGE>
October 31, 1996 and October 31, 1995, Other Expenses of each Fund were reduced
by the Advisers in the following amounts:
1997 1996 1995
---- ---- ----
Adjustable Rate Government $191,739 $386,863 $551,405
Short Duration Government 285,329 169,069 219,994
Short Duration Tax-Free 282,291 238,097 213,139
Core Fixed Income 311,343 233,065 176,469
Municipal Income 299,884 238,203 196,265
Government Income 364,989 219,091 242,036
Global Income 223,969 337,079 70,195
High Yield* 200,097 N/A N/A
______________________
* High Yield Fund commenced operations on August 1, 1997.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by the
Advisers in performing certain accounting services not being provided by the
Trust's custodian.
CUSTODIAN AND SUB-CUSTODIANS
- ----------------------------
State Street Bank and Trust Company ("State Street"), 1776 Heritage Drive,
North Quincy, Massachusetts 02110, 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 Place,
Boston, Massachusetts 02110, have been selected as auditors of the Trust. In
addition to audit services, Arthur Andersen LLP prepares the Trust's federal and
state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a dealer is dealing with a Fund as
principal and receives compensation equal to the spread between the dealer's
cost for a given security and the resale price of such security). In certain
foreign countries, debt securities in which the Global Income Fund, Core Fixed
Income and High Yield Funds 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
B-81
<PAGE>
occasions when an Adviser deems the purchase or sale of a security to be in the
best interests of a Fund as well as its other customers (including any other
fund or other investment company or advisory account for which the Advisers or
an affiliate act as investment adviser), a Fund, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution. In
such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the applicable Adviser in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to the applicable Fund and such other customers. In some instances,
this procedure may adversely affect the size and price of the position
obtainable for a Fund. The Management Agreement permits each Adviser, in its
discretion, to purchase and sell portfolio securities to and from dealers who
provide the Trust with brokerage or research services in which dealers may
execute brokerage transactions at a higher cost to the Fund. Brokerage and
research services furnished by firms through which the Fund's effect their
securities transactions may be used by the Advisers in servicing other accounts
and not all of these services may be used by the Adviser in connection with the
specific Fund generating the brokerage credits. The fees received under the
Management Agreement are not reduced by reason of the Adviser receiving such
brokerage and research services. In addition, in selecting brokers and dealers,
the Advisers may take into account sales of shares of the Funds and other funds
in the Goldman Sachs Group of Funds by such brokers and dealers.
For the fiscal year ended October 31, 1995, the Funds then in existence
paid no brokerage commissions.
B-82
<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-83
<PAGE>
For the fiscal year ended October 31, 1997, 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, 1997:
Adjustable Rate Fund $61,000 $61,000(100%)/1/ $739,605,010(100%)/2/ N/A$
Short Duration Government Fund 19,000 19,000(100%)/1/ 494,733,847(100%)/2/ N/A
Core Fixed Income Fund 3,000 3,000(100%)/1/ 8,429,994(100%)/2/ N/A
Government Income Fund 2,400 2,400(100%)/1/ 26,765,840(100%)/2/ N/A
Municipal Income Fund 1,800 1,800(100%)/1/ 33,112,625(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-84
<PAGE>
During the fiscal year ended October 31, 1997, the Funds acquired and sold
securities of their regular broker-dealers: Smith Barnery, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Dresdner Bank, Sanwa
Securities, J.P. Morgan & Co., Inc., Bear Stearns & Co., Nomura Securities and
Morgan Stanley & Co.
At October 31, 1997, Short Duration Tax-Free Fund and Municipal Income Fund
held no securities of their regular broker-dealers. As of the same date, Short
Duration Government Fund, Global Income Fund, Adjustable Rate Government Fund,
Government Income Fund, Core Fixed Income Fund and High Yield Fund held the
following amounts of securities of their regular broker-dealers, as defined in
Rule 10b-1 under the Act, or their parents ($ in thousands): Short Duration
Government Fund: Lehman Brothers, Inc. ($1,350), Nomura Securities ($1,680) and
Bear Stearns ($1,680); Global Income: Morgan Stanley ($681); Adjustable Rate
Government Fund: Lehman Brothers, Inc. ($1,856), Bear Stearns ($2,310) and
Nomura Securities ($2,310); Government Income Fund: Lehman Brothers, Inc.
($6,209), Nomura Securities ($7,200), Bear Stearns ($7,200); Salomon Brothers
($959); J.P. Morgan & Co. ($523); Morgan Stanley & Co. ($523) and Merrill Lynch
($2,240); Core Fixed Income: Lehman Brothers, Inc. ($7,143), Nomura Securities
($8,100), Bear Stearns ($8,100), J.P. Morgan ($1,046) and Morgan Stanley & Co.
($943). High Yield Fund: Bear Stearns ($2,580) and Lehman Brothers, Inc.
($2,073).
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 Fixed Income:
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 Government 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, 1997, no Service Shares of the
Adjustable Rate Government Fund were outstanding; no Class A, Class B or Class C
Shares of Short Duration Government Fund, Short Duration Tax-Free Fund and Core
Fixed Income were outstanding; no Class C Shares of
B-85
<PAGE>
Government Income Fund and Municipal Income Fund were outstanding; and no shares
of High Yield Fund were outstanding.
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 among 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 series. 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 attributed 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
B-86
<PAGE>
also bear the cost of an Authorized Dealer Service Plan at an annual rate of up
to 0.25% of average daily net assets attributed to Class A Shares.
Class B and Class C 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 and
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 attributed to Class B and
Class C Shares. Class B and 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 attributed to Class B and 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, shares are fully paid and non-assessable. In the event of
liquidation of a Fund, shareholders of that Fund are entitled to share pro rata
in the net assets of the applicable class of the relevant Fund available for
distribution to such shareholders. All shares are freely transferable and have
no preemptive, subscription or conversion rights.
As of February 1, 1998, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following funds: Adjustable
Rate Government Fund -- First Trust of New York, 100 Wall Street, Suite 1600,
New York, NY (14.19%); State Treasurer/Nebraska Investment Council, 841 "O"
Street, Suite 500, Lincoln, NE 68508 (8.08%); First Security Bank of Idaho FBO,
Idaho Housing Agency, P.O. BOX 30007, Salt Lake City, UT 84130 (7.55%); Meadows
Foundation Inc., 3003 Swiss Avenue, Dallas, TX 75204 (5.15%); Regents of the
University oF Minnesota, 100 Church Street SE, Room 311A, Minneapolis, MN 55455
(5.08%); Short Duration Government Fund -- Central Carolina Bank & Trust Co.,
P.O. Box 931, Durham, NC 27702, (6.10%); State Street Bank & Trust Co.,
(29.64%); P.O. Box 1992, Boston, MA 02105 (24.69%);
B-87
<PAGE>
Richfield Bank & Trust Co., Kirchbak Co., 6625 Lyndale Avenue South, Richfield,
MN 55423 (5.50%); Norwest Bank Iowa NA, P.O. Box 1450 NW 8477, Minneapolis, MN
55480 (6.65%); Short Duration Tax-free Fund -- Donald R. Gant, Partner, Goldman,
Sachs & Co., 85 Broad Street, 22nd Floor, New York, NY 10004 (15.20%); K-G,
Inc., 166 Oak Knoll Terrace, Highland Park, IL 60035 (8.97%); Lafayette American
Bank C/o Hubco, 1000 Macarthur Blvd., Mahwah, NJ 07430 (7.34%); Nelda Start,
P.O. Box 909, Orange, TX 77631-0909 (6.62%); Government Income Fund -- Frontier
Trust Co., Inc. TR, FBO Dade County Public Schools, 1720 S. Gadsden Street,
Tallahassee, FL 32301-5547 (5.4%); Core Fixed Income -- Local 234 Electric
Workers Retirement Fund, 10300 Merritt Street, Castroville, CA 95012 (5.29%);
Vinson and Elkins Pension Plan C/o Banc One, 910 Travis Street, Fl 6, Houston,
TX 77002-5802 (7.88%); Vinson and Elkins Lawyers, Retirement Plan, Texas
Commerce Bank N.A., P.O. Box 2550, Houston, TX 77252 (25.48%) Norwest Bank Iowa,
P.O. Box 1450 NW 8477, Minneapolis, MN 55480 (5.25%); Global Income Fund --
First National Bank North Dakota, P.O. Box 6001, Grand Forks, ND 58206-6001
(5.4%); State Street Bank and Trust, GS Profit Sharing Master Trust, P.O. Box
1992, Boston, MA 02105-1992 (15.9%).
Rule 18f-2 under the Act provides that any matter required to be submitted
by the provisions of the Act or applicable state law, or otherwise, to the
holders of the outstanding voting securities of an investment company such as
the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of 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 as "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters
B-88
<PAGE>
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 with
substantially the same investment objective, restrictions and policies.
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
B-89
<PAGE>
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 an 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 of Delaware business trust
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 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 and to employ other advisers in considering the merits
of the request and shall require an undertaking by the shareholders making such
request to reimburse the Fund for the expense of any such advisers in the event
that the Trustees determine not to bring such action.
B-90
<PAGE>
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
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 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, but not always, 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 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
government 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 one dealer; (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 (if
quotations are unavailable from a pricing service or, if the quotations by the
Adviser are believed to be inaccurate, the contracts will be valued by
calculating the mean between the last bid and asked quotations supplied by at
least one 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 a broker identified by the
portfolio manager/trader.
B-91
<PAGE>
In addition, 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 will be valued at the mean between the closing bid and asked prices, or
if closing bid and asked prices are not available, at the exchange defined close
price on the exchange or system in which such securities are principally traded.
If the relevant exchange or system has not closed by the time for determining
the Fund's net asset value; the securities will be valued at the mean between
the bid and asked prices at the time the net asset value is determined. 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.
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 Fixed Income and
High Yield Funds calculate their net asset value. Occasionally, events affecting
the values of such securities may occur between the times at which they are
determined and the calculation of net asset value which will not be reflected in
the computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value, in which case an adjustment
may be made.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities,
B-92
<PAGE>
insurance companies and financial institutions. Each prospective shareholder is
urged to consult his own tax adviser with respect to the specific federal,
state, local and foreign tax consequences of investing in the Funds. This
summary is based on the laws in effect on the date of this Additional Statement,
which are subject to change.
GENERAL
-------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect to
be treated and intends to continue to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) a Fund derive at least 90% of its gross income
(including tax-exempt interest) for its taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stocks or securities, or foreign currencies or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"); and (b) 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.
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 Fixed Income'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
Fixed Income'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
B-93
<PAGE>
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, if any, over certain
disallowed deductions ("net tax-exempt interest"). A Fund may retain for
investment its "net capital gain" (which consists of the excess of its net long-
term capital gain over its net short-term capital loss). However, if a Fund
retains any investment company taxable income or net capital gain, it will be
subject to tax at regular corporate rates on the amount retained. If a Fund
retains any net capital gain, that Fund may designate the retained amount as
undistributed net capital gain in a notice to its shareholders who, if subject
to U.S. federal income tax on long-term capital gains, (i) will be required to
include in income for federal income tax purposes, as long-term capital gain,
their shares of such undistributed amount, and (ii) will be entitled to credit
their proportionate shares of the tax paid by that Fund against their U.S.
federal income tax liabilities, if any, and to claim refunds to the extent the
credit exceeds such liabilities. For U.S. federal income tax purposes, the tax
basis of shares owned by a shareholder of the Fund will be increased by an
amount equal under current law to 65% of the amount of undistributed net capital
gain included in the shareholder's gross income. Each Fund intends to distribute
for each taxable year to its shareholders all or substantially all of its
investment company taxable income (if any), net capital gain and any net tax-
exempt interest. Exchange control or other foreign laws, regulations or
practices may restrict repatriation of investment income, capital or the
proceeds of securities sales by foreign investors such as Global Income Fund or
Core Fixed Income and may therefore make it more difficult for Global Income
Fund or Core Fixed Income to satisfy the distribution requirements described
above, as well as the excise tax distribution requirements described below.
However, Global Income Fund and Core Fixed Income 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
B-94
<PAGE>
of the loss. At October 31, 1997, the Funds had approximately the following
amounts of capital loss carry forwards:
Years of
Amount Expiration
------ ----------
Adjustable Rate Government $49,069,000 2000-2004
Short Duration Government 14,144,000 2002-2004
Short Duration Tax-Free 4,058,000 2002-2003
Municipal Income 641,973 2004
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 that are actually paid
in January of the following year will be treated as if they were received by
shareholders on December 31 of the year declared.
The Tax Exempt Funds may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." The Tax Exempt Funds may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
that 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
B-95
<PAGE>
Service has also issued private letter rulings to certain taxpayers (which do
not serve as precedent for other taxpayers) to the effect that tax-exempt
interest received by a regulated investment company with respect to such
obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax Exempt Funds intends to take
the position that it is the owner of any municipal obligations acquired subject
to a standby commitment or other third party put and that tax-exempt interest
earned with respect to such municipal obligations will be tax-exempt in its
hands. There is no assurance that the Service will agree with such position in
any particular case. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the treatment of tender fees paid
by these Funds, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Tax Exempt
Funds' portfolios in a manner designed to minimize any adverse impact from the
tax rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging 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 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
B-96
<PAGE>
affect the amount, timing and character of income, gain or loss recognized by
Core Fixed Income and Global Income Fund. Under these rules, foreign exchange
gain or loss realized by Core Fixed Income 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 Fixed Income'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 Fixed Income, Global Income, and High Yield Funds may be subject to
foreign taxes on income (possibly including, in some cases, capital gains) from
foreign securities. Tax conventions between certain countries and the U.S. may
reduce or eliminate such taxes in some cases. Because more than 50% of Global
Income Fund's total assets at the close of any taxable year will generally
consist of stock or securities of foreign corporations, Global Income Fund will
generally qualify to file an election with the Internal Revenue Service pursuant
to which shareholders of Global Income Fund would be required to (i) include in
ordinary gross income (in addition to taxable dividends actually received) their
pro rata shares of foreign income taxes paid by Global Income Fund that are
treated as income taxes under U.S. tax regulations (which excludes, for example,
stamp taxes, securities transaction taxes, and similar taxes) even though not
actually received by such shareholders, and (ii) treat such respective pro rata
portions as foreign income taxes paid by them. Global Income Fund may or may
not make this election for any particular taxable year. Core Fixed Income and
High Yield Funds will not satisfy the 50% requirement described above and,
therefore, will not make this election. Core Fixed Income and High Yield Funds
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
B-97
<PAGE>
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 Fixed Income, Global Income or High Yield Funds acquire stock
(including, under proposed regulations, an option to acquire stock such as is
inherent in a convertible bond) in certain foreign corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, rents, royalties or capital gain) or hold at least 50% of their
assets in investments producing such passive income ("passive foreign investment
companies") Core Fixed Income, 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 Fixed
Income, Global Income or High Yield Funds is timely distributed to its
shareholders. Core Fixed Income, 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 Fixed Income, Global
Income or High Yield Funds to recognize taxable income or gain without the
concurrent receipt of cash. Core Fixed Income, Global Income or High Yield Funds
may limit and/or manage
B-98
<PAGE>
their holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
A Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark-to-market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS DISTRIBUTIONS
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations concerning the tax-exempt status of such obligations, nor does it
guarantee or represent that bond counsels' opinions are correct. Bond counsels'
opinions will generally be based in part upon covenants by the issuers and
related parties regarding continuing compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex 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
B-99
<PAGE>
availability of tax-exempt obligations and the value of a Tax Exempt Fund's
portfolio may be affected by restrictive federal income tax legislation enacted
in recent years or by similar, future legislation. If a Tax Exempt Fund
satisfies the applicable requirements, dividends paid by the Fund which are
attributable to tax exempt interest on Municipal Securities and designated by
the Fund as exempt-interest dividends in a written notice mailed to its
shareholders within sixty days after the close of its taxable year may be
treated by shareholders as items of interest excludable from their gross income
under Section 103(a) of the Code. Exempt-interest dividends a Tax Exempt Fund
receives from other regulated investment companies, including exempt-interest
dividends on auction rate preferred securities of such companies held by a Fund,
are treated as interest on Municipal Securities and may be distributed by a Tax
Exempt Fund as exempt-interest dividends. The recipient of tax-exempt income is
required to report such income on his federal income tax return. However, a
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain the exclusion under Section 103(a) if such
shareholder would be treated as a "substantial user" under Section 147(a)(1)
with respect to some or all of the tax-exempt obligations held by a Tax Exempt
Fund. The Code provides that interest on indebtedness incurred or continued to
purchase or carry shares of a Tax Exempt Fund is not deductible to the extent
attributable to exempt-interest dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions from investment company taxable income, as
defined above, are taxable to shareholders who are subject to tax as ordinary
income whether paid in cash or reinvested in additional shares. Taxable
distributions include distributions from any Fund, including Short Duration Tax-
Free Fund and Municipal Income Fund, that are attributable to (i) 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
B-100
<PAGE>
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 (20% or 28%, as applicable) whether
received in cash or additional shares and regardless of the length of time their
shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less than a
minimum period, generally 46 days. Receipt of certain distributions qualifying
for the deduction may result in reduction of the tax basis of the corporate
shareholder's shares and may give rise to or increase its liability for federal
corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes, will first reduce a
shareholder's basis in his shares and, after the shareholder's basis is reduced
to zero, will generally constitute capital gains to a shareholder who holds his
shares as capital assets. Amounts that are not allowable as a deduction in
computing taxable income, including expenses associated with earning tax-exempt
interest income, do not reduce a Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of Short Duration Tax-Free Fund's
or Municipal Income Fund's distributions from gross tax-exempt interest income
that exceeds its net tax-exempt interest would be taxable as ordinary income to
the extent of such disallowed deductions even though such excess portion may
represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash and will have a cost basis in the shares received equal
to such amount.
After the close of each calendar year, each Fund will inform shareholders
of the federal income tax status of its dividends and distributions for such
year, including the portion of such
B-101
<PAGE>
dividends, if any, that qualifies as tax-exempt or as capital gain, the portion,
if any, that should be treated as a tax preference item for purposes of the
federal alternative minimum tax and the foreign tax credits, if any, associated
with such dividends. 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.
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
Government 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
B-102
<PAGE>
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.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish the Funds with their correct taxpayer identification number and with
certain required certifications or if the Service or a broker notifies the Funds
that the number furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from Short
Duration Tax-Free Fund or Municipal Income Fund will not be subject to backup
withholding if the applicable Fund reasonably estimates that at least 95% of its
distributions will be exempt-interest dividends. A Fund may refuse to accept an
application that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment 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
B-103
<PAGE>
by an applicable tax treaty) unless the dividends are effectively connected with
a U.S. trade or business of the shareholder, in which case the dividends will be
subject to tax on a net income basis at the graduated rates applicable to U.S.
individuals or domestic corporations. Distributions of net capital gain,
including amounts retained by a Fund which are designated as undistributed
capital gains, to a shareholder who is not a U.S. person will not be subject to
U.S. federal income or withholding tax unless the distributions are effectively
connected with the shareholder's trade or business in the United States or, in
the case of a shareholder who is a nonresident alien individual, the shareholder
is present in the United States for 183 days or more during the taxable year and
certain other conditions are met. Non-U.S. shareholders may also be subject to
U.S. withholding tax on deemed income resulting from any election by Global
Income Fund to treat qualified foreign taxes it pays as passed through to
shareholders (as described above), but they may not be able to claim a U.S. tax
credit or deduction with respect to such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder
B-104
<PAGE>
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.
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
B-105
<PAGE>
Thirty-day yield, tax equivalent yield (Short Duration Tax- Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A, 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.
The Service Shares of Global Income Fund commenced operations on March 12,
1997; the Service Shares of Government Income and Municipal Income Funds
commenced operations on August 15, 1997. The Service Shares of these Funds had
no operating or performance history prior thereto. However, in accordance with
interpretive positions expressed by the staff of the SEC, each of these Funds
has adopted the performance records of its respective Class A shares from that
class' inception date (August 2, 1991, February 10, 1993 and July 20, 1993,
respectively) to the inception dates of the Service Shares stated above.
Quotations of performance data of these Funds relating to this period include
the performance record of the applicable Class A Shares (excluding the impact of
any applicable front-end sales charge). The performance records of the
applicable Class A Shares reflect the expenses actually incurred by the Fund.
These expenses include any asset-based sales charges (i.e., fees under
distribution and Authorized Dealer Service Plans) imposed and other operating
expenses. Total return quotations will be calculated pursuant to SEC-approved
methodology.
B-106
<PAGE>
YIELD
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield(1)
- ----------------------------------- ------------ -------------- -------------
30-Days
ended
10/31/97
ADJUSTABLE RATE GOVERNMENT FUND
Institutional Shares 5.98% 5.98%
Administration Shares 5.74% 5.74%
Service Shares(2) 5.48% 5.48%
Class A Shares
(assumes 1.5% sales charge) 5.64% 5.39%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.19% 5.82%
Administration Shares 5.93% 5.55%
Service Shares 5.68% 5.31%
Class A Shares(4)
(assumes 2.0% sales charge) 5.75% 5.14%
Class B Shares(4) 5.35% 4.82%
Class C Shares(5) N/A N/A
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.09% 3.30%
Administration Shares 3.84% 3.05%
Service Shares 3.59% 2.81%
Class A Shares(4)
(assumes 2.0% sales charge) 3.77% 2.78%
Class B Shares(4) 3.23% 2.28%
Class C Shares(5) N/A N/A
CORE FIXED INCOME
Institutional Shares 6.27% 5.89%
Administration Shares 6.03% 5.66%
Service Shares 5.76% 5.38%
Class A Shares(4)
(assumes 4.5% sales charge) 5.75% 5.14%
Class B Shares(4) 5.27% 4.89%
Class C Shares(5) 5.23% 4.82%
GLOBAL INCOME FUND
Institutional Shares 5.10% 4.66%
Service Shares(2) 4.59% 4.15%
Class A Shares
(assumes 4.5% sales charge) 4.36% 3.95%
Class B Shares 4.02% 3.64%
Class C Shares(7) 4.01% 3.63%
B-107
<PAGE>
YIELD
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield(1)
- ----------------------------------- ------------ -------------- -------------
30-Days
ended
10/31/97
MUNICIPAL INCOME FUND
Institutional Shares(6) N/A N/A
Service Shares (6) N/A N/A
Class A Shares 4.16% 3.42%
(assumes 4.5% sales charge)
Class B Shares 3.60% 3.08%
Class C Shares(7) 3.61% 2.97%
GOVERNMENT INCOME FUND
Institutional Shares(6) N/A N/A
Service Shares(6) N/A N/A
Class A Shares
(assumes 4.5% sales charge) 5.81% 4.54%
Class B Shares 5.33% 4.26%
Class C Shares(7) 5.31% 4.22%
HIGH YIELD FUND(8)
Institutional Shares N/A N/A
Service Shares N/A N/A
Class A Shares
(assumes 4.5% sales charge) N/A N/A
Class B Shares N/A N/A
Class C Shares(7) N/A N/A
B-108
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate(1)
- ----------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
30 Days
ended
10/31/97
ADJUSTABLE RATE GOVERMENT FUND
Institutional Shares 6.00% 6.00%
Administration Shares 5.75% 5.75%
Service Shares(2) 5.50% 5.50%
Class A Shares
assumes no sales charge 5.75% 5.47%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.15% 5.78%
Administration Shares 5.89% 5.51%
Service Shares 5.65% 5.28%
Class A Shares(4)
assumes no sales charge 5.90% 5.27%
Class B Shares(4) 5.29% 4.77%
Class C Shares(5) 5.13% 4.75%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.04% 3.25%
Administration Shares 3.79% 3.00%
Service Shares(4) 3.54% 2.76%
Class A Shares
assumes no sales charge 3.79% 2.79%
Class B Shares(4) 3.18% 2.24%
Class C Shares(5) 2.99% 2.03%
CORE FIXED INCOME
Institutional Shares 6.15% 5.77%
Administration Shares 5.90% 5.53%
Service Shares(4) 5.64% 5.27%
Class A Shares
assumes no sales charge 5.90% 5.27%
Class B Shares(4) 5.15% 4.77%
Class C Shares(5) 5.10% 4.69%
GLOBAL INCOME FUND
Institutional Shares 5.77% 5.38%
Service Shares(2) 5.35% 4.96%
Class A Shares
assumes no sales charge 5.24% 4.81%
Class B Shares 4.73% 4.34%
Class C Shares(7) 4.77% 4.39%
</TABLE>
B-109
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate(1)
- ----------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
30 Days
ended
10/31/97
MUNICIPAL INCOME FUND
Institutional Shares(6) 4.51% 4.45%
Service Shares(6) 4.04% 3.51%
Class A Shares
assumes no sales charge 4.29% 3.52%
Class B Shares 3.54% 3.02%
Class C Shares(7) 3.55% 2.92%
GOVERNMENT INCOME FUND
Institutional Shares(6) 6.32% 5.40%
Service Shares(6) 5.84% 4.77%
Class A Shares
assumes no sales charge 6.06% 4.74%
Class B Shares 5.31% 4.24%
Class C Shares(7) 5.29% 4.21%
HIGH YIELD FUND(8)
Institutional Shares 8.25% 7.87%
Service Shares 7.78% 7.39%
Class A Shares
assumes no sales charge 7.98% 7.35%
Class B Shares 7.21% 6.83%
Class C Shares(7) 7.17% 6.78%
</TABLE>
B-110
<PAGE>
TAX-EQUIVALENT YIELD(3)
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield(1)
- ---------------------------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
30 Days
ended
10/31/97
SHORT DURATION TAX-FREE FUND(3)
Institutional Shares 6.82% 5.49%
Administration Shares 6.40% 5.07%
Service Shares 5.98% 4.66%
Class A Shares
assumes no sales charge 6.40% 4.71%
Class B Shares 5.37% 3.78%
Class C Shares 5.05% 3.42%
MUNICIPAL INCOME FUND(3)
Institutional Shares 7.62% 7.52%
Service Shares 6.82% 5.93%
Class A Shares
assumes no sales charge 7.25% 5.95%
Class B Shares 5.98% 5.10%
Class C Shares 6.00% 4.93%
</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) Service Shares commenced operations on March 27, 1997 for Adjustable Rate
Government Fund, and March 12, 1997 for Global Income Fund.
(3) The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 40.8% (adjusted for the 3% phase out
of itemized deductions for individuals at high income levels) federal
income tax rate.
(4) Class A and B Shares of Short Duration Government, Short Duration Tax-Free
and Core Fixed Income commenced operations on May 1, 1997.
(5) Class C Shares commenced operations on August 15, 1997.
(6) Institutional and Service Shares of Municipal Income and Government Income
Funds commenced operations on August 15, 1997.
(7) Class C Shares commenced operations on August 15, 1997.
(8) High Yield Fund commenced operations on August 1, 1997.
The above tables should not be considered a representation of future
performance.
B-111
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
------------------------------------------------------------------
Investment Investment With Fee Without Fee
Date Period Reductions Reductions
Fund and/or and/or
- -------------------------------- Expense Expense
Limitations Limitations
------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
<S> <C> <C> <C> <C>
Institutional Shares 7/17/91/1a/ ended 10/31/97 5.54% 5.43%
one year ended
11/1/96 10/31/97 6.70% 6.67%
five years ended
11/1/92 10/31/97 5.25% 5.20%
Administration Shares 4/15/93/1b/ ended 10/31/97 5.07% 5.02%
one year ended
11/1/96 10/31/97 6.43% 6.40%
Service Shares 3/27/97/1c/ ended 10/31/97 3.81% 3.78%
Class A Shares 5/12/951d ended 10/31/97
assumes 1/5% sales charge 5.75% 5.43%
assumes no sales charge 6.41% 6.09%
one year ended
11/1/96 10/31/97
assumes 1.5% sales charge 4.83% 4.53%
assumes no sales charge 6.43% 6.13%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/97 7.22% 6.82%
one year ended
11/1/96 10/31/97 7.07% 6.68%
five years ended
11/1/92 10/31/97 5.83% 5.57%
Administration Shares 2/28/96/2b/ ended 10/31/97 6.53% 6.19%
one year ended
11/1/96 10/31/97 6.91% 6.52%
Service Shares 4/10/96/2b/ ended 10/31/97 7.07% 6.73%
11/1/96 one year ended
10/31/97 6.63% 6.24%
Class A Shares 5/1/97/2c/ ended 10/31/97
assumes 2.0% sales charge 2.06% 1.74%
assumes no sales charge 4.14% 3.82%
Class B Shares 5/1/97/2c/ ended 10/31/97 3.94% 3.65%
Class C Shares 8/15/97/2d/ ended 10/31/97 1.44% 1.36%
</TABLE>
B-112
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
------------------------------------------------------------------
Investment Investment With Fee Without Fee
Date Period Reductions Reductions
Fund and/or and/or
- -------------------------------- Expense Expense
Limitations Limitations
------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE
FUND
Institutional Shares 10/1/923a ended 10/31/97 4.44% 3.88%
11/1/96 one year ended 5.40% 4.59%
10/31/97
11/1/92 five years ended 4.59% 4.06%
10/31/97
Administration Shares 5/20/933b ended 10/31/97 3.87% 3.41%
11/1/96 one year ended 5.14% 4.33%
10/31/97
Service Shares 9/20/943c ended 10/31/97 4.49% 3.93%
11/1/96 one year ended 4.77% 3.96%
10/31/97
Class A Shares 5/1/973d ended 10/31/97
assumes 2.05% sales 1.35% 0.83%
charge
assumes no sales 3.39% 2.86%
charge
Class B Shares 5/1/973d ended 10/31/97 3.07% 2.59%
Class C Shares 8/15/973e ended 10/31/97 0.97% 0.80%
CORE FIXED INCOME
Institutional Shares 1/15/944a 10/31/97 7.08% 6.50%
11/1/96 one year ended
10/31/97 9.19% 8.78%
Administration Shares 2/28/964b ended 10/31/97 7.45% 7.05%
11/1/96 one year ended
10/31/97 8.92% 8.52%
Service Shares 3/13/964b ended 10/31/96 8.31% 7.93%
11/1/96 one year ended 8.65% 8.25%
10/31/97
Class A Shares 5/1/974c ended 10/31/974c
assumes 4/5% sales 2.10% 1.78%
charge
assumes no sales 6.94% 6.61%
charge
Class B Shares 5/1/974c ended 10/31/97 6.63% 6.42%
Class C Shares 8/15/974d ended 10/31/97 2.74% 2.64%
</TABLE>
B-113
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------------------
Investment Investment With Fee Without Fee
- -------------------------- Date Period Reductions Reductions
Fund and/or and/or
- -------------------------- Expense Expense
Limitations Limitations
---------------------------------------------------------------------
GLOBAL INCOME FUND/5c/
<S> <C> <C> <C> <C>
Class A Shares 8/2/91/5a/ ended 10/31/97
assumes 4.5% sales 7.49% 7.15%
charge
assumes no sales 8.28% 7.94%
charge
11/1/96 one year ended
10/31/97
assumes 4.5% sales 4.76% 4.31%
charge 9.66% 9.20%
assumes no sales
charge
11/1/92 five years ended
10/31/97
assumes 4.5% sales 7.20% 6.85%
charge 8.19% 7.83%
assumes no sales
charge
Class B Shares 5/1/96/5b/ ended 10/31/97 10.27% 9.84%
11/1/96 one year ended 9.04% 8.63%
ended 10/31/97
Institutional Shares 8/1/95/5d/ ended 10/31/97 11.75% 11.28%
11/1/96 one year ended 10.26% 9.83%
10/31/97
Service Shares 8/2/91/5e/ ended 10/31/97 8.28% 7.97%
11/1/96 one year ended 9.66% 9.38%
10/31/97
11/1/92 five years ended 8.19% 7.87%
10/31/97
Class C Shares 8/15/97/5f/ ended 10/31/97 3.03% 2.96%
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/97
assumes 4.5% sales 5.04% 4.06%
charge
assumes no sales 6.18% 5.18%
charge
11/1/96 one year ended
10/31/97
assumes 4.5% sales 4.29% 3.50%
charge
assumes no sales 9.23% 8.40%
charge
Class B Shares 5/1/96/6b/ ended 10/31/97 8.63% 8.02%
11/1/96 one year ended
10/31/97 8.48% 7.92%
Class C Shares 8/15/97/6c/ ended 10/31/97 1.75% 1.61%
</TABLE>
B-114
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------------------
Investment Investment With Fee Without Fee
- -------------------------- Date Period Reductions Reductions
Fund and/or and/or
- -------------------------- Expense Expense
Limitations Limitations
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Shares 8/15/97/6c/ ended 10/31/97 2.10% 1.50%
Service 7/20/93 ended 10/31/97 6.17% 5.23%
11/1/96 one year ended 9.18% 8.60%
10/31/97
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/97
assume 4.5% sales 6.10% 3.84%
charge
assumes no sales 7.14% 4.85%
charge
11/1/96 one year ended
10/31/97
assumes 4.5% sales 3.80% 2.45%
charge
assumes no sales 8.72% 7.30%
charge
Class B Shares 5/1/96/7b/ ended 10/31/97 8.59% 7.36%
11/1/96 one year ended 7.96% 6.82%
10/31/97
Class C Shares 8/15/97/7c/ ended 10/31/97 2.72% 2.49%
Institutional Shares 8/15/97/7c/ ended 10/31/97 2.94% 2.72%
Service Shares 2/10/93/7c/ ended 10/31/97 7.13% 4.91%
11/1/96 one year ended 8.67% 7.55%
10/31/97
HIGH YIELD FUND
Class A Shares 8/1/97/8a/ ended 10/31/97
assumes 4.5% sales (3.06%) (3.21%)
charge
assumes no sales 1.50% 1.35%
charge
Class B Shares 8/1/97/8a/ ended 10/31/97 1.31% 1.21%
Class C Shares 8/15/97/8b/ ended 10/31/97 1.46% 1.38%
Institutional Shares 8/1/97/8a/ ended 10/31/97 1.58% 1.48%
Service Shares 8/1/97/8a/ ended 10/31/97 1.46% 1.36%
</TABLE>
_____________________________
1a Institutional Shares of Adjustable Rate Government Fund commenced
operations on July 17, 1991.
1b Administration Shares of Adjustable Rate Government Fund commended
operations on April 15, 1993.
115
<PAGE>
1c Service Shares of Adjustable Rate Government Fund commenced operations on
March 27, 1997.
1d Class A shares of Adjustable Rate Government 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.
2c Class A and Class B Shares of Short Duration Government Fund commenced
operations on May 1, 1997. An aggregate total return (not annualized) is
shown instead of an average annual total return since Class A and Class B
Shares have not completed a full 12 months of operation as of October 31,
1997.
2d Class C Shares of Short Duration Government Fund commenced operations on
August 15, 1997. An aggregate total return (not annualized) is shown instead
of an average annual total return since Class C Shares have not completed a
full 12 months of operation as of October 31, 1997.
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.
3d Class A and Class B Shares of Short Duration Tax-Free Fund commenced
operations on May 1, 1997. An aggregate total return (not annualized) is
shown instead of an average annual total return since Class A and Class B
shares have not completed a full 12 months of operation as of October 31,
1997.
3e Class C Shares of Short Duration Tax-Free Fund commenced operations on August
15, 1997. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class C Shares have not completed a full 12
months of operation as of October 31, 1997.
4a Institutional Shares of Core Fixed Income commenced operations on January 5,
1994.
4b Administration Shares of Core Fixed Income commenced operations on February
28, 1996. Service Shares of Core Fixed Income commenced operations on March
13, 1996.
4c Class A and Class B Shares of Core Fixed Income commenced operations on May
1, 1997. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class A and Class B Shares have not
completed a full 12 months of operation as of October 31, 1997.
4d Class C Shares of Core Fixed Income commenced operations on August 15, 1997.
An aggregate total return (not annualized) is shown instead of an average
annual total return since Class C Shares have not completed a full 12 months
of operation as of October 31, 1997.
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 Institutional Shares of Global Income Fund commenced operations on August 1,
1995.
B-116
<PAGE>
5e Service Shares of Global Income Fund commenced operations on March 12, 1997.
5f Class C Shares of Global Income Fund commenced operations August 15, 1997. An
aggregate total return (not annualized) is shown instead of an average annual
total return since Class C Shares have not completed a full 12 months of
operation as of October 31, 1997.
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.
6c Class C, Institutional and Service Shares of the Municipal Income Fund
commenced operations on August 15, 1997.
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.
7c Class C, Institutional and Service Shares of the Government Income Fund
commenced operations on August 15, 1997.
8a Class A, Class B, Institutional and Service Shares, Shares of High Yield Fund
commenced operations on August 1, 1997. An aggregate total return (not
annualized) is shown instead of an average annual total return Since Class A,
Class B, Institutional and Service Shares of High Yield Fund have not
completed a full 12 months of operation as of October 31, 1997.
8b Class C Shares of High Yield Fund commenced operations on August 15, 1997. An
aggregate total return (not annualized) is shown instead of an average annual
total return since Class C Shares of High Yield Fund have not completed a
full 12 months of operation as of October 31, 1997.
The above table should not be considered a representation of future performance.
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.
- -------------- ----------------- -------------------------------- -----
B-117
<PAGE>
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 Fixed Income, 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 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
B-118
<PAGE>
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:
o 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;
o 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;
o Credit Ratings of domestic government bonds in various countries;
o Price volatility comparisons of types of securities over different periods
of time; and
o 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
B-119
<PAGE>
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
Shares of the Funds are offered and sold on a continuous basis by the
Trust's Distributor, Goldman Sachs, acting as agent. As described in the
Prospectus, shares of the Funds are redeemed at their net asset value as next
determined after receipt of the purchase or redemption order.
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90- day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net asset value of 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 may incur
transaction costs upon the disposition of the securities received in the
redemption.
B-120
<PAGE>
The right of a shareholder to redeem shares and the date of payment by each
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for such Fund to dispose of securities owned by it
or fairly to determine the value of its net assets; or for such other period as
the SEC may by order permit for the protection of shareholders of such Fund.
(The Trust may also suspend or postpone the recommendation of the transfer of
shares upon the occurrence of any of the foregoing conditions).
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 1997 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. No other
portions of the Fund's Annual Report are incorporated herein by reference.
OTHER INFORMATION REGARDING PURCHASES
The Adviser, Distributor and/or their affiliates may pay, out of their own
assets, compensation to Service Organizations and other persons in connection
with the sale and/or servicing of shares of the Funds and other investment
portfolios of the Trust. 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 shareholder servicing and
processing. These Additional Payments may take the form of "due
B-121
<PAGE>
diligence" payments for an institution's examination of the Funds and payments
for providing extra employee training and information relating to the Funds;
"listing" fees for the placement of the Funds on a dealer's list of mutual funds
available for purchase by its customers; "marketing support" fees for providing
assistance in promoting the sale of the Funds' shares; and payments for the sale
of shares and/or the maintenance of share 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 any 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 institution, or may be based on a percentage of the value of
shares sold to, or held by, customers of the institution involved, and may be
different for different institutions. 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 Service Organizations and other institutions 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.
B-122
<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
_____________________
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of a Fund's fiscal
year end.
1-A
<PAGE>
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
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 one
year, unless explicitly noted.
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 three 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 senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, 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.
3-A
<PAGE>
STANDARD & POOR'S RATINGS GROUP
Aaa: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to meet the financial commitment on the obligation is
extremely strong.
Aa: Bonds and debt rated AA have a very strong capacity to meet the
financial commitment on the obligation and differ from the higher rated issues
only in small degree.
A: Bonds and debt rated A have a strong capacity to meet the financial
commitment on the obligation 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 meet the financial commitment on the obligation. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligtor.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded
as having significant speculative characteristics with respect to the capacity
meet the financial commitment on the obligation. 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 vulnerability to non-payment than
other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to the obligtor's inadequate capacity to meet the financial
commitment on the obligation.
B: Bonds and debt rated B are more vulnerable to non-payment but the
obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to meet its financial commitment on the
obligation.
CCC: Bonds and debt rated CCC is currently vulnerable to non-payment, and
are dependent upon favorable business, financial, and economic conditions to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, such securities are not likely to
have the capacity to meet its financial commitment on the obligation.
CC: The rating CC is typically applied to bonds and debt that are
currently highly vulnerable to non-payment.
4-A
<PAGE>
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but debt service
payments on this obligation are continued.
D: Bonds and debt rated D are in payment default. The D rating category
is used when payments on an obligation 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.
R This rating is attached to highlight derivative, hybrid, and certain
other obligations that Standard & Poor's believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies, certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
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 commercial paper rating categories are as follows:
A-1 Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 Obligations are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations rated "A-1".
However, the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.
A-3 Obligations exhibit adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
B- Obligations are regarded as having significant speculative
characteristics. The obligor currently has the
5-A
<PAGE>
capacity to meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C - Obligations are currently vulnerable to nonpayment and are dependent
on favorable business, financial, and economic conditions for the obligor to
meet its financial obligation.
D - Obligations are in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless Standard & Poor's believes such
payments will be made during such grace period. The "D" rating will also be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
FITCH IBCA, INC.
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 capacity for
timely payment at financial commitments, which is unlikely to be adversely
affected by reasonably foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very high
credit quality. These ratings denote a very low expectation of investment risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
A: Bonds rated A are considered to be investment grade and of high
credit quality. These ratings denote a low expectation of investment risk and
indicate strong capacity of timely payment of financial commitments.
BBB: Bonds rated BBB are considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse circumstances and in economic conditions are more likely
to impair this category.
6-A
<PAGE>
BB: Bonds are considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic changes over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B: Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
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. The Fitch IBCA
ratings from and including "AA" to "b" may be modified by the addition of a plus
or minus sign.
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch IBCA's short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations or up to three years for
U.S. public finance securities.
F 1: Highest Credit Quality. Issues assigned this rating reflect the
strongest capacity for timely payment of financial commitments; may
have an added "+" to denote any exceptionally strong credit feature.
F 2: Good Credit Quality. Issues assigned this rating have a satisfactory
capacity for timely payment of financial commitments, but the margin
of safety is not as great as for issues assigned F 1 ratings.
7-A
<PAGE>
F 3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C Securities possess high default risk. This designation indicates that
the capacity for meeting financial commitments is solely reliant upon
a sustained, favorable business and economic environment.
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.
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 economic conditions.
However, risk factors are more variable and greater in periods of stress.
A=, A, A-: Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for
8-A
<PAGE>
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.
D: Defaulted debt obligation.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
D-1+: 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.
D-1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors
are very small.
D-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.
D-3: Satisfactory liquidity and other protection factors qualify issues as
investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
D-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.
D-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.
9-A
<PAGE>
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") and variable rate demand obligations
are designated Variable Moody's Investment Grade ("VMIG"). Such ratings
recognize the differences between short-term credit risk and long-term risk.
Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality enjoying 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.
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 carrying specific
risk but having protection commonly regarded as required of an investment
security and not distinctly or predominantly speculative.
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.
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Those issues determined
to possess very strong characteristics will be given a plus (+)
designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
10-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.
o Privately owned and ranked among Wall Street's best capitalized firms,
with partners' capital of approximately $__________billion as of November ,
1997.
o With thirty-four offices worldwide Goldman Sachs employs over 9,000
professionals focused on opportunities in major markets.
o The number one underwriter of all international equity issues FROM 1993-
1996.
o A research budget of $200 million for 1997.
o Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
o The number one lead manager of U.S. common stock offerings for the past
eight years (1989-1996).*
o The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1996).
* Source: Securities Data Corporation. Common stock ranking excludes REITS,
-----------------------------------
Investment 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 Roebuck & Co. 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 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 Fixed Income Fund,
Goldman Sachs Global Income Fund and Goldman Sachs High Yield Fund, each dated
March 1, 1998, 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
Investment Objectives and Policies B-4
Other Investments and Practices B-12
Investment Restrictions B-62
Management B-65
Portfolio Transactions B-81
Shares of the Trust B-85
Net Asset Value B-91
Taxation B-92
Performance Information B-104
Other Information B-120
Financial Statements B-121
Other Information Regarding Purchases B-121
Service Plan B-123
Appendix A 1-A
Appendix B 1-B
The date of this Additional Statement is March 1, 1998.
<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") is an open-end Management Investment
Company. 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 Government Fund"), Goldman Sachs Core Fixed Income Fund ("Core
Fixed Income"), 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 34 other series of shares. Adjustable Rate Government Fund,
Core Fixed Income, 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 Fixed Income 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 Government 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
Fixed Income, 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 Government
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
B-3
<PAGE>
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, 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.
INVESTMENT OBJECTIVES AND POLICIES
ADJUSTABLE RATE GOVERNMENT FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Government 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 Government and Short Duration Government Funds 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 Government 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
B-4
<PAGE>
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 Government Fund
-------------------------------------
seeks to minimize net asset value fluctuations by investing primarily in
adjustable rate mortgage pass-through securities and other mortgage securities
with periodic interest rate resets, maintaining a maximum duration of two years
and a target duration equal to that of a six-month to one-year U.S. Treasury
security, and utilizing certain active management techniques to seek to hedge
interest rate risk. Short Duration Government Fund seeks to minimize net asset
value fluctuations by utilizing certain interest rate hedging techniques and by
maintaining a maximum duration of not more than three years. The duration
target of the Short Duration Government Fund is that of the 2-year U.S. Treasury
Security plus or minus .5 years. There is no assurance that these strategies
for the Adjustable Rate Government 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
B-5
<PAGE>
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 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
B-6
<PAGE>
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 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:
o 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;
o 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;
o 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
o Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
designed to provide this diversification.
B-7
<PAGE>
CORE FIXED INCOME
Core Fixed Income 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 Fixed Income 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.
Core Fixed Income's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fixed Income's return is likely to increase. Conversely, when interest
rates increase, Core Fixed Income'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 Fixed Income'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 Fixed Income than from shorter-term investments.
A number of investment strategies will be used to achieve the Core Fixed
Income'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
usually 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 Fixed Income will attempt to
----------------------------------
control its exposure to interest rate risk, including overall market exposure
and the spread risk of particular sectors
B-8
<PAGE>
and securities, through active portfolio management techniques. Core Fixed
Income'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 Fixed Income'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 Fixed Income's investment portfolio. In determining Core Fixed
Income's investment strategy and making market timing decisions, the Adviser
will have 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
managers 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.
B-9
<PAGE>
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 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
B-10
<PAGE>
its balance sheet, its ability to withstand economic downturns and its potential
to generate ample cash flow to service its debt. The ability to analyze
accurately 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 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
B-11
<PAGE>
rate risk: when interest rates increase, the value of fixed income securities
tends to decline.
OTHER INVESTMENTS OBJECTIVES 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 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) right of the issuer to
borrow from the Treasury (such as securities of Federal Home Loan Banks), (b)
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 (c) 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 invest in custodial receipts in respect of securities issued
or guaranteed as to principal and interest by the U.S. government, its agencies
instrumentalities, political
B-12
<PAGE>
subdivisions or authorities. Such custodial receipts evidence ownership of
future interest payments, principal payments or both on certain notes or bonds
issued or guaranteed as to principal and interest by the U.S. government, its
agencies, instrumentalities, political subdivisions or authorities. These
custodial receipts are known by various names, including "Treasury Receipts,"
"Treasury Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on
Treasury Securities" ("CATs"). For certain securities law purposes, custodial
receipts are not considered U.S. Government Securities.
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
Adjustable Rate, Short Duration Government, Core Fixed Income 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, if a Fund purchases Mortgaged Backed Securities
at a premium, a faster than expected prepayment rate will reduce both the market
value and the yield to maturity from those which were anticipated. A prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if a Fund purchases Mortgage-
Backed Securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce yield to maturity and market
values. To the extent that a Fund invests in Mortgage-Backed securities, its
investment adviser may seek to manage these
B-13
<PAGE>
potential risks by investing in a variety of Mortgage-Backed Securities and by
using certain hedging techniques.
Adjustable Rate Mortgage Loans ("ARMs"). ARMs generally provide for a
---------------------------------------
fixed initial mortgage interest rate for a specified period of time.
Thereafter, the interest rates (the "Mortgage Interest Rates") may be subject to
periodic adjustment based on changes in the applicable index rate (the "Index
Rate"). The adjusted rate would be equal to the Index Rate plus a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some mortgagors
may find difficult to make. However, certain ARMs may provide that the Mortgage
Interest Rate may not be adjusted to a rate above an applicable lifetime maximum
rate or below an applicable lifetime minimum rate for such ARM. Certain ARMs
may also be subject to limitations on the maximum amount by which the 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
B-14
<PAGE>
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost
of Funds, the National Median Cost of Funds, the one-month, three-month, six-
month or one-year London Interbank Offered Rate, the prime rate of a specific
bank or commercial paper rates. Some indices, such as the one-year constant
maturity Treasury rate, closely mirror changes in market interest rate levels.
Others, such as the 11th District Federal Home Loan Bank Cost of Funds index,
tend to lag behind changes in market rate levels and tend to be somewhat less
volatile. The degree of volatility in the market value of each Taxable Fund's
portfolio and therefore in the net asset value of each Taxable Fund's shares
will be a function of the length of the interest rate reset periods and the
degree of volatility in the applicable indices.
FIXED-RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans included
-------------------------
in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple interest
at fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed-Rate Mortgage Loans generally provide for monthly payments of
principal and interest in substantially equal installments for the term of 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.
B-15
<PAGE>
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may also
reduce the monthly payments due under such mortgage loan, change the rate
of interest, reduce the principal balance of the loan to the then-current
appraised value of the related mortgaged property, alter the mortgage loan
repayment schedule and grant priority of certain liens over the lien of the
mortgage loan. If a court relieves a borrower's obligation to repay
amounts otherwise due on a mortgage loan, the mortgage loan servicer will
not be required to advance such amounts, and any loss may be borne by the
holders of securities backed by such loans. In addition, numerous federal
and state consumer protection laws impose 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.
B-16
<PAGE>
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States. Ginnie Mae is authorized to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration ("FHA Loans"), or guaranteed by the Veterans Administration ("VA
Loans"), or by pools of other eligible mortgage loans. In order to meet its
obligations under any guarantee, Ginnie Mae is authorized to borrow from the
United States Treasury in an unlimited amount.
Fannie Mae Certificates. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the United States Congress. Each Fannie Mae
Certificate is issued and guaranteed by Fannie Mae and represents an undivided
interest in a pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool
consists of residential mortgage loans ("Mortgage Loans") either previously
owned by Fannie Mae or purchased by it in connection with the formation of the
Pool. The Mortgage Loans may be either conventional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. government agency) or Mortgage Loans that are
either insured by the 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 participation 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
B-17
<PAGE>
received on the underlying loans). Freddie Mac also guarantees to each
registered Certificate holder ultimate collection of all principal of the
related mortgage loans, without any offset or deduction, but does not,
generally, guarantee the timely payment of scheduled principal. The obligations
of Freddie Mac under its guaranty of Freddie Mac Certificates are obligations
solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one-to-four-family residential properties or
multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac
Certificate group may include whole loans, participation interests in whole
loans, undivided interests in whole loans and participations comprising another
Freddie Mac Certificate group.
Conventional Mortgage Loans. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-
rate mortgage loans with original terms to maturity of between five and thirty
years. Substantially all of these mortgage loans are secured by first liens on
one- to four-family residential properties or multi-family projects. Each
mortgage loan must meet the applicable standards set forth in the law creating
Freddie Mac or Fannie Mae. A Freddie Mac Certificate 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 both
--------------------------------
government guaranteed and privately issued 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
B-18
<PAGE>
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be 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.
These securities may be issued by U.S. government agencies and instrumentalities
such as Fannie Mae or sponsored enterprises such as Freddie Mac or, in the case
of Core Fixed Income, 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.
B-19
<PAGE>
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class Mortgage-Backed Securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed Mortgage-Backed Securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans
or the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to
B-20
<PAGE>
apply principal payments and prepayments of the Mortgage Assets to two or more
classes concurrently on a proportionate or disproportionate basis. These
simultaneous payments are taken into account in calculating the final
distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments
of the Mortgage Assets are then required to be applied to one or more other
classes of the Certificates. The scheduled principal payments for the PAC
Certificates generally have the highest priority on each payment date after
interest due has been paid to all classes entitled to receive interest
currently. Shortfalls, if any, are added to the amount payable on the next
payment date. The PAC Certificate payment schedule is taken into account in
calculating the final distribution date of each class of PAC. In order to
create PAC tranches, one or more tranches generally must be created that absorb
most of the volatility in the underlying Mortgage Assets. These tranches tend to
have market prices and yields that are much more volatile than other PAC
classes.
Stripped Mortgage-Backed Securities. The Taxable Funds may invest in
-----------------------------------
Stripped Mortgage-Backed Securities ("SMBS"), which are derivative multiclass
mortgage securities, issued or guaranteed by the U.S. government, its agencies
or instrumentalities. Core Fixed Income, 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. 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.
B-21
<PAGE>
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
Ratings. The ratings assigned by a rating organization to Mortgage Pass-
-------
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
Credit Enhancement. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things,
payment guarantees, letters of credit, pool insurance, subordination, or any
combination thereof.
Subordination; Shifting of Interest; Reserve Fund. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage 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
B-22
<PAGE>
certificates is intended to preserve the availability of the subordination
provided by the subordinate certificates. In addition, because the senior
certificate-holders in a shifting interest credit enhancement structure are
entitled to receive a percentage of principal prepayments which is greater than
their proportionate interest in the trust fund, the rate of principal
prepayments on the mortgage loans will have an even greater effect on the rate
of principal payments and the amount of interest payments on, and the yield to
maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due to them and
will protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event that the Reserve Fund is depleted before
the subordinated amount is reduced to zero, senior certificate-holders will
nevertheless have a preferential right to receive current distributions from the
mortgage pool to the extent of the then outstanding subordinated amount. Unless
otherwise specified, until the subordinated amount is reduced to zero, on any
distribution date any amount otherwise distributable to the subordinate
certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--- ----
all certificate-holders 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
B-23
<PAGE>
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
Asset-backed securities represent participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property, receivables
from revolving credit (credit card) agreements and other categories of
receivables. Such assets are securitiized through the use of trusts and special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation, or other credit enhancements may be present.
Core Fixed Income, 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. To the extent that a Fund
invests in asset-backed securities, the values of such Fund's portfolio
securities will vary with changes in market interest rates generally and the
differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by Mortgage-Backed Securities because asset-backed securities
generally do not have the benefit of a security
B-24
<PAGE>
interest in collateral that is comparable to Mortgage Assets. Credit card
receivables are generally unsecured and the debtors on such receivables are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set-off certain amounts owed
on the credit cards, thereby reducing the balance due. Automobile receivables
generally are secured, but by automobiles rather than residential real property.
Most issuers of automobile receivables permit the loan servicers to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the asset-backed securities. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that, in some cases, recoveries
on repossessed collateral may not be available to support payments on these
securities.
LOAN PARTICIPATIONS
The High Yield Fund may invest in loan participations. Such loans must be
to issuers in whose obligations the High Yield Fund may invest. A loan
participation is an interest in a loan to a U.S. or foreign company or other
borrower which is administered and sold by a financial intermediary. In a
typical corporate loan syndication, a number of lenders, usually banks (co-
lenders), lend a corporate borrower a specified sum pursuant to the terms and
conditions of a loan agreement. One of the co-lenders usually agrees to act as
the agent bank with respect to the loan.
Participation interests acquired by the High Yield Fund may take the form
of a direct or co-lending relationship with the corporate borrower, an
assignment of an interest in the loan by a co-lender or another participant, or
a participation in the seller's share of the loan. When the High Yield Fund
acts as co-lender in connection with a participation interest or when the High
Yield Fund acquires certain participation interests, the High Yield Fund will
have direct recourse against the borrower if the borrower fails to pay scheduled
principal and interest. In cases where the High Yield Fund lacks direct
recourse, it will look to the agent bank to enforce appropriate credit remedies
against the borrower. In these cases, the High Yield Fund may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Fund had purchased a direct obligation (such as commercial
paper) of such borrower. For example, in the event of the bankruptcy or
insolvency of the corporate borrower, a loan participation may be subject to
certain defenses by the borrower as a result of improper conduct by the agent
bank. Moreover, under the terms of the loan participation, the High Yield Fund
may be regarded as a creditor of the agent bank (rather than of the underlying
corporate borrower), so that the High Yield Fund may also be subject to the risk
that the agent bank may
B-25
<PAGE>
become insolvent. The secondary market, if any, for these loan participations is
limited and any loan participations purchased by the High Yield Fund will be
regarded as illiquid.
For purposes of certain investment limitations pertaining to
diversification of the High Yield Fund's portfolio investments, the issuer of a
loan participation will be the underlying borrower. However, in cases where the
High Yield Fund does not have recourse directly against the borrower, both the
borrower and each agent bank and co-lender interposed between the High Yield
Fund and the borrower will be deemed issuers of a loan participation.
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
B-26
<PAGE>
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."
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.
B-27
<PAGE>
CORPORATE DEBT OBLIGATIONS
Core Fixed Income 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.
Fixed income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions or
changing circumstances may weaken their issuers' capacity to pay interest and
repay principal. Medium to lower rated and comparable non-rated securities tend
to offer higher yields than higher rated securities with the same maturities
because the historical financial condition of the issuers of such securities may
not have been as strong as that of other issuers. Since medium to lower rated
securities generally involve greater risks of loss of income and principal than
higher rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Funds' investment
advisers will attempt to reduce these risks through portfolio diversification
and by analysis of each issuer and its ability to make timely payments of income
and principal, as well as broad economic trends and corporate developments.
TRUST PREFERREDS. The Government Income, Core Fixed Income, Global Income
----------------
and High Yield Funds may invest in trust preferred securities. A trust
preferred or capital security is a long dated bond (for example 30 years) with
preferred features. The preferred features are that payment of interest can be
deferred for a specified period without initiating a default event. From a
bondholder's viewpoint, the securities are senior in claim to standard preferred
but are junior to other bondholders. From the issuer's viewpoint, the
securities are attractive because their interest is deductible for tax purposes
like other types of debt instruments.
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-28
<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 IBCA, inc. 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
B-29
<PAGE>
subsequent to their acquisition will not affect cash income from such securities
but will be reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield Fixed-Income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace such
security with a lower-yielding security, resulting in
B-30
<PAGE>
a decreased return for investors. In addition, if the High Yield Fund
experiences unexpected net redemptions of the High Yield Fund's shares, it may
be forced to sell its higher-rated securities, resulting in a decline in the
overall credit quality of the High Yield Fund's portfolio and increasing the
exposure of the High Yield Fund to the risks of high yield securities. The High
Yield Fund may also incur additional expenses to the extent that it is required
to seek recovery upon a default in the payment of principal or interest on a
portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment grade
and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Fixed Income 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
B-31
<PAGE>
arising from possible financial difficulties of borrowers play an important part
in the operations of this industry.
Municipal Securities
Core Fixed Income, 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 Fixed
Income 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
B-32
<PAGE>
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 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 Fixed Income 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 Fixed Income, 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
B-33
<PAGE>
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 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 Fixed Income, 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.
B-34
<PAGE>
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 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
B-35
<PAGE>
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
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 Fixed Income 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 Fixed Income'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
B-36
<PAGE>
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 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 Fixed Income, 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.
B-37
<PAGE>
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 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
B-38
<PAGE>
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 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 Fixed Income, 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
B-39
<PAGE>
certain special considerations, including those set forth below, which are not
typically associated with investing in U.S. issuers. Investments in the
securities of foreign issuers usually involve currencies of foreign countries,
and since Core Fixed Income, High Yield and Global Income Funds may temporarily
hold funds in bank deposits in foreign currencies during completion of
investment programs, Core Fixed Income, 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. A Fund may be subject to currency exposure
independent of its securities positions.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad. To the extent that a
substantial portion of a Fund's total assets, adjusted to reflect the Fund's net
position after giving effect to currency transactions, is denominated or quoted
in the currencies of foreign countries, the Fund will be more susceptible to the
risk of adverse economic and political developments within those countries. A
Fund's net currency positions may expose it to risks independent of its
securities positions. In addition, if the payment declines in value against the
U.S. dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a comparable U.S.
company. Volume and liquidity in most foreign bond markets are less than in the
United States markets and securities of many foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Fixed
commissions on foreign securities exchanges are generally higher than negotiated
commissions on U.S. exchanges, although each Fund endeavors to achieve the most
favorable net results on its portfolio transactions. There is generally less
government supervision and regulation of securities markets and exchanges,
brokers, dealers and listed and unlisted 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.
B-40
<PAGE>
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 Fixed Income, High Yield Fund or
Global Income Fund is uninvested and no return is earned on such assets. The
inability of Core Fixed Income, 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
Fixed Income, High Yield Fund or Global Income Fund due to subsequent declines
in value of the portfolio securities, or, if Core Fixed Income, 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 Fixed Income 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 price accurately its portfolio securities or
to dispose of such securities at the times determined to be appropriate. The
risks associated with reduced liquidity may be particularly acute to the extent
that 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
B-41
<PAGE>
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 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.
B-42
<PAGE>
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 Fixed Income 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 Fixed Income may either accept or make delivery of the currency
specified in the contract or, at or prior to maturity, enter into a closing
purchase transaction involving the purchase or sale of an offsetting contract.
Closing purchase transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract.
B-43
<PAGE>
Global Income, High Yield or Core Fixed Income Incomes may enter into
forward foreign currency exchange contracts in several circumstances. First,
when Global Income, High Yield or Core Fixed Income 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 Fixed Income 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 Fixed Income 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 Fixed Income 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 Fixed Income Fund 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 Fixed Income may also
purchase and sell forward contracts to seek to increase total return when the
Advisers anticipate that the foreign currency will appreciate or depreciate in
value, but securities quoted or denominated in that currency do not present
attractive investment opportunities and are not held in a Fund's portfolio.
B-44
<PAGE>
Global Income, High Yield and Core Fixed Income 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 Fixed Income and High Yield Funds will not enter into a
forward contract with a term of greater than one year.
While Global Income, Core Fixed Income 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
Fixed Income 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 Fixed Income 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.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. Since a forward foreign currency exchange contract
is not guaranteed by an exchange or clearinghouse, a default on the contract
would deprive an Underlying Fund of unrealized profits or force the Fund to
cover its commitments for purchase or resale, if any, at the current market
price.
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-
B-45
<PAGE>
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 Fixed Income, Adjustable Rate, Government Income, Short Duration
Government, Global Income and High Yield Funds may enter into mortgage swaps and
Core Fixed Income 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. To the extent that the net amount payable under an
B-46
<PAGE>
interest rate, index or mortgage swap and the entire amount of the payment
stream payable by a Fund under a currency swap or an interest rate floor, cap or
collar is held in a segregated account consisting of cash or liquid assets the
Funds and their investment advisers believe that transactions do not constitute
senior securities under the Act and, accordingly, will not treat them as being
subject to a Fund's borrowing restrictions.
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 investment advisers, under the supervision of the Board of Trustees, are
responsible for determining and monitoring the liquidity of the Funds'
transactions in swaps, caps, floors and collars.
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 such Fund to sell specified securities
to the holder of the option at a specified price if the option is exercised at
any time before the expiration date. All call options written by a Fund are
covered, which means that such Fund will own the securities subject to the
option so long as the option is outstanding or such Fund will use the other
methods described below. The Fund's purpose in writing covered call options is
to realize greater income than would be realized on portfolio securities
transactions alone. However, a
B-47
<PAGE>
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. All put options written by a
Fund would be covered, which means that such Fund would have deposited with its
custodian cash or liquid assets with a value at least equal to the exercise
price of the put option. The purpose of writing such options is to generate
additional income for the Fund. However, in return for the option premium, each
Fund accepts the risk that it may be required to purchase the underlying
securities at a price in excess of the securities' market value at the time of
purchase.
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 Fixed Income 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
B-48
<PAGE>
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 options 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 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
B-49
<PAGE>
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 Fixed Income,
----------------------------------------------------
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
Fixed Income 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, Fixed Income and High Yield Funds may
purchase call options on currency to seek to increase total return when the
Advisers anticipate that the currency will appreciate in value, but the
securities denominated or quoted in that currency do not present attractive
investment opportunities and are not included in the Fund's portfolios.
A call option written by Core Fixed Income, 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 Fixed Income, 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;
B-50
<PAGE>
otherwise the Fund would realize either no gain or a loss on the purchase of the
call option.
Core Fixed Income, 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 Fixed
Income, 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.
In addition to using options for the hedging purposes described above, Core
Fixed Income, 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
Fixed Income 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 Fixed Income 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
Fixed Income 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 Fixed Income 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
Fixed Income 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 Fixed
Income 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
Fixed Income for the purpose of benefiting from a decline in the value of
currencies which it does not own. Global Income, High Yield and Core Fixed
Income 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
B-51
<PAGE>
Fixed Income 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 differential between two securities. Such transactions are referred
to as "yield curve" options. In contrast to other types of options, a yield
curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
A Fund may purchase or write yield curve options 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 the Fund 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 in an effort to increase current income
if, in the judgment of the Adviser, the Fund will be able to profit from
movements in the spread between the yields of the underlying securities. The
trading of yield curve options is subject to all of the risks associated with
the trading of other types of options. In addition, however, such options
present a risk of loss even if the yield of one of the underlying securities
remains constant, or if the spread moves in a direction or to an extent which
was not anticipated.
Yield curve options written by a Fund will 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 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
B-52
<PAGE>
securities or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing sale
transaction with respect to options it has purchased, it will have to exercise
the options in order to realize any profit and will incur transaction costs upon
the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
A Fund may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded over-the-counter with broker-dealers who
make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations.
Transactions by an Underlying Fund in options on securities and indices
will be subject to limitations established by each of the exchanges, boards of
trade or other trading facilities 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
or trade or other trading facilities or are held or written in one or more
accounts or through one of 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 or the Funds' investment advisers. An
exchange, board of trade or other trading facility may order the liquidation of
positions found to be in excess of these limits, and it may impose certain other
sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging
B-53
<PAGE>
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 Fixed Income 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 Fixed Income 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 Fixed Income, Global
Income and High Yield Funds may each seek to offset anticipated changes in the
value of a currency in which its portfolio securities, or securities that it
intends to purchase, are quoted or denominated by purchasing and selling futures
contracts on such currencies.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation
B-54
<PAGE>
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 Fixed Income, 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.
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,
B-55
<PAGE>
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 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
B-56
<PAGE>
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.
In addition to bona fide hedging definition, a CFTC regulation permits the
Funds to engage in other futures transactions if the aggregate initial margin
and premiums required to establish such positions in futures contracts and
options on futures do 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.
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government Securities. The only
futures contracts available to hedge a Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies. In
addition, it is not possible to hedge fully or protect against currency
fluctuations affecting the value of securities denominated in foreign currencies
because the value of such securities is likely to fluctuate as a result of
independent factors not related to currency fluctuations.
B-57
<PAGE>
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. 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
B-58
<PAGE>
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 rank senior
to common stocks in an issuer's capital structure and consequently entail less
risk than the issuer's common stock.
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 at an amount at least equal to the market value of the securities
loaned. A Fund would be required to have the right to call a loan and obtain the
securities loaned at any time on five days' notice. For the duration of a loan,
a Fund would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned and would also receive compensation
from investment of the collateral. A Fund would not have the right to vote any
securities having voting rights during the existence of the loan, but a Fund
would call the loan in anticipation of an important vote to be taken among
holders of the securities or the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovering, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the 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, it is
intended that the value of the securities loaned would 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, certain SMBS, municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted Securities, unless the
Board of Trustees determines, based upon a continuing review of the trading
markets for the specific Restricted Securities, that such Restricted
B-59
<PAGE>
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.
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 may
reflect a discount from the price at which such securities trade when they are
not restricted, since the restriction make 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 may also sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Funds may also 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 and liquid assets in an amount sufficient to meet the
purchase price. Alternatively, each Fund may enter into offsetting contracts
for the forward sale of other securities that it owns. Securities purchased or
sold on a when-issued or forward commitment basis involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date or
if the value of the security to be sold increases prior to the settlement date.
B-60
<PAGE>
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 or any of its affiliates 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 its affiliates.
The Core Fixed Income, 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
Fixed Income High Yield and Global Income Funds may invest in World Equity
Benchmark Shares ("WEB") 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 is maintained by each Fund's custodian. The repurchase
price may be higher than the purchase price, the difference being income to a
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to a Fund together with the repurchase price on repurchase. In
either case, the income to a Fund is unrelated to the interest rate on the
security subject to the repurchase agreement.
For purposes of the Act and, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event
of commencement of bankruptcy or insolvency proceedings with respect to the
seller of the security before repurchase of the security under a repurchase
agreement, a Fund may encounter delay and incur costs before being able to sell
the security. Such a
B-61
<PAGE>
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 following investment restrictions have been adopted by the Trust as
fundamental policies that cannot be changed without the affirmative vote of the
holders of a majority as defined in the Act of the outstanding voting securities
of the 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 Trust or a Fund present
at a meeting, if the holders of more than 50% of the outstanding shares of the
Trust or a Fund are present or represented by proxy or, (b) more than 50% of the
shares of the Trust or a Fund.
For the purposes of the limitations (except for the asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered
B-62
<PAGE>
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by, a Fund. With respect to the Tax Exempt Funds, the identification
of the issuer of a Municipal Security that is not a general obligation is made
by the Adviser based on the characteristics of the Municipal Security, the most
important of which is the source of funds for the payment of principal and
interest on such securities.
AS A MATTER OF FUNDAMENTAL POLICY, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
Government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in municipal securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other municipal securities. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations;
B-63
<PAGE>
(3) borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% of its total assets (including the amount borrowed), (b)
the Fund may, to the extent permitted by applicable law borrow up to
an additional 5% of its total assets for temporary purposes, (c) the
Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities, (d) the
Fund may purchase securities on margin to the extent permitted by
applicable law and (e) the Fund may engage 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 Fixed Income, 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 Fixed Income, 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; and
(8) issue senior securities to the extent such issuance would violate
applicable law.
Notwithstanding any other fundamental investment restriction or policy,
each Fund may invest some or all of its assets in a single open-end investment
company or series thereof with
B-64
<PAGE>
substantially the same fundamental investment objective, restrictions and
policies as the Fund.
In addition, to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of Shareholders.
A 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 (excluding
covered mortgage dollar rolls) exceed 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 55, 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.
B-65
<PAGE>
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Managing Director, Goldman Sachs since May 1996;
- ---------------------
President, MFS Retirement Services Inc., of Massachusetts Financial Services
prior thereto.
John P. McNulty,* Age 45, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
Mary P. McPherson, Age 62, 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 67, 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 68, 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 Director, Baker, Fentress & Co. (a closed-end non-diversified management
investment company) April 1992 to present.
Richard P. Strubel, Age 58, 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 48, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
B-66
<PAGE>
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since April 1, 1985; Manager,
- ---------
Shareholder Services for GSAM since November 1989.
James A. Fitzpatrick,* Age 33, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President of Goldman Sachs Asset Management since April 1997;
- ---------
Vice President and General Manager, First Data Corporation-Investor Services
Group prior thereto.
Scott M. Gilman,* Age 38, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990.
John M. Perlowski,* Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 37, 85 Broad Street, New York, New York 10004.
Secretary. General Counsel of the Mutual Funds Group of GSAM since December
- ---------
1997; Associate General Counsel of GSAM February 1994 to December 1997; Vice
President and Assistant General Counsel of Goldman Sachs since June 1992;
Counsel to the Funds Group, GSAM since June 1992; Partner, Hale and Dorr from
September 1991 to June 1992.
Howard B. Surloff,* Age 32, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Assistant General Counsel, Goldman Sachs Asset Management and
- ---------
Associate General Counsel to the Funds Group since December 1997; 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 32, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Assistant General Counsel, Goldman Sachs Asset Management
- --------------------
and Associate General Counsel to the Funds Group since December 1997; 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 34, 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 26, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman
- -------------------
B-67
<PAGE>
Sachs from January 1996 to Present. Secretary at Cleary, Gottlieb, Stein and
Hamilton from September 1990 to January 1994.
Kaysie P. Uniacke*, Age 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Managing Director, Goldman Sachs since December 1997; Vice
- -------------------
President and Senior Portfolio Manager, GSAM since 1988.
Elizabeth D. Anderson*, Age 28, 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 February 1, 1998,
the Trustees and officers as a group owned less than 1% of the outstanding
shares of beneficial interest of each Fund.
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, 1997:
Retirement Total
Pension or Benefits Compensation
Aggregate Accrued as from Goldman
Compensation Part of Sachs Trust
from the Trust's (including the
Funds/1/ Expenses Funds)/2/
--------------- ------------ ----------------
Name of Trustees
Ashok N. Bakhru $4,688 $0 $93,750
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
Mary P. McPherson 3,525 0 70,500
Alan A. Shuch 0 0 0
Jackson W. Smart 3,525 0 70,500
William H. Springer 3,525 0 70,500
Richard P. Strubel 3,525 0 70,500
- -------------------------
/1/ Reflects amount paid by Goldman Sachs Trust, a Delaware business trust,
during fiscal year ended October 31, 1997.
/2/ Goldman Sachs Trust consisted of 36 mutual funds, including eight fixed-
income Funds, on October 31, 1997.
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 Fixed
B-68
<PAGE>
Income pursuant to a management agreement. GSFM, One New York Plaza, New York,
New York 10004, serves as the investment adviser to Adjustable Rate Government
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 also 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 City,
Milan, Montreal, Osaka, Paris, Sao Paulo, Seoul, Shanghai, Singapore, Sydney,
Taipei, Tokyo, Toronto, Vancouver and Zurich. It has trading professionals
throughout the United States, as well as in London, Tokyo, Hong Kong and
Singapore. The active participation of Goldman Sachs in the world's financial
markets enhances its ability to identify attractive investments.
The 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, the Goldman Sachs Global 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 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
B-69
<PAGE>
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 $4.6
billion in tax-free securities in 1997, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
In structuring Adjustable Rate Government 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 Government 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 SMBS).
With respect to the Adjustable Rate Government Fund, Government Income
Fund, Short Duration Government Fund, High Yield Fund and Core Fixed Income
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
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and prepayment
B-70
<PAGE>
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 Government Fund,
Government Income Fund, Short Duration Government Fund and Core Fixed Income
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
B-71
<PAGE>
these services to third parties or using such services as a basis for trading
for its own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
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 the expectations of Goldman
Sachs' professionals expectations to produce an optimal currency and asset
allocation for the level of risk suitable for the Fund's investment objective
and criteria.
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. The
Management Agreements were most
B-72
<PAGE>
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 Management
Agreement was approved by the shareholders of Adjustable Rate Government 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 Fixed Income 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.
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:
Rate for Period or
Contractual Year Ended
Fund Rate* October 31, 1997
---- ---- ----------------
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .40% .40%
Core Fixed Income .40% .40%
High Yield .70% .65%
GSFM
Short Duration Government .50% .40%
Adjustable Rate Government .40% .40%
GSAMI .90% .59%
Global Income
_____________________
* With respect to the Government Income, Municipal Income and Global Income
Funds, a Management Agreement combining both advisory and administration
services (and subadvisory services in the case of Global Income Fund) was
adopted effective April 30, 1997. The Management Agreements for the other
Funds previously combined such services. The
B-73
<PAGE>
contractual rate set forth in the table is the rate payable under the
Management Agreements (and, in the case of Government Income, Municipal
Income and Global Income Funds, is identical to the aggregate advisory,
subadvisory and administration fee rate payable by such Funds under the
previously separate investment advisory, subadvisory and administration
agreements). For the fiscal year ended October 31, 1997, the annual rate
expressed is the combined advisory and administration fees paid (after
voluntary fee limitations).
For the fiscal years ended October 31, 1997, 1996 and 1995, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
1997 1996 1995
---- ---- ----
Adjustable Rate Government $2,293,118 $2,535,709 $2,947,492
Short Duration Government/1/ 422,632 411,360 517,091
Short Duration Tax-Free 144,157 169,796 260,970
Core Fixed Income 334,580 246,568 137,158
Global Income/2//5/ 1,415,050 1,117,226 706,460
Government Income/3//5/ 134,628 74,060 44,037
Municipal Income/4/ 320,868 211,283 154,707
High Yield/6/ 407,474 N/A N/A
_________________________
/1/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $528,290, $514,200 and $646,364
respectively, for such years.
/2/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of $0,
$837,920 and $1,412,921, respectively. If expense limitations had not been
in effect, Global Income Fund would have paid advisory and subadvisory fees
of $2,158,925 for the year ended October 31, 1997 and $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.
/3/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $350,034, $148,120 and $101,737 respectively,
for such years.
/4/ Had expense limitations not been in effect for the year ended October 31,
1995, Municipal Income Fund would have paid advisory fees of $200,207 for
the year.
/5/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
/6/ High Yield Fund commenced operations on August 1, 1997. Had expense
limitations not been in effect, High Yield Fund would have paid $438,819
for the period.
B-74
<PAGE>
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 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 both on a proprietary
basis and or 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
B-75
<PAGE>
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.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which the Advisers and/or their
affiliates are performing services or when position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods in
which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also possible.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Funds in certain emerging markets in which
limitations are imposed upon the
B-76
<PAGE>
aggregate amount of investment, in the aggregate or individual issuers, by
affiliated foreign investors.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income, High Yield and Core Fixed Income 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, ubject 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 Goldman Sachs or its affiliates to give advice to clients that
may cause these clients to take actions adverse to the interests of the client.
To the extent affiliated transactions are permitted, the Funds will deal with
Goldman Sachs and its affiliates on an arms-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit
B-77
<PAGE>
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 the Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
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 year ended October 31, 1995. No Class C Shares
were outstanding during the fiscal years ended October 31, 1995 and 1996.
Goldman Sachs retained approximately the following combined commissions on sales
of Class A, B and C Shares during the following periods:
1997 1996 1995
---- ---- ----
Adjustable Rate Government/1/ $ 156,000 $79,000 $40,000
Municipal Income/2/ 57,000 24,900 48,000
Government Income/2/ 193,000 17,300 22,000
Global Income/2/ 176,000 52,600 15,000
Short Duration Government/3/ 63,000 N/A N/A
Short Duration Tax-Free/3/ 6,000 N/A N/A
Core Fixed Income/3/ 14,000 N/A N/A
High Yield/3/ 3,194,000 N/A N/A
_____________________
/1/ The Adjustable Rate Government Fund does not offer Class B and C Shares.
B-78
<PAGE>
/2/ Prior to May 1, 1996 and August 15, 1997, the Municipal Income, Government
Income and Global Income Funds did not offer Class B and Class C Shares
respectively.
/3/ Prior to May 1, 1996 and August 15, 1997, Short Duration, Short Duration
Tax-Free, and Core Fixed Income Funds did not offer Class A and B and C
Shares, respectively. High Yield Fund commenced operations on August 1,
1997 with the exception of Class C Shares which commenced August 15, 1997.
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 assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs received fees for the fiscal years
ended October 31, 1997, 1996 and 1995 by each Fund then in existence as follows:
Fund 1997 1996 1995
- ---- ---- ---- ----
Adjustable Rate Government $272,449 $278,337 $306,662
Short Duration Government 77,989 0 0
Short Duration Tax-Free 61,185 16,980 26,098
Core Fixed Income 85,882 24,657 13,716
Global Income 106,886 121,212 106,764
Municipal Income 152,152 90,284 63,695
Government Income Fund 163,181 72,237 94,095
High Yield Fund/1/ 27,280 N/A N/A
________________________
/1/ High Yield Fund commenced operations on August 1, 1997.
The foregoing distribution and transfer agency agreements each provide that
Goldman Sachs may render similar services to others so long as the services each
provides thereunder to the Funds are not impaired thereby. Each such agreement
also provides that the Trust will indemnify Goldman Sachs against certain
liabilities.
B-79
<PAGE>
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser, the fees and expenses of
the Trust's custodian, transfer agent fees, brokerage fees and commissions,
filing fees for the registration or qualification of the Trust's shares under
federal or state securities laws, expenses of the organization of the Trust,
fees and expenses incurred by the Trust in connection with membership in
investment company organizations, taxes, interest, costs of liability insurance,
fidelity bonds or indemnification, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal, tax and auditing fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees in the case
of Global Income Fund and High Yield Fund and other extraordinary expenses) to
the following percentage of each Fund's average daily net assets:
Short Duration Government Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fixed Income 0.05%
Global Income Fund 0.06%
High Yield Fund 0.14%
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 years ended October 31, 1997,
B-80
<PAGE>
October 31, 1996 and October 31, 1995, Other Expenses of each Fund were reduced
by the Advisers in the following amounts:
1997 1996 1995
---- ---- ----
Adjustable Rate Government $191,739 $386,863 $551,405
Short Duration Government 285,329 169,069 219,994
Short Duration Tax-Free 282,291 238,097 213,139
Core Fixed Income 311,343 233,065 176,469
Municipal Income 299,884 238,203 196,265
Government Income 364,989 219,091 242,036
Global Income 223,969 337,079 70,195
High Yield* 200,097 N/A N/A
______________________
* High Yield Fund commenced operations on August 1, 1997.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by the
Advisers in performing certain accounting services not being provided by the
Trust's custodian.
CUSTODIAN AND SUB-CUSTODIANS
- ----------------------------
State Street Bank and Trust Company ("State Street"), 1776 Heritage Drive,
North Quincy, Massachusetts 02110, 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 Place,
Boston, Massachusetts 02110, have been selected as auditors of the Trust. In
addition to audit services, Arthur Andersen LLP prepares the Trust's federal and
state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a dealer is dealing with a Fund as
principal and receives compensation equal to the spread between the dealer's
cost for a given security and the resale price of such security). In certain
foreign countries, debt securities in which the Global Income Fund, Core Fixed
Income and High Yield Funds 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
B-81
<PAGE>
occasions when an Adviser deems the purchase or sale of a security to be in the
best interests of a Fund as well as its other customers (including any other
fund or other investment company or advisory account for which the Advisers or
an affiliate act as investment adviser), a Fund, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution. In
such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the applicable Adviser in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to the applicable Fund and such other customers. In some instances,
this procedure may adversely affect the size and price of the position
obtainable for a Fund. The Management Agreement permits each Adviser, in its
discretion, to purchase and sell portfolio securities to and from dealers who
provide the Trust with brokerage or research services in which dealers may
execute brokerage transactions at a higher cost to the Fund. Brokerage and
research services furnished by firms through which the Fund's effect their
securities transactions may be used by the Advisers in servicing other accounts
and not all of these services may be used by the Adviser in connection with the
specific Fund generating the brokerage credits. The fees received under the
Management Agreement are not reduced by reason of the Adviser receiving such
brokerage and research services. In addition, in selecting brokers and dealers,
the Advisers may take into account sales of shares of the Funds and other funds
in the Goldman Sachs Group of Funds by such brokers and dealers.
For the fiscal year ended October 31, 1995, the Funds then in existence
paid no brokerage commissions.
B-82
<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-83
<PAGE>
For the fiscal year ended October 31, 1997, 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, 1997:
Adjustable Rate Fund $61,000 $61,000(100%)/1/ $739,605,010(100%)/2/ N/A$
Short Duration Government Fund 19,000 19,000(100%)/1/ 494,733,847(100%)/2/ N/A
Core Fixed Income Fund 3,000 3,000(100%)/1/ 8,429,994(100%)/2/ N/A
Government Income Fund 2,400 2,400(100%)/1/ 26,765,840(100%)/2/ N/A
Municipal Income Fund 1,800 1,800(100%)/1/ 33,112,625(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-84
<PAGE>
During the fiscal year ended October 31, 1997, the Funds acquired and sold
securities of their regular broker-dealers: Smith Barnery, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Dresdner Bank, Sanwa
Securities, J.P. Morgan & Co., Inc., Bear Stearns & Co., Nomura Securities and
Morgan Stanley & Co.
At October 31, 1997, Short Duration Tax-Free Fund and Municipal Income Fund
held no securities of their regular broker-dealers. As of the same date, Short
Duration Government Fund, Global Income Fund, Adjustable Rate Government Fund,
Government Income Fund, Core Fixed Income Fund and High Yield Fund held the
following amounts of securities of their regular broker-dealers, as defined in
Rule 10b-1 under the Act, or their parents ($ in thousands): Short Duration
Government Fund: Lehman Brothers, Inc. ($1,350), Nomura Securities ($1,680) and
Bear Stearns ($1,680); Global Income: Morgan Stanley ($681); Adjustable Rate
Government Fund: Lehman Brothers, Inc. ($1,856), Bear Stearns ($2,310) and
Nomura Securities ($2,310); Government Income Fund: Lehman Brothers, Inc.
($6,209), Nomura Securities ($7,200), Bear Stearns ($7,200); Salomon Brothers
($959); J.P. Morgan & Co. ($523); Morgan Stanley & Co. ($523) and Merrill Lynch
($2,240); Core Fixed Income: Lehman Brothers, Inc. ($7,143), Nomura Securities
($8,100), Bear Stearns ($8,100), J.P. Morgan ($1,046) and Morgan Stanley & Co.
($943). High Yield Fund: Bear Stearns ($2,580) and Lehman Brothers, Inc.
($2,073).
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 Fixed Income:
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 Government 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, 1997, no Service Shares of the
Adjustable Rate Government Fund were outstanding; no Class A, Class B or Class C
Shares of Short Duration Government Fund, Short Duration Tax-Free Fund and Core
Fixed Income were outstanding; no Class C Shares of
B-85
<PAGE>
Government Income Fund and Municipal Income Fund were outstanding; and no shares
of High Yield Fund were outstanding.
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 among 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 series. 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 attributed 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
B-86
<PAGE>
also bear the cost of an Authorized Dealer Service Plan at an annual rate of up
to 0.25% of average daily net assets attributed to Class A Shares.
Class B and Class C 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 and
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 attributed to Class B and
Class C Shares. Class B and 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 attributed to Class B and 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, shares are fully paid and non-assessable. In the event of
liquidation of a Fund, shareholders of that Fund are entitled to share pro rata
in the net assets of the applicable class of the relevant Fund available for
distribution to such shareholders. All shares are freely transferable and have
no preemptive, subscription or conversion rights.
As of February 1, 1998, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following funds: Adjustable
Rate Government Fund -- First Trust of New York, 100 Wall Street, Suite 1600,
New York, NY (14.19%); State Treasurer/Nebraska Investment Council, 841 "O"
Street, Suite 500, Lincoln, NE 68508 (8.08%); First Security Bank of Idaho FBO,
Idaho Housing Agency, P.O. BOX 30007, Salt Lake City, UT 84130 (7.55%); Meadows
Foundation Inc., 3003 Swiss Avenue, Dallas, TX 75204 (5.15%); Regents of the
University oF Minnesota, 100 Church Street SE, Room 311A, Minneapolis, MN 55455
(5.08%); Short Duration Government Fund -- Central Carolina Bank & Trust Co.,
P.O. Box 931, Durham, NC 27702, (6.10%); State Street Bank & Trust Co.,
(29.64%); P.O. Box 1992, Boston, MA 02105 (24.69%);
B-87
<PAGE>
Richfield Bank & Trust Co., Kirchbak Co., 6625 Lyndale Avenue South, Richfield,
MN 55423 (5.50%); Norwest Bank Iowa NA, P.O. Box 1450 NW 8477, Minneapolis, MN
55480 (6.65%); Short Duration Tax-free Fund -- Donald R. Gant, Partner, Goldman,
Sachs & Co., 85 Broad Street, 22nd Floor, New York, NY 10004 (15.20%); K-G,
Inc., 166 Oak Knoll Terrace, Highland Park, IL 60035 (8.97%); Lafayette American
Bank C/o Hubco, 1000 Macarthur Blvd., Mahwah, NJ 07430 (7.34%); Nelda Start,
P.O. Box 909, Orange, TX 77631-0909 (6.62%); Government Income Fund -- Frontier
Trust Co., Inc. TR, FBO Dade County Public Schools, 1720 S. Gadsden Street,
Tallahassee, FL 32301-5547 (5.4%); Core Fixed Income -- Local 234 Electric
Workers Retirement Fund, 10300 Merritt Street, Castroville, CA 95012 (5.29%);
Vinson and Elkins Pension Plan C/o Banc One, 910 Travis Street, Fl 6, Houston,
TX 77002-5802 (7.88%); Vinson and Elkins Lawyers, Retirement Plan, Texas
Commerce Bank N.A., P.O. Box 2550, Houston, TX 77252 (25.48%) Norwest Bank Iowa,
P.O. Box 1450 NW 8477, Minneapolis, MN 55480 (5.25%); Global Income Fund --
First National Bank North Dakota, P.O. Box 6001, Grand Forks, ND 58206-6001
(5.4%); State Street Bank and Trust, GS Profit Sharing Master Trust, P.O. Box
1992, Boston, MA 02105-1992 (15.9%).
Rule 18f-2 under the Act provides that any matter required to be submitted
by the provisions of the Act or applicable state law, or otherwise, to the
holders of the outstanding voting securities of an investment company such as
the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of 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 as "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters
B-88
<PAGE>
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 with
substantially the same investment objective, restrictions and policies.
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
B-89
<PAGE>
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 an 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 of Delaware business trust
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 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 and to employ other advisers in considering the merits
of the request and shall require an undertaking by the shareholders making such
request to reimburse the Fund for the expense of any such advisers in the event
that the Trustees determine not to bring such action.
B-90
<PAGE>
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
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 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, but not always, 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 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
government 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 one dealer; (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 (if
quotations are unavailable from a pricing service or, if the quotations by the
Adviser are believed to be inaccurate, the contracts will be valued by
calculating the mean between the last bid and asked quotations supplied by at
least one 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 a broker identified by the
portfolio manager/trader.
B-91
<PAGE>
In addition, 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 will be valued at the mean between the closing bid and asked prices, or
if closing bid and asked prices are not available, at the exchange defined close
price on the exchange or system in which such securities are principally traded.
If the relevant exchange or system has not closed by the time for determining
the Fund's net asset value; the securities will be valued at the mean between
the bid and asked prices at the time the net asset value is determined. 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.
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 Fixed Income and
High Yield Funds calculate their net asset value. Occasionally, events affecting
the values of such securities may occur between the times at which they are
determined and the calculation of net asset value which will not be reflected in
the computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value, in which case an adjustment
may be made.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities,
B-92
<PAGE>
insurance companies and financial institutions. Each prospective shareholder is
urged to consult his own tax adviser with respect to the specific federal,
state, local and foreign tax consequences of investing in the Funds. This
summary is based on the laws in effect on the date of this Additional Statement,
which are subject to change.
GENERAL
-------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect to
be treated and intends to continue to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) a Fund derive at least 90% of its gross income
(including tax-exempt interest) for its taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stocks or securities, or foreign currencies or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"); and (b) 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.
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 Fixed Income'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
Fixed Income'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
B-93
<PAGE>
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, if any, over certain
disallowed deductions ("net tax-exempt interest"). A Fund may retain for
investment its "net capital gain" (which consists of the excess of its net long-
term capital gain over its net short-term capital loss). However, if a Fund
retains any investment company taxable income or net capital gain, it will be
subject to tax at regular corporate rates on the amount retained. If a Fund
retains any net capital gain, that Fund may designate the retained amount as
undistributed net capital gain in a notice to its shareholders who, if subject
to U.S. federal income tax on long-term capital gains, (i) will be required to
include in income for federal income tax purposes, as long-term capital gain,
their shares of such undistributed amount, and (ii) will be entitled to credit
their proportionate shares of the tax paid by that Fund against their U.S.
federal income tax liabilities, if any, and to claim refunds to the extent the
credit exceeds such liabilities. For U.S. federal income tax purposes, the tax
basis of shares owned by a shareholder of the Fund will be increased by an
amount equal under current law to 65% of the amount of undistributed net capital
gain included in the shareholder's gross income. Each Fund intends to distribute
for each taxable year to its shareholders all or substantially all of its
investment company taxable income (if any), net capital gain and any net tax-
exempt interest. Exchange control or other foreign laws, regulations or
practices may restrict repatriation of investment income, capital or the
proceeds of securities sales by foreign investors such as Global Income Fund or
Core Fixed Income and may therefore make it more difficult for Global Income
Fund or Core Fixed Income to satisfy the distribution requirements described
above, as well as the excise tax distribution requirements described below.
However, Global Income Fund and Core Fixed Income 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
B-94
<PAGE>
of the loss. At October 31, 1997, the Funds had approximately the following
amounts of capital loss carry forwards:
Years of
Amount Expiration
------ ----------
Adjustable Rate Government $49,069,000 2000-2004
Short Duration Government 14,144,000 2002-2004
Short Duration Tax-Free 4,058,000 2002-2003
Municipal Income 641,973 2004
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 that are actually paid
in January of the following year will be treated as if they were received by
shareholders on December 31 of the year declared.
The Tax Exempt Funds may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." The Tax Exempt Funds may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
that 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
B-95
<PAGE>
Service has also issued private letter rulings to certain taxpayers (which do
not serve as precedent for other taxpayers) to the effect that tax-exempt
interest received by a regulated investment company with respect to such
obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax Exempt Funds intends to take
the position that it is the owner of any municipal obligations acquired subject
to a standby commitment or other third party put and that tax-exempt interest
earned with respect to such municipal obligations will be tax-exempt in its
hands. There is no assurance that the Service will agree with such position in
any particular case. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the treatment of tender fees paid
by these Funds, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Tax Exempt
Funds' portfolios in a manner designed to minimize any adverse impact from the
tax rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging 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 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
B-96
<PAGE>
affect the amount, timing and character of income, gain or loss recognized by
Core Fixed Income and Global Income Fund. Under these rules, foreign exchange
gain or loss realized by Core Fixed Income 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 Fixed Income'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 Fixed Income, Global Income, and High Yield Funds may be subject to
foreign taxes on income (possibly including, in some cases, capital gains) from
foreign securities. Tax conventions between certain countries and the U.S. may
reduce or eliminate such taxes in some cases. Because more than 50% of Global
Income Fund's total assets at the close of any taxable year will generally
consist of stock or securities of foreign corporations, Global Income Fund will
generally qualify to file an election with the Internal Revenue Service pursuant
to which shareholders of Global Income Fund would be required to (i) include in
ordinary gross income (in addition to taxable dividends actually received) their
pro rata shares of foreign income taxes paid by Global Income Fund that are
treated as income taxes under U.S. tax regulations (which excludes, for example,
stamp taxes, securities transaction taxes, and similar taxes) even though not
actually received by such shareholders, and (ii) treat such respective pro rata
portions as foreign income taxes paid by them. Global Income Fund may or may
not make this election for any particular taxable year. Core Fixed Income and
High Yield Funds will not satisfy the 50% requirement described above and,
therefore, will not make this election. Core Fixed Income and High Yield Funds
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
B-97
<PAGE>
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 Fixed Income, Global Income or High Yield Funds acquire stock
(including, under proposed regulations, an option to acquire stock such as is
inherent in a convertible bond) in certain foreign corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, rents, royalties or capital gain) or hold at least 50% of their
assets in investments producing such passive income ("passive foreign investment
companies") Core Fixed Income, 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 Fixed
Income, Global Income or High Yield Funds is timely distributed to its
shareholders. Core Fixed Income, 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 Fixed Income, Global
Income or High Yield Funds to recognize taxable income or gain without the
concurrent receipt of cash. Core Fixed Income, Global Income or High Yield Funds
may limit and/or manage
B-98
<PAGE>
their holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
A Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark-to-market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS DISTRIBUTIONS
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations concerning the tax-exempt status of such obligations, nor does it
guarantee or represent that bond counsels' opinions are correct. Bond counsels'
opinions will generally be based in part upon covenants by the issuers and
related parties regarding continuing compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex 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
B-99
<PAGE>
availability of tax-exempt obligations and the value of a Tax Exempt Fund's
portfolio may be affected by restrictive federal income tax legislation enacted
in recent years or by similar, future legislation. If a Tax Exempt Fund
satisfies the applicable requirements, dividends paid by the Fund which are
attributable to tax exempt interest on Municipal Securities and designated by
the Fund as exempt-interest dividends in a written notice mailed to its
shareholders within sixty days after the close of its taxable year may be
treated by shareholders as items of interest excludable from their gross income
under Section 103(a) of the Code. Exempt-interest dividends a Tax Exempt Fund
receives from other regulated investment companies, including exempt-interest
dividends on auction rate preferred securities of such companies held by a Fund,
are treated as interest on Municipal Securities and may be distributed by a Tax
Exempt Fund as exempt-interest dividends. The recipient of tax-exempt income is
required to report such income on his federal income tax return. However, a
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain the exclusion under Section 103(a) if such
shareholder would be treated as a "substantial user" under Section 147(a)(1)
with respect to some or all of the tax-exempt obligations held by a Tax Exempt
Fund. The Code provides that interest on indebtedness incurred or continued to
purchase or carry shares of a Tax Exempt Fund is not deductible to the extent
attributable to exempt-interest dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions from investment company taxable income, as
defined above, are taxable to shareholders who are subject to tax as ordinary
income whether paid in cash or reinvested in additional shares. Taxable
distributions include distributions from any Fund, including Short Duration Tax-
Free Fund and Municipal Income Fund, that are attributable to (i) 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
B-100
<PAGE>
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 (20% or 28%, as applicable) whether
received in cash or additional shares and regardless of the length of time their
shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less than a
minimum period, generally 46 days. Receipt of certain distributions qualifying
for the deduction may result in reduction of the tax basis of the corporate
shareholder's shares and may give rise to or increase its liability for federal
corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes, will first reduce a
shareholder's basis in his shares and, after the shareholder's basis is reduced
to zero, will generally constitute capital gains to a shareholder who holds his
shares as capital assets. Amounts that are not allowable as a deduction in
computing taxable income, including expenses associated with earning tax-exempt
interest income, do not reduce a Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of Short Duration Tax-Free Fund's
or Municipal Income Fund's distributions from gross tax-exempt interest income
that exceeds its net tax-exempt interest would be taxable as ordinary income to
the extent of such disallowed deductions even though such excess portion may
represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash and will have a cost basis in the shares received equal
to such amount.
After the close of each calendar year, each Fund will inform shareholders
of the federal income tax status of its dividends and distributions for such
year, including the portion of such
B-101
<PAGE>
dividends, if any, that qualifies as tax-exempt or as capital gain, the portion,
if any, that should be treated as a tax preference item for purposes of the
federal alternative minimum tax and the foreign tax credits, if any, associated
with such dividends. 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.
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
Government 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
B-102
<PAGE>
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.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish the Funds with their correct taxpayer identification number and with
certain required certifications or if the Service or a broker notifies the Funds
that the number furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from Short
Duration Tax-Free Fund or Municipal Income Fund will not be subject to backup
withholding if the applicable Fund reasonably estimates that at least 95% of its
distributions will be exempt-interest dividends. A Fund may refuse to accept an
application that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment 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
B-103
<PAGE>
by an applicable tax treaty) unless the dividends are effectively connected with
a U.S. trade or business of the shareholder, in which case the dividends will be
subject to tax on a net income basis at the graduated rates applicable to U.S.
individuals or domestic corporations. Distributions of net capital gain,
including amounts retained by a Fund which are designated as undistributed
capital gains, to a shareholder who is not a U.S. person will not be subject to
U.S. federal income or withholding tax unless the distributions are effectively
connected with the shareholder's trade or business in the United States or, in
the case of a shareholder who is a nonresident alien individual, the shareholder
is present in the United States for 183 days or more during the taxable year and
certain other conditions are met. Non-U.S. shareholders may also be subject to
U.S. withholding tax on deemed income resulting from any election by Global
Income Fund to treat qualified foreign taxes it pays as passed through to
shareholders (as described above), but they may not be able to claim a U.S. tax
credit or deduction with respect to such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder
B-104
<PAGE>
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.
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
B-105
<PAGE>
Thirty-day yield, tax equivalent yield (Short Duration Tax- Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A, 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.
The Service Shares of Global Income Fund commenced operations on March 12,
1997; the Service Shares of Government Income and Municipal Income Funds
commenced operations on August 15, 1997. The Service Shares of these Funds had
no operating or performance history prior thereto. However, in accordance with
interpretive positions expressed by the staff of the SEC, each of these Funds
has adopted the performance records of its respective Class A shares from that
class' inception date (August 2, 1991, February 10, 1993 and July 20, 1993,
respectively) to the inception dates of the Service Shares stated above.
Quotations of performance data of these Funds relating to this period include
the performance record of the applicable Class A Shares (excluding the impact of
any applicable front-end sales charge). The performance records of the
applicable Class A Shares reflect the expenses actually incurred by the Fund.
These expenses include any asset-based sales charges (i.e., fees under
distribution and Authorized Dealer Service Plans) imposed and other operating
expenses. Total return quotations will be calculated pursuant to SEC-approved
methodology.
B-106
<PAGE>
YIELD
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield(1)
- ----------------------------------- ------------ -------------- -------------
30-Days
ended
10/31/97
ADJUSTABLE RATE GOVERNMENT FUND
Institutional Shares 5.98% 5.98%
Administration Shares 5.74% 5.74%
Service Shares(2) 5.48% 5.48%
Class A Shares
(assumes 1.5% sales charge) 5.64% 5.39%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.19% 5.82%
Administration Shares 5.93% 5.55%
Service Shares 5.68% 5.31%
Class A Shares(4)
(assumes 2.0% sales charge) 5.75% 5.14%
Class B Shares(4) 5.35% 4.82%
Class C Shares(5) N/A N/A
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.09% 3.30%
Administration Shares 3.84% 3.05%
Service Shares 3.59% 2.81%
Class A Shares(4)
(assumes 2.0% sales charge) 3.77% 2.78%
Class B Shares(4) 3.23% 2.28%
Class C Shares(5) N/A N/A
CORE FIXED INCOME
Institutional Shares 6.27% 5.89%
Administration Shares 6.03% 5.66%
Service Shares 5.76% 5.38%
Class A Shares(4)
(assumes 4.5% sales charge) 5.75% 5.14%
Class B Shares(4) 5.27% 4.89%
Class C Shares(5) 5.23% 4.82%
GLOBAL INCOME FUND
Institutional Shares 5.10% 4.66%
Service Shares(2) 4.59% 4.15%
Class A Shares
(assumes 4.5% sales charge) 4.36% 3.95%
Class B Shares 4.02% 3.64%
Class C Shares(7) 4.01% 3.63%
B-107
<PAGE>
YIELD
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield(1)
- ----------------------------------- ------------ -------------- -------------
30-Days
ended
10/31/97
MUNICIPAL INCOME FUND
Institutional Shares(6) N/A N/A
Service Shares (6) N/A N/A
Class A Shares 4.16% 3.42%
(assumes 4.5% sales charge)
Class B Shares 3.60% 3.08%
Class C Shares(7) 3.61% 2.97%
GOVERNMENT INCOME FUND
Institutional Shares(6) N/A N/A
Service Shares(6) N/A N/A
Class A Shares
(assumes 4.5% sales charge) 5.81% 4.54%
Class B Shares 5.33% 4.26%
Class C Shares(7) 5.31% 4.22%
HIGH YIELD FUND(8)
Institutional Shares N/A N/A
Service Shares N/A N/A
Class A Shares
(assumes 4.5% sales charge) N/A N/A
Class B Shares N/A N/A
Class C Shares(7) N/A N/A
B-108
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate(1)
- ----------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
30 Days
ended
10/31/97
ADJUSTABLE RATE GOVERMENT FUND
Institutional Shares 6.00% 6.00%
Administration Shares 5.75% 5.75%
Service Shares(2) 5.50% 5.50%
Class A Shares
assumes no sales charge 5.75% 5.47%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.15% 5.78%
Administration Shares 5.89% 5.51%
Service Shares 5.65% 5.28%
Class A Shares(4)
assumes no sales charge 5.90% 5.27%
Class B Shares(4) 5.29% 4.77%
Class C Shares(5) 5.13% 4.75%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.04% 3.25%
Administration Shares 3.79% 3.00%
Service Shares(4) 3.54% 2.76%
Class A Shares
assumes no sales charge 3.79% 2.79%
Class B Shares(4) 3.18% 2.24%
Class C Shares(5) 2.99% 2.03%
CORE FIXED INCOME
Institutional Shares 6.15% 5.77%
Administration Shares 5.90% 5.53%
Service Shares(4) 5.64% 5.27%
Class A Shares
assumes no sales charge 5.90% 5.27%
Class B Shares(4) 5.15% 4.77%
Class C Shares(5) 5.10% 4.69%
GLOBAL INCOME FUND
Institutional Shares 5.77% 5.38%
Service Shares(2) 5.35% 4.96%
Class A Shares
assumes no sales charge 5.24% 4.81%
Class B Shares 4.73% 4.34%
Class C Shares(7) 4.77% 4.39%
</TABLE>
B-109
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate(1)
- ----------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
30 Days
ended
10/31/97
MUNICIPAL INCOME FUND
Institutional Shares(6) 4.51% 4.45%
Service Shares(6) 4.04% 3.51%
Class A Shares
assumes no sales charge 4.29% 3.52%
Class B Shares 3.54% 3.02%
Class C Shares(7) 3.55% 2.92%
GOVERNMENT INCOME FUND
Institutional Shares(6) 6.32% 5.40%
Service Shares(6) 5.84% 4.77%
Class A Shares
assumes no sales charge 6.06% 4.74%
Class B Shares 5.31% 4.24%
Class C Shares(7) 5.29% 4.21%
HIGH YIELD FUND(8)
Institutional Shares 8.25% 7.87%
Service Shares 7.78% 7.39%
Class A Shares
assumes no sales charge 7.98% 7.35%
Class B Shares 7.21% 6.83%
Class C Shares(7) 7.17% 6.78%
</TABLE>
B-110
<PAGE>
TAX-EQUIVALENT YIELD(3)
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield(1)
- ---------------------------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
30 Days
ended
10/31/97
SHORT DURATION TAX-FREE FUND(3)
Institutional Shares 6.82% 5.49%
Administration Shares 6.40% 5.07%
Service Shares 5.98% 4.66%
Class A Shares
assumes no sales charge 6.40% 4.71%
Class B Shares 5.37% 3.78%
Class C Shares 5.05% 3.42%
MUNICIPAL INCOME FUND(3)
Institutional Shares 7.62% 7.52%
Service Shares 6.82% 5.93%
Class A Shares
assumes no sales charge 7.25% 5.95%
Class B Shares 5.98% 5.10%
Class C Shares 6.00% 4.93%
</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) Service Shares commenced operations on March 27, 1997 for Adjustable Rate
Government Fund, and March 12, 1997 for Global Income Fund.
(3) The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 40.8% (adjusted for the 3% phase out
of itemized deductions for individuals at high income levels) federal
income tax rate.
(4) Class A and B Shares of Short Duration Government, Short Duration Tax-Free
and Core Fixed Income commenced operations on May 1, 1997.
(5) Class C Shares commenced operations on August 15, 1997.
(6) Institutional and Service Shares of Municipal Income and Government Income
Funds commenced operations on August 15, 1997.
(7) Class C Shares commenced operations on August 15, 1997.
(8) High Yield Fund commenced operations on August 1, 1997.
The above tables should not be considered a representation of future
performance.
B-111
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
------------------------------------------------------------------
Investment Investment With Fee Without Fee
Date Period Reductions Reductions
Fund and/or and/or
- -------------------------------- Expense Expense
Limitations Limitations
------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
<S> <C> <C> <C> <C>
Institutional Shares 7/17/91/1a/ ended 10/31/97 5.54% 5.43%
one year ended
11/1/96 10/31/97 6.70% 6.67%
five years ended
11/1/92 10/31/97 5.25% 5.20%
Administration Shares 4/15/93/1b/ ended 10/31/97 5.07% 5.02%
one year ended
11/1/96 10/31/97 6.43% 6.40%
Service Shares 3/27/97/1c/ ended 10/31/97 3.81% 3.78%
Class A Shares 5/12/951d ended 10/31/97
assumes 1/5% sales charge 5.75% 5.43%
assumes no sales charge 6.41% 6.09%
one year ended
11/1/96 10/31/97
assumes 1.5% sales charge 4.83% 4.53%
assumes no sales charge 6.43% 6.13%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/97 7.22% 6.82%
one year ended
11/1/96 10/31/97 7.07% 6.68%
five years ended
11/1/92 10/31/97 5.83% 5.57%
Administration Shares 2/28/96/2b/ ended 10/31/97 6.53% 6.19%
one year ended
11/1/96 10/31/97 6.91% 6.52%
Service Shares 4/10/96/2b/ ended 10/31/97 7.07% 6.73%
11/1/96 one year ended
10/31/97 6.63% 6.24%
Class A Shares 5/1/97/2c/ ended 10/31/97
assumes 2.0% sales charge 2.06% 1.74%
assumes no sales charge 4.14% 3.82%
Class B Shares 5/1/97/2c/ ended 10/31/97 3.94% 3.65%
Class C Shares 8/15/97/2d/ ended 10/31/97 1.44% 1.36%
</TABLE>
B-112
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
------------------------------------------------------------------
Investment Investment With Fee Without Fee
Date Period Reductions Reductions
Fund and/or and/or
- -------------------------------- Expense Expense
Limitations Limitations
------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE
FUND
Institutional Shares 10/1/923a ended 10/31/97 4.44% 3.88%
11/1/96 one year ended 5.40% 4.59%
10/31/97
11/1/92 five years ended 4.59% 4.06%
10/31/97
Administration Shares 5/20/933b ended 10/31/97 3.87% 3.41%
11/1/96 one year ended 5.14% 4.33%
10/31/97
Service Shares 9/20/943c ended 10/31/97 4.49% 3.93%
11/1/96 one year ended 4.77% 3.96%
10/31/97
Class A Shares 5/1/973d ended 10/31/97
assumes 2.05% sales 1.35% 0.83%
charge
assumes no sales 3.39% 2.86%
charge
Class B Shares 5/1/973d ended 10/31/97 3.07% 2.59%
Class C Shares 8/15/973e ended 10/31/97 0.97% 0.80%
CORE FIXED INCOME
Institutional Shares 1/15/944a 10/31/97 7.08% 6.50%
11/1/96 one year ended
10/31/97 9.19% 8.78%
Administration Shares 2/28/964b ended 10/31/97 7.45% 7.05%
11/1/96 one year ended
10/31/97 8.92% 8.52%
Service Shares 3/13/964b ended 10/31/96 8.31% 7.93%
11/1/96 one year ended 8.65% 8.25%
10/31/97
Class A Shares 5/1/974c ended 10/31/974c
assumes 4/5% sales 2.10% 1.78%
charge
assumes no sales 6.94% 6.61%
charge
Class B Shares 5/1/974c ended 10/31/97 6.63% 6.42%
Class C Shares 8/15/974d ended 10/31/97 2.74% 2.64%
</TABLE>
B-113
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------------------
Investment Investment With Fee Without Fee
- -------------------------- Date Period Reductions Reductions
Fund and/or and/or
- -------------------------- Expense Expense
Limitations Limitations
---------------------------------------------------------------------
GLOBAL INCOME FUND/5c/
<S> <C> <C> <C> <C>
Class A Shares 8/2/91/5a/ ended 10/31/97
assumes 4.5% sales 7.49% 7.15%
charge
assumes no sales 8.28% 7.94%
charge
11/1/96 one year ended
10/31/97
assumes 4.5% sales 4.76% 4.31%
charge 9.66% 9.20%
assumes no sales
charge
11/1/92 five years ended
10/31/97
assumes 4.5% sales 7.20% 6.85%
charge 8.19% 7.83%
assumes no sales
charge
Class B Shares 5/1/96/5b/ ended 10/31/97 10.27% 9.84%
11/1/96 one year ended 9.04% 8.63%
ended 10/31/97
Institutional Shares 8/1/95/5d/ ended 10/31/97 11.75% 11.28%
11/1/96 one year ended 10.26% 9.83%
10/31/97
Service Shares 8/2/91/5e/ ended 10/31/97 8.28% 7.97%
11/1/96 one year ended 9.66% 9.38%
10/31/97
11/1/92 five years ended 8.19% 7.87%
10/31/97
Class C Shares 8/15/97/5f/ ended 10/31/97 3.03% 2.96%
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/97
assumes 4.5% sales 5.04% 4.06%
charge
assumes no sales 6.18% 5.18%
charge
11/1/96 one year ended
10/31/97
assumes 4.5% sales 4.29% 3.50%
charge
assumes no sales 9.23% 8.40%
charge
Class B Shares 5/1/96/6b/ ended 10/31/97 8.63% 8.02%
11/1/96 one year ended
10/31/97 8.48% 7.92%
Class C Shares 8/15/97/6c/ ended 10/31/97 1.75% 1.61%
</TABLE>
B-114
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------------------
Investment Investment With Fee Without Fee
- -------------------------- Date Period Reductions Reductions
Fund and/or and/or
- -------------------------- Expense Expense
Limitations Limitations
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Shares 8/15/97/6c/ ended 10/31/97 2.10% 1.50%
Service 7/20/93 ended 10/31/97 6.17% 5.23%
11/1/96 one year ended 9.18% 8.60%
10/31/97
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/97
assume 4.5% sales 6.10% 3.84%
charge
assumes no sales 7.14% 4.85%
charge
11/1/96 one year ended
10/31/97
assumes 4.5% sales 3.80% 2.45%
charge
assumes no sales 8.72% 7.30%
charge
Class B Shares 5/1/96/7b/ ended 10/31/97 8.59% 7.36%
11/1/96 one year ended 7.96% 6.82%
10/31/97
Class C Shares 8/15/97/7c/ ended 10/31/97 2.72% 2.49%
Institutional Shares 8/15/97/7c/ ended 10/31/97 2.94% 2.72%
Service Shares 2/10/93/7c/ ended 10/31/97 7.13% 4.91%
11/1/96 one year ended 8.67% 7.55%
10/31/97
HIGH YIELD FUND
Class A Shares 8/1/97/8a/ ended 10/31/97
assumes 4.5% sales (3.06%) (3.21%)
charge
assumes no sales 1.50% 1.35%
charge
Class B Shares 8/1/97/8a/ ended 10/31/97 1.31% 1.21%
Class C Shares 8/15/97/8b/ ended 10/31/97 1.46% 1.38%
Institutional Shares 8/1/97/8a/ ended 10/31/97 1.58% 1.48%
Service Shares 8/1/97/8a/ ended 10/31/97 1.46% 1.36%
</TABLE>
_____________________________
1a Institutional Shares of Adjustable Rate Government Fund commenced
operations on July 17, 1991.
1b Administration Shares of Adjustable Rate Government Fund commended
operations on April 15, 1993.
115
<PAGE>
1c Service Shares of Adjustable Rate Government Fund commenced operations on
March 27, 1997.
1d Class A shares of Adjustable Rate Government 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.
2c Class A and Class B Shares of Short Duration Government Fund commenced
operations on May 1, 1997. An aggregate total return (not annualized) is
shown instead of an average annual total return since Class A and Class B
Shares have not completed a full 12 months of operation as of October 31,
1997.
2d Class C Shares of Short Duration Government Fund commenced operations on
August 15, 1997. An aggregate total return (not annualized) is shown instead
of an average annual total return since Class C Shares have not completed a
full 12 months of operation as of October 31, 1997.
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.
3d Class A and Class B Shares of Short Duration Tax-Free Fund commenced
operations on May 1, 1997. An aggregate total return (not annualized) is
shown instead of an average annual total return since Class A and Class B
shares have not completed a full 12 months of operation as of October 31,
1997.
3e Class C Shares of Short Duration Tax-Free Fund commenced operations on August
15, 1997. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class C Shares have not completed a full 12
months of operation as of October 31, 1997.
4a Institutional Shares of Core Fixed Income commenced operations on January 5,
1994.
4b Administration Shares of Core Fixed Income commenced operations on February
28, 1996. Service Shares of Core Fixed Income commenced operations on March
13, 1996.
4c Class A and Class B Shares of Core Fixed Income commenced operations on May
1, 1997. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class A and Class B Shares have not
completed a full 12 months of operation as of October 31, 1997.
4d Class C Shares of Core Fixed Income commenced operations on August 15, 1997.
An aggregate total return (not annualized) is shown instead of an average
annual total return since Class C Shares have not completed a full 12 months
of operation as of October 31, 1997.
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 Institutional Shares of Global Income Fund commenced operations on August 1,
1995.
B-116
<PAGE>
5e Service Shares of Global Income Fund commenced operations on March 12, 1997.
5f Class C Shares of Global Income Fund commenced operations August 15, 1997. An
aggregate total return (not annualized) is shown instead of an average annual
total return since Class C Shares have not completed a full 12 months of
operation as of October 31, 1997.
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.
6c Class C, Institutional and Service Shares of the Municipal Income Fund
commenced operations on August 15, 1997.
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.
7c Class C, Institutional and Service Shares of the Government Income Fund
commenced operations on August 15, 1997.
8a Class A, Class B, Institutional and Service Shares, Shares of High Yield Fund
commenced operations on August 1, 1997. An aggregate total return (not
annualized) is shown instead of an average annual total return Since Class A,
Class B, Institutional and Service Shares of High Yield Fund have not
completed a full 12 months of operation as of October 31, 1997.
8b Class C Shares of High Yield Fund commenced operations on August 15, 1997. An
aggregate total return (not annualized) is shown instead of an average annual
total return since Class C Shares of High Yield Fund have not completed a
full 12 months of operation as of October 31, 1997.
The above table should not be considered a representation of future performance.
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.
- -------------- ----------------- -------------------------------- -----
B-117
<PAGE>
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 Fixed Income, 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 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
B-118
<PAGE>
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:
o 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;
o 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;
o Credit Ratings of domestic government bonds in various countries;
o Price volatility comparisons of types of securities over different periods
of time; and
o 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
B-119
<PAGE>
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
Shares of the Funds are offered and sold on a continuous basis by the
Trust's Distributor, Goldman Sachs, acting as agent. As described in the
Prospectus, shares of the Funds are redeemed at their net asset value as next
determined after receipt of the purchase or redemption order.
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90- day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net asset value of 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 may incur
transaction costs upon the disposition of the securities received in the
redemption.
B-120
<PAGE>
The right of a shareholder to redeem shares and the date of payment by each
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for such Fund to dispose of securities owned by it
or fairly to determine the value of its net assets; or for such other period as
the SEC may by order permit for the protection of shareholders of such Fund.
(The Trust may also suspend or postpone the recommendation of the transfer of
shares upon the occurrence of any of the foregoing conditions).
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 1997 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. No other
portions of the Fund's Annual Report are incorporated herein by reference.
OTHER INFORMATION REGARDING PURCHASES
The Adviser, Distributor and/or their affiliates may pay, out of their own
assets, compensation to Service Organizations and other persons in connection
with the sale and/or servicing of shares of the Funds and other investment
portfolios of the Trust. 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 shareholder servicing and
processing. These Additional Payments may take the form of "due
B-121
<PAGE>
diligence" payments for an institution's examination of the Funds and payments
for providing extra employee training and information relating to the Funds;
"listing" fees for the placement of the Funds on a dealer's list of mutual funds
available for purchase by its customers; "marketing support" fees for providing
assistance in promoting the sale of the Funds' shares; and payments for the sale
of shares and/or the maintenance of share 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 any 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 institution, or may be based on a percentage of the value of
shares sold to, or held by, customers of the institution involved, and may be
different for different institutions. 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 Service Organizations and other institutions 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.
B-122
<PAGE>
SERVICE PLAN
Each Fund has adopted a service plan (the "Plan") with respect to its
Service Shares which authorizes it to compensate Service Organizations for
providing certain administration services and personal and account maintenance
services to their customers who are or may become beneficial owners of such
Shares. Pursuant to the Plan, a Fund will enter into agreements with Service
Organizations which purchase Service Shares of the Fund on behalf of their
customers ("Service Agreements"). Under such Service Agreements, the Service
Organizations may perform some or all of the following services: (a) act,
directly or through an agent, as the sole shareholder of record and nominee for
all customers, (b) maintain account records for each customer who beneficially
owns Service Shares of a Fund, (c) answer questions and handle correspondence
from customers regarding their accounts, (d) process customer orders to
purchase, redeem and exchange Service Shares of a Fund, and handle the
transmission of funds representing the customers' purchase price or redemption
proceeds, (e) issue confirmations for transactions in shares by customers, (f)
provide facilities to answer questions from prospective and existing investors
about Service Shares of a Fund, (g) receive and answer investor correspondence,
including requests for prospectuses and statements of additional information,
(h) display and make prospectuses available on the Service Organization's
premises, (i) assist customers in completing application forms, selecting
dividend and other account options and opening custody accounts with the Service
Organization and (j) act as liaison between customers and a Fund, including
obtaining information from a Fund, working with a Fund to correct errors and
resolve problems and providing statistical and other information to a Fund. As
compensation for such services, a Fund will pay each Service Organization a
service fee in an amount up to 0.50% (on an annualized basis) of the average
daily net assets of the Service Shares of such Fund attributable to or held in
the name of such Service Organization; provided, however, that the fee paid for
personal and account maintenance services shall not exceed 0.25% of such average
daily net assets. For the fiscal years ended October 31, 1997, October 31, 1996
and October 31, 1995 service fees were paid by the Funds as follows:
Fund 1997 1996 1995
---- ---- ---- ----
Adjustable Rate Government $292 (1) (1)
Short Duration Government 12,087 $1,222 (2)
Short Duration Tax-Free 6,435 2,322 $1,797
Government Income 2 (3) (3)
Municipal Income 2 (4) (4)
Core Fixed Income 6,207 422 (5)
Global Income 523 (6) (6)
High Yield(7) 8 N/A N/A
_________________________
(1) No Service Shares of Adjustable Rate Government Fund were outstanding at
October 31, 1996 and 1995.
(2) No Service Shares of Short Duration Government Fund were outstanding at
October 31, 1995.
B-123
<PAGE>
(3) No Service Shares of Government Income Fund were outstanding at October 31,
1996 and 1995.
(4) No Service Shares of Municipal Income Fund were outstanding at October 31,
1996 and 1995.
(5) No Service Shares of Core Fixed Income Fund were outstanding at October 31,
1995.
(6) No Service Shares of Global Income Fund were outstanding at October 31,
1996 and 1995.
(7) High Yield Fund commenced operations on August 1, 1998.
Each Fund has adopted its Plan pursuant to Rule 12b-1 under the 1940 Act in
order to avoid any possibility that payments to the Service Organizations
pursuant to the Service Agreements might violate the 1940 Act. Rule 12b-1,
which was adopted by the SEC under the Act, regulates the circumstances under
which an investment company or series thereof may bear expenses associated with
the distribution of its shares. In particular, such an investment company or
series thereof cannot engage directly or indirectly in financing any activity
which is primarily intended to result in the sale of shares issued by the
company unless it has adopted a plan pursuant to, and complies with the other
requirements of, such Rule. The Trust believes that fees paid for the services
provided in the Plan and described above are not expenses incurred primarily for
effecting the distribution of Service Shares. However, should such payments be
deemed by a court or the SEC to be distribution expenses, such payments would be
duly authorized by the Plan.
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling or
distributing securities, although institutions such as national banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. In addition, under some state securities laws, banks and other
financial institutions purchasing Service Shares on behalf of their customers
may be required to register as dealers. Should future legislative or
administrative action or judicial or administrative decisions or interpretations
prohibit or restrict the activities of one or more of the Service Organizations
in connection with the Funds, such Service Organizations might be required to
alter materially or discontinue the services performed under their Service
Agreements. If one or more of the Service Organizations were restricted from
effecting purchases or sales of Service Shares automatically pursuant to pre-
authorized instructions, for example, effecting such transactions on a manual
basis might affect the size and/or growth of a Fund. Any such alteration or
discontinuance of services could require the Board of Trustees to consider
changing a Fund's method of operations or providing alternative means of
offering Service Shares of a Fund to customers of such Service Organizations, in
which case the operation of such Fund, its size and/or its growth might be
significantly altered. It is not anticipated, however, that any alternation of
a Fund's operations would have any effect on the net asset value per share or
result in financial losses to any shareholder.
B-124
<PAGE>
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in Service Shares of such Fund. Service Organizations, including banks
regulated by the Comptroller of the Currency, the Federal Reserve Board or the
Federal Deposit Insurance Corporation, and investment advisers and other money
managers subject to the jurisdiction of the SEC, the Department of Labor or
state securities regulators, are urged to consult legal advisers before
investing fiduciary assets in Service Shares of the Funds. In addition, under
some state securities laws, banks and other financial institutions purchasing
Service Shares on behalf of their customers may be required to register as
dealers.
The Plans with respect to the Adjustable Rate Government, Short Duration
Government, Short Duration Tax-Free and Core Fixed Income Funds were approved by
The Goldman Sachs Group, L.P., as the sole shareholder of Service Shares of each
Fund. The Trustees, including a majority of the Trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
the operation of the Plans or the related Service Agreements, most recently
voted to approve each Fund's Plan and Service Agreements at a meeting called for
the purpose of voting on such Plans and Service Agreements on April 23, 1997,
including Global and High Yield Funds. Each Plan and Service Agreement will
remain in effect until April 30, 1998 and will continue in effect thereafter
only if such continuance is specifically approved annually by a vote of the
Board of Trustees in the manner described above. No Plan may be amended to
increase materially the amount to be spent for the services described therein
without approval of the Service Shareholders of the applicable Fund, and all
material amendments of each Plan must also be approved by the Board of Trustees
in the manner described above. Each Plan may be terminated at any time by a
majority of the Board of Trustees as described above or by vote of a majority of
the outstanding Service Shares of the applicable Fund. The Service Agreements
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Board of Trustees as described above or by a vote of a majority
of the outstanding Service Shares of the applicable Fund on not more than sixty
(60) days' written notice to any other party to the Service Agreements.
The Service Agreements will terminate automatically if assigned. So long
as the Plans are in effect, the selection and nomination of those Trustees who
are not interested persons will be committed to the discretion of the Trust's
Nominating Committee, which consists of all of the non-interested members of the
Board of Trustees. The Board of Trustees has determined that, in its judgment,
there is a reasonable likelihood that a Fund's Plan will benefit such Fund and
its holders of Service Shares. In the Board of Trustees' quarterly review of
the Plans and Service Agreements, the Board will consider their continued
appropriateness and the level of compensation provided therein.
B-125
<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
_____________________
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of a Fund's fiscal
year end.
1-A
<PAGE>
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
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 one
year, unless explicitly noted.
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 three 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 senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, 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.
3-A
<PAGE>
STANDARD & POOR'S RATINGS GROUP
Aaa: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to meet the financial commitment on the obligation is
extremely strong.
Aa: Bonds and debt rated AA have a very strong capacity to meet the
financial commitment on the obligation and differ from the higher rated issues
only in small degree.
A: Bonds and debt rated A have a strong capacity to meet the financial
commitment on the obligation 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 meet the financial commitment on the obligation. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligtor.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded
as having significant speculative characteristics with respect to the capacity
meet the financial commitment on the obligation. 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 vulnerability to non-payment than
other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to the obligtor's inadequate capacity to meet the financial
commitment on the obligation.
B: Bonds and debt rated B are more vulnerable to non-payment but the
obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to meet its financial commitment on the
obligation.
CCC: Bonds and debt rated CCC is currently vulnerable to non-payment, and
are dependent upon favorable business, financial, and economic conditions to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, such securities are not likely to
have the capacity to meet its financial commitment on the obligation.
CC: The rating CC is typically applied to bonds and debt that are
currently highly vulnerable to non-payment.
4-A
<PAGE>
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but debt service
payments on this obligation are continued.
D: Bonds and debt rated D are in payment default. The D rating category
is used when payments on an obligation 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.
R This rating is attached to highlight derivative, hybrid, and certain
other obligations that Standard & Poor's believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies, certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
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 commercial paper rating categories are as follows:
A-1 Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 Obligations are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations rated "A-1".
However, the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.
A-3 Obligations exhibit adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
B- Obligations are regarded as having significant speculative
characteristics. The obligor currently has the
5-A
<PAGE>
capacity to meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C - Obligations are currently vulnerable to nonpayment and are dependent
on favorable business, financial, and economic conditions for the obligor to
meet its financial obligation.
D - Obligations are in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless Standard & Poor's believes such
payments will be made during such grace period. The "D" rating will also be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
FITCH IBCA, INC.
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 capacity for
timely payment at financial commitments, which is unlikely to be adversely
affected by reasonably foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very high
credit quality. These ratings denote a very low expectation of investment risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
A: Bonds rated A are considered to be investment grade and of high
credit quality. These ratings denote a low expectation of investment risk and
indicate strong capacity of timely payment of financial commitments.
BBB: Bonds rated BBB are considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse circumstances and in economic conditions are more likely
to impair this category.
6-A
<PAGE>
BB: Bonds are considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic changes over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B: Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
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. The Fitch IBCA
ratings from and including "AA" to "b" may be modified by the addition of a plus
or minus sign.
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch IBCA's short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations or up to three years for
U.S. public finance securities.
F 1: Highest Credit Quality. Issues assigned this rating reflect the
strongest capacity for timely payment of financial commitments; may
have an added "+" to denote any exceptionally strong credit feature.
F 2: Good Credit Quality. Issues assigned this rating have a satisfactory
capacity for timely payment of financial commitments, but the margin
of safety is not as great as for issues assigned F 1 ratings.
7-A
<PAGE>
F 3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C Securities possess high default risk. This designation indicates that
the capacity for meeting financial commitments is solely reliant upon
a sustained, favorable business and economic environment.
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.
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 economic conditions.
However, risk factors are more variable and greater in periods of stress.
A=, A, A-: Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for
8-A
<PAGE>
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.
D: Defaulted debt obligation.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
D-1+: 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.
D-1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors
are very small.
D-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.
D-3: Satisfactory liquidity and other protection factors qualify issues as
investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
D-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.
D-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.
9-A
<PAGE>
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") and variable rate demand obligations
are designated Variable Moody's Investment Grade ("VMIG"). Such ratings
recognize the differences between short-term credit risk and long-term risk.
Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality enjoying 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.
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 carrying specific
risk but having protection commonly regarded as required of an investment
security and not distinctly or predominantly speculative.
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.
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Those issues determined
to possess very strong characteristics will be given a plus (+)
designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
10-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.
o Privately owned and ranked among Wall Street's best capitalized firms,
with partners' capital of approximately $__________billion as of November ,
1997.
o With thirty-four offices worldwide Goldman Sachs employs over 9,000
professionals focused on opportunities in major markets.
o The number one underwriter of all international equity issues FROM 1993-
1996.
o A research budget of $200 million for 1997.
o Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
o The number one lead manager of U.S. common stock offerings for the past
eight years (1989-1996).*
o The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1996).
* Source: Securities Data Corporation. Common stock ranking excludes REITS,
-----------------------------------
Investment 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 Roebuck & Co. 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
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 March
1, 1998, 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>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Introduction B-3
Investment Objectives and Policies B-4
Other Investments and Practices B-12
Investment Restrictions B-62
Management B-65
Portfolio Transactions B-81
Shares of the Trust B-85
Net Asset Value B-91
Taxation B-92
Performance Information B-104
Other Information B-120
Financial Statements B-121
Other Information Regarding Purchases, Redemptions,
Exchanges and Dividends B-122
Distribution and Authorized Dealer Service Plans B-125
Appendix A 1-A
Appendix B 1-B
</TABLE>
The date of this Additional Statement is March 1, 1998.
<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 MANAGEMENT, L.P. GOLDMAN,SACHS & CO.
ADVISER TO GOLDMAN SACHS TRANSFER AGENT
ADJUSTABLE RATE GOVERNMENT FUND 4900 SEARS TOWER
AND SHORT DURATION GOVERNMENT FUND CHICAGO, ILLINOIS 60606
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") is an open-end Management Investment
Company. 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 Government Fund"), Goldman Sachs Core Fixed Income Fund ("Core
Fixed Income"), 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 34 other series of shares. Adjustable Rate Government Fund,
Core Fixed Income, 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 Fixed Income 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 Government 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
Fixed Income, 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 Government
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
B-3
<PAGE>
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, 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.
INVESTMENT OBJECTIVES AND POLICIES
ADJUSTABLE RATE GOVERNMENT FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Government 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 Government and Short Duration Government Funds 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 Government 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
B-4
<PAGE>
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 Government Fund
-------------------------------------
seeks to minimize net asset value fluctuations by investing primarily in
adjustable rate mortgage pass-through securities and other mortgage securities
with periodic interest rate resets, maintaining a maximum duration of two years
and a target duration equal to that of a six-month to one-year U.S. Treasury
security, and utilizing certain active management techniques to seek to hedge
interest rate risk. Short Duration Government Fund seeks to minimize net asset
value fluctuations by utilizing certain interest rate hedging techniques and by
maintaining a maximum duration of not more than three years. The duration
target of the Short Duration Government Fund is that of the 2-year U.S. Treasury
Security plus or minus .5 years. There is no assurance that these strategies
for the Adjustable Rate Government 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
B-5
<PAGE>
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 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
B-6
<PAGE>
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 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:
o 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;
o 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;
o 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
o Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
designed to provide this diversification.
B-7
<PAGE>
CORE FIXED INCOME
Core Fixed Income 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 Fixed Income 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.
Core Fixed Income's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fixed Income's return is likely to increase. Conversely, when interest
rates increase, Core Fixed Income'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 Fixed Income'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 Fixed Income than from shorter-term investments.
A number of investment strategies will be used to achieve the Core Fixed
Income'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
usually 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 Fixed Income will attempt to
----------------------------------
control its exposure to interest rate risk, including overall market exposure
and the spread risk of particular sectors
B-8
<PAGE>
and securities, through active portfolio management techniques. Core Fixed
Income'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 Fixed Income'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 Fixed Income's investment portfolio. In determining Core Fixed
Income's investment strategy and making market timing decisions, the Adviser
will have 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
managers 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.
B-9
<PAGE>
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 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
B-10
<PAGE>
its balance sheet, its ability to withstand economic downturns and its potential
to generate ample cash flow to service its debt. The ability to analyze
accurately 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 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
B-11
<PAGE>
rate risk: when interest rates increase, the value of fixed income securities
tends to decline.
OTHER INVESTMENTS OBJECTIVES 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 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) right of the issuer to
borrow from the Treasury (such as securities of Federal Home Loan Banks), (b)
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 (c) 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 invest in custodial receipts in respect of securities issued
or guaranteed as to principal and interest by the U.S. government, its agencies
instrumentalities, political
B-12
<PAGE>
subdivisions or authorities. Such custodial receipts evidence ownership of
future interest payments, principal payments or both on certain notes or bonds
issued or guaranteed as to principal and interest by the U.S. government, its
agencies, instrumentalities, political subdivisions or authorities. These
custodial receipts are known by various names, including "Treasury Receipts,"
"Treasury Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on
Treasury Securities" ("CATs"). For certain securities law purposes, custodial
receipts are not considered U.S. Government Securities.
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
Adjustable Rate, Short Duration Government, Core Fixed Income 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, if a Fund purchases Mortgaged Backed Securities
at a premium, a faster than expected prepayment rate will reduce both the market
value and the yield to maturity from those which were anticipated. A prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if a Fund purchases Mortgage-
Backed Securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce yield to maturity and market
values. To the extent that a Fund invests in Mortgage-Backed securities, its
investment adviser may seek to manage these
B-13
<PAGE>
potential risks by investing in a variety of Mortgage-Backed Securities and by
using certain hedging techniques.
Adjustable Rate Mortgage Loans ("ARMs"). ARMs generally provide for a
---------------------------------------
fixed initial mortgage interest rate for a specified period of time.
Thereafter, the interest rates (the "Mortgage Interest Rates") may be subject to
periodic adjustment based on changes in the applicable index rate (the "Index
Rate"). The adjusted rate would be equal to the Index Rate plus a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some mortgagors
may find difficult to make. However, certain ARMs may provide that the Mortgage
Interest Rate may not be adjusted to a rate above an applicable lifetime maximum
rate or below an applicable lifetime minimum rate for such ARM. Certain ARMs
may also be subject to limitations on the maximum amount by which the 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
B-14
<PAGE>
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost
of Funds, the National Median Cost of Funds, the one-month, three-month, six-
month or one-year London Interbank Offered Rate, the prime rate of a specific
bank or commercial paper rates. Some indices, such as the one-year constant
maturity Treasury rate, closely mirror changes in market interest rate levels.
Others, such as the 11th District Federal Home Loan Bank Cost of Funds index,
tend to lag behind changes in market rate levels and tend to be somewhat less
volatile. The degree of volatility in the market value of each Taxable Fund's
portfolio and therefore in the net asset value of each Taxable Fund's shares
will be a function of the length of the interest rate reset periods and the
degree of volatility in the applicable indices.
FIXED-RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans included
-------------------------
in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple interest
at fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed-Rate Mortgage Loans generally provide for monthly payments of
principal and interest in substantially equal installments for the term of 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.
B-15
<PAGE>
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may also
reduce the monthly payments due under such mortgage loan, change the rate
of interest, reduce the principal balance of the loan to the then-current
appraised value of the related mortgaged property, alter the mortgage loan
repayment schedule and grant priority of certain liens over the lien of the
mortgage loan. If a court relieves a borrower's obligation to repay
amounts otherwise due on a mortgage loan, the mortgage loan servicer will
not be required to advance such amounts, and any loss may be borne by the
holders of securities backed by such loans. In addition, numerous federal
and state consumer protection laws impose 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.
B-16
<PAGE>
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States. Ginnie Mae is authorized to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration ("FHA Loans"), or guaranteed by the Veterans Administration ("VA
Loans"), or by pools of other eligible mortgage loans. In order to meet its
obligations under any guarantee, Ginnie Mae is authorized to borrow from the
United States Treasury in an unlimited amount.
Fannie Mae Certificates. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the United States Congress. Each Fannie Mae
Certificate is issued and guaranteed by Fannie Mae and represents an undivided
interest in a pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool
consists of residential mortgage loans ("Mortgage Loans") either previously
owned by Fannie Mae or purchased by it in connection with the formation of the
Pool. The Mortgage Loans may be either conventional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. government agency) or Mortgage Loans that are
either insured by the 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 participation 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
B-17
<PAGE>
received on the underlying loans). Freddie Mac also guarantees to each
registered Certificate holder ultimate collection of all principal of the
related mortgage loans, without any offset or deduction, but does not,
generally, guarantee the timely payment of scheduled principal. The obligations
of Freddie Mac under its guaranty of Freddie Mac Certificates are obligations
solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one-to-four-family residential properties or
multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac
Certificate group may include whole loans, participation interests in whole
loans, undivided interests in whole loans and participations comprising another
Freddie Mac Certificate group.
Conventional Mortgage Loans. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-
rate mortgage loans with original terms to maturity of between five and thirty
years. Substantially all of these mortgage loans are secured by first liens on
one- to four-family residential properties or multi-family projects. Each
mortgage loan must meet the applicable standards set forth in the law creating
Freddie Mac or Fannie Mae. A Freddie Mac Certificate 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 both
--------------------------------
government guaranteed and privately issued 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
B-18
<PAGE>
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be 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.
These securities may be issued by U.S. government agencies and instrumentalities
such as Fannie Mae or sponsored enterprises such as Freddie Mac or, in the case
of Core Fixed Income, 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.
B-19
<PAGE>
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class Mortgage-Backed Securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed Mortgage-Backed Securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans
or the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to
B-20
<PAGE>
apply principal payments and prepayments of the Mortgage Assets to two or more
classes concurrently on a proportionate or disproportionate basis. These
simultaneous payments are taken into account in calculating the final
distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments
of the Mortgage Assets are then required to be applied to one or more other
classes of the Certificates. The scheduled principal payments for the PAC
Certificates generally have the highest priority on each payment date after
interest due has been paid to all classes entitled to receive interest
currently. Shortfalls, if any, are added to the amount payable on the next
payment date. The PAC Certificate payment schedule is taken into account in
calculating the final distribution date of each class of PAC. In order to
create PAC tranches, one or more tranches generally must be created that absorb
most of the volatility in the underlying Mortgage Assets. These tranches tend to
have market prices and yields that are much more volatile than other PAC
classes.
Stripped Mortgage-Backed Securities. The Taxable Funds may invest in
-----------------------------------
Stripped Mortgage-Backed Securities ("SMBS"), which are derivative multiclass
mortgage securities, issued or guaranteed by the U.S. government, its agencies
or instrumentalities. Core Fixed Income, 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. 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.
B-21
<PAGE>
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
Ratings. The ratings assigned by a rating organization to Mortgage Pass-
-------
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
Credit Enhancement. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things,
payment guarantees, letters of credit, pool insurance, subordination, or any
combination thereof.
Subordination; Shifting of Interest; Reserve Fund. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage 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
B-22
<PAGE>
certificates is intended to preserve the availability of the subordination
provided by the subordinate certificates. In addition, because the senior
certificate-holders in a shifting interest credit enhancement structure are
entitled to receive a percentage of principal prepayments which is greater than
their proportionate interest in the trust fund, the rate of principal
prepayments on the mortgage loans will have an even greater effect on the rate
of principal payments and the amount of interest payments on, and the yield to
maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due to them and
will protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event that the Reserve Fund is depleted before
the subordinated amount is reduced to zero, senior certificate-holders will
nevertheless have a preferential right to receive current distributions from the
mortgage pool to the extent of the then outstanding subordinated amount. Unless
otherwise specified, until the subordinated amount is reduced to zero, on any
distribution date any amount otherwise distributable to the subordinate
certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--- ----
all certificate-holders 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
B-23
<PAGE>
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
Asset-backed securities represent participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property, receivables
from revolving credit (credit card) agreements and other categories of
receivables. Such assets are securitiized through the use of trusts and special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation, or other credit enhancements may be present.
Core Fixed Income, 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. To the extent that a Fund
invests in asset-backed securities, the values of such Fund's portfolio
securities will vary with changes in market interest rates generally and the
differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by Mortgage-Backed Securities because asset-backed securities
generally do not have the benefit of a security
B-24
<PAGE>
interest in collateral that is comparable to Mortgage Assets. Credit card
receivables are generally unsecured and the debtors on such receivables are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set-off certain amounts owed
on the credit cards, thereby reducing the balance due. Automobile receivables
generally are secured, but by automobiles rather than residential real property.
Most issuers of automobile receivables permit the loan servicers to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the asset-backed securities. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that, in some cases, recoveries
on repossessed collateral may not be available to support payments on these
securities.
LOAN PARTICIPATIONS
The High Yield Fund may invest in loan participations. Such loans must be
to issuers in whose obligations the High Yield Fund may invest. A loan
participation is an interest in a loan to a U.S. or foreign company or other
borrower which is administered and sold by a financial intermediary. In a
typical corporate loan syndication, a number of lenders, usually banks (co-
lenders), lend a corporate borrower a specified sum pursuant to the terms and
conditions of a loan agreement. One of the co-lenders usually agrees to act as
the agent bank with respect to the loan.
Participation interests acquired by the High Yield Fund may take the form
of a direct or co-lending relationship with the corporate borrower, an
assignment of an interest in the loan by a co-lender or another participant, or
a participation in the seller's share of the loan. When the High Yield Fund
acts as co-lender in connection with a participation interest or when the High
Yield Fund acquires certain participation interests, the High Yield Fund will
have direct recourse against the borrower if the borrower fails to pay scheduled
principal and interest. In cases where the High Yield Fund lacks direct
recourse, it will look to the agent bank to enforce appropriate credit remedies
against the borrower. In these cases, the High Yield Fund may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Fund had purchased a direct obligation (such as commercial
paper) of such borrower. For example, in the event of the bankruptcy or
insolvency of the corporate borrower, a loan participation may be subject to
certain defenses by the borrower as a result of improper conduct by the agent
bank. Moreover, under the terms of the loan participation, the High Yield Fund
may be regarded as a creditor of the agent bank (rather than of the underlying
corporate borrower), so that the High Yield Fund may also be subject to the risk
that the agent bank may
B-25
<PAGE>
become insolvent. The secondary market, if any, for these loan participations is
limited and any loan participations purchased by the High Yield Fund will be
regarded as illiquid.
For purposes of certain investment limitations pertaining to
diversification of the High Yield Fund's portfolio investments, the issuer of a
loan participation will be the underlying borrower. However, in cases where the
High Yield Fund does not have recourse directly against the borrower, both the
borrower and each agent bank and co-lender interposed between the High Yield
Fund and the borrower will be deemed issuers of a loan participation.
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
B-26
<PAGE>
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."
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.
B-27
<PAGE>
CORPORATE DEBT OBLIGATIONS
Core Fixed Income 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.
Fixed income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions or
changing circumstances may weaken their issuers' capacity to pay interest and
repay principal. Medium to lower rated and comparable non-rated securities tend
to offer higher yields than higher rated securities with the same maturities
because the historical financial condition of the issuers of such securities may
not have been as strong as that of other issuers. Since medium to lower rated
securities generally involve greater risks of loss of income and principal than
higher rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Funds' investment
advisers will attempt to reduce these risks through portfolio diversification
and by analysis of each issuer and its ability to make timely payments of income
and principal, as well as broad economic trends and corporate developments.
TRUST PREFERREDS. The Government Income, Core Fixed Income, Global Income
----------------
and High Yield Funds may invest in trust preferred securities. A trust
preferred or capital security is a long dated bond (for example 30 years) with
preferred features. The preferred features are that payment of interest can be
deferred for a specified period without initiating a default event. From a
bondholder's viewpoint, the securities are senior in claim to standard preferred
but are junior to other bondholders. From the issuer's viewpoint, the
securities are attractive because their interest is deductible for tax purposes
like other types of debt instruments.
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-28
<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 IBCA, inc. 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
B-29
<PAGE>
subsequent to their acquisition will not affect cash income from such securities
but will be reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield Fixed-Income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace such
security with a lower-yielding security, resulting in
B-30
<PAGE>
a decreased return for investors. In addition, if the High Yield Fund
experiences unexpected net redemptions of the High Yield Fund's shares, it may
be forced to sell its higher-rated securities, resulting in a decline in the
overall credit quality of the High Yield Fund's portfolio and increasing the
exposure of the High Yield Fund to the risks of high yield securities. The High
Yield Fund may also incur additional expenses to the extent that it is required
to seek recovery upon a default in the payment of principal or interest on a
portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment grade
and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Fixed Income 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
B-31
<PAGE>
arising from possible financial difficulties of borrowers play an important part
in the operations of this industry.
Municipal Securities
Core Fixed Income, 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 Fixed
Income 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
B-32
<PAGE>
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 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 Fixed Income 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 Fixed Income, 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
B-33
<PAGE>
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 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 Fixed Income, 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.
B-34
<PAGE>
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 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
B-35
<PAGE>
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
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 Fixed Income 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 Fixed Income'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
B-36
<PAGE>
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 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 Fixed Income, 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.
B-37
<PAGE>
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 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
B-38
<PAGE>
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 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 Fixed Income, 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
B-39
<PAGE>
certain special considerations, including those set forth below, which are not
typically associated with investing in U.S. issuers. Investments in the
securities of foreign issuers usually involve currencies of foreign countries,
and since Core Fixed Income, High Yield and Global Income Funds may temporarily
hold funds in bank deposits in foreign currencies during completion of
investment programs, Core Fixed Income, 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. A Fund may be subject to currency exposure
independent of its securities positions.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad. To the extent that a
substantial portion of a Fund's total assets, adjusted to reflect the Fund's net
position after giving effect to currency transactions, is denominated or quoted
in the currencies of foreign countries, the Fund will be more susceptible to the
risk of adverse economic and political developments within those countries. A
Fund's net currency positions may expose it to risks independent of its
securities positions. In addition, if the payment declines in value against the
U.S. dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a comparable U.S.
company. Volume and liquidity in most foreign bond markets are less than in the
United States markets and securities of many foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Fixed
commissions on foreign securities exchanges are generally higher than negotiated
commissions on U.S. exchanges, although each Fund endeavors to achieve the most
favorable net results on its portfolio transactions. There is generally less
government supervision and regulation of securities markets and exchanges,
brokers, dealers and listed and unlisted 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.
B-40
<PAGE>
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 Fixed Income, High Yield Fund or
Global Income Fund is uninvested and no return is earned on such assets. The
inability of Core Fixed Income, 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
Fixed Income, High Yield Fund or Global Income Fund due to subsequent declines
in value of the portfolio securities, or, if Core Fixed Income, 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 Fixed Income 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 price accurately its portfolio securities or
to dispose of such securities at the times determined to be appropriate. The
risks associated with reduced liquidity may be particularly acute to the extent
that 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
B-41
<PAGE>
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 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.
B-42
<PAGE>
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 Fixed Income 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 Fixed Income may either accept or make delivery of the currency
specified in the contract or, at or prior to maturity, enter into a closing
purchase transaction involving the purchase or sale of an offsetting contract.
Closing purchase transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract.
B-43
<PAGE>
Global Income, High Yield or Core Fixed Income Incomes may enter into
forward foreign currency exchange contracts in several circumstances. First,
when Global Income, High Yield or Core Fixed Income 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 Fixed Income 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 Fixed Income 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 Fixed Income 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 Fixed Income Fund 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 Fixed Income may also
purchase and sell forward contracts to seek to increase total return when the
Advisers anticipate that the foreign currency will appreciate or depreciate in
value, but securities quoted or denominated in that currency do not present
attractive investment opportunities and are not held in a Fund's portfolio.
B-44
<PAGE>
Global Income, High Yield and Core Fixed Income 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 Fixed Income and High Yield Funds will not enter into a
forward contract with a term of greater than one year.
While Global Income, Core Fixed Income 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
Fixed Income 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 Fixed Income 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.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. Since a forward foreign currency exchange contract
is not guaranteed by an exchange or clearinghouse, a default on the contract
would deprive an Underlying Fund of unrealized profits or force the Fund to
cover its commitments for purchase or resale, if any, at the current market
price.
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-
B-45
<PAGE>
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 Fixed Income, Adjustable Rate, Government Income, Short Duration
Government, Global Income and High Yield Funds may enter into mortgage swaps and
Core Fixed Income 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. To the extent that the net amount payable under an
B-46
<PAGE>
interest rate, index or mortgage swap and the entire amount of the payment
stream payable by a Fund under a currency swap or an interest rate floor, cap or
collar is held in a segregated account consisting of cash or liquid assets the
Funds and their investment advisers believe that transactions do not constitute
senior securities under the Act and, accordingly, will not treat them as being
subject to a Fund's borrowing restrictions.
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 investment advisers, under the supervision of the Board of Trustees, are
responsible for determining and monitoring the liquidity of the Funds'
transactions in swaps, caps, floors and collars.
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 such Fund to sell specified securities
to the holder of the option at a specified price if the option is exercised at
any time before the expiration date. All call options written by a Fund are
covered, which means that such Fund will own the securities subject to the
option so long as the option is outstanding or such Fund will use the other
methods described below. The Fund's purpose in writing covered call options is
to realize greater income than would be realized on portfolio securities
transactions alone. However, a
B-47
<PAGE>
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. All put options written by a
Fund would be covered, which means that such Fund would have deposited with its
custodian cash or liquid assets with a value at least equal to the exercise
price of the put option. The purpose of writing such options is to generate
additional income for the Fund. However, in return for the option premium, each
Fund accepts the risk that it may be required to purchase the underlying
securities at a price in excess of the securities' market value at the time of
purchase.
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 Fixed Income 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
B-48
<PAGE>
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 options 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 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
B-49
<PAGE>
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 Fixed Income,
----------------------------------------------------
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
Fixed Income 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, Fixed Income and High Yield Funds may
purchase call options on currency to seek to increase total return when the
Advisers anticipate that the currency will appreciate in value, but the
securities denominated or quoted in that currency do not present attractive
investment opportunities and are not included in the Fund's portfolios.
A call option written by Core Fixed Income, 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 Fixed Income, 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;
B-50
<PAGE>
otherwise the Fund would realize either no gain or a loss on the purchase of the
call option.
Core Fixed Income, 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 Fixed
Income, 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.
In addition to using options for the hedging purposes described above, Core
Fixed Income, 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
Fixed Income 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 Fixed Income 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
Fixed Income 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 Fixed Income 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
Fixed Income 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 Fixed
Income 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
Fixed Income for the purpose of benefiting from a decline in the value of
currencies which it does not own. Global Income, High Yield and Core Fixed
Income 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
B-51
<PAGE>
Fixed Income 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 differential between two securities. Such transactions are referred
to as "yield curve" options. In contrast to other types of options, a yield
curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
A Fund may purchase or write yield curve options 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 the Fund 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 in an effort to increase current income
if, in the judgment of the Adviser, the Fund will be able to profit from
movements in the spread between the yields of the underlying securities. The
trading of yield curve options is subject to all of the risks associated with
the trading of other types of options. In addition, however, such options
present a risk of loss even if the yield of one of the underlying securities
remains constant, or if the spread moves in a direction or to an extent which
was not anticipated.
Yield curve options written by a Fund will 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 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
B-52
<PAGE>
securities or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing sale
transaction with respect to options it has purchased, it will have to exercise
the options in order to realize any profit and will incur transaction costs upon
the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
A Fund may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded over-the-counter with broker-dealers who
make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations.
Transactions by an Underlying Fund in options on securities and indices
will be subject to limitations established by each of the exchanges, boards of
trade or other trading facilities 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
or trade or other trading facilities or are held or written in one or more
accounts or through one of 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 or the Funds' investment advisers. An
exchange, board of trade or other trading facility may order the liquidation of
positions found to be in excess of these limits, and it may impose certain other
sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging
B-53
<PAGE>
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 Fixed Income 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 Fixed Income 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 Fixed Income, Global
Income and High Yield Funds may each seek to offset anticipated changes in the
value of a currency in which its portfolio securities, or securities that it
intends to purchase, are quoted or denominated by purchasing and selling futures
contracts on such currencies.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation
B-54
<PAGE>
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 Fixed Income, 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.
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,
B-55
<PAGE>
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 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
B-56
<PAGE>
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.
In addition to bona fide hedging definition, a CFTC regulation permits the
Funds to engage in other futures transactions if the aggregate initial margin
and premiums required to establish such positions in futures contracts and
options on futures do 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.
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government Securities. The only
futures contracts available to hedge a Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies. In
addition, it is not possible to hedge fully or protect against currency
fluctuations affecting the value of securities denominated in foreign currencies
because the value of such securities is likely to fluctuate as a result of
independent factors not related to currency fluctuations.
B-57
<PAGE>
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. 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
B-58
<PAGE>
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 rank senior
to common stocks in an issuer's capital structure and consequently entail less
risk than the issuer's common stock.
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 at an amount at least equal to the market value of the securities
loaned. A Fund would be required to have the right to call a loan and obtain the
securities loaned at any time on five days' notice. For the duration of a loan,
a Fund would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned and would also receive compensation
from investment of the collateral. A Fund would not have the right to vote any
securities having voting rights during the existence of the loan, but a Fund
would call the loan in anticipation of an important vote to be taken among
holders of the securities or the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovering, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the 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, it is
intended that the value of the securities loaned would 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, certain SMBS, municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted Securities, unless the
Board of Trustees determines, based upon a continuing review of the trading
markets for the specific Restricted Securities, that such Restricted
B-59
<PAGE>
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.
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 may
reflect a discount from the price at which such securities trade when they are
not restricted, since the restriction make 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 may also sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Funds may also 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 and liquid assets in an amount sufficient to meet the
purchase price. Alternatively, each Fund may enter into offsetting contracts
for the forward sale of other securities that it owns. Securities purchased or
sold on a when-issued or forward commitment basis involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date or
if the value of the security to be sold increases prior to the settlement date.
B-60
<PAGE>
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 or any of its affiliates 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 its affiliates.
The Core Fixed Income, 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
Fixed Income High Yield and Global Income Funds may invest in World Equity
Benchmark Shares ("WEB") 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 is maintained by each Fund's custodian. The repurchase
price may be higher than the purchase price, the difference being income to a
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to a Fund together with the repurchase price on repurchase. In
either case, the income to a Fund is unrelated to the interest rate on the
security subject to the repurchase agreement.
For purposes of the Act and, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event
of commencement of bankruptcy or insolvency proceedings with respect to the
seller of the security before repurchase of the security under a repurchase
agreement, a Fund may encounter delay and incur costs before being able to sell
the security. Such a
B-61
<PAGE>
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 following investment restrictions have been adopted by the Trust as
fundamental policies that cannot be changed without the affirmative vote of the
holders of a majority as defined in the Act of the outstanding voting securities
of the 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 Trust or a Fund present
at a meeting, if the holders of more than 50% of the outstanding shares of the
Trust or a Fund are present or represented by proxy or, (b) more than 50% of the
shares of the Trust or a Fund.
For the purposes of the limitations (except for the asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered
B-62
<PAGE>
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by, a Fund. With respect to the Tax Exempt Funds, the identification
of the issuer of a Municipal Security that is not a general obligation is made
by the Adviser based on the characteristics of the Municipal Security, the most
important of which is the source of funds for the payment of principal and
interest on such securities.
AS A MATTER OF FUNDAMENTAL POLICY, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
Government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in municipal securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other municipal securities. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations;
B-63
<PAGE>
(3) borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% of its total assets (including the amount borrowed), (b)
the Fund may, to the extent permitted by applicable law borrow up to
an additional 5% of its total assets for temporary purposes, (c) the
Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities, (d) the
Fund may purchase securities on margin to the extent permitted by
applicable law and (e) the Fund may engage 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 Fixed Income, 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 Fixed Income, 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; and
(8) issue senior securities to the extent such issuance would violate
applicable law.
Notwithstanding any other fundamental investment restriction or policy,
each Fund may invest some or all of its assets in a single open-end investment
company or series thereof with
B-64
<PAGE>
substantially the same fundamental investment objective, restrictions and
policies as the Fund.
In addition, to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of Shareholders.
A 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 (excluding
covered mortgage dollar rolls) exceed 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 55, 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.
B-65
<PAGE>
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Managing Director, Goldman Sachs since May 1996;
- ---------------------
President, MFS Retirement Services Inc., of Massachusetts Financial Services
prior thereto.
John P. McNulty,* Age 45, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
Mary P. McPherson, Age 62, 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 67, 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 68, 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 Director, Baker, Fentress & Co. (a closed-end non-diversified management
investment company) April 1992 to present.
Richard P. Strubel, Age 58, 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 48, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
B-66
<PAGE>
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since April 1, 1985; Manager,
- ---------
Shareholder Services for GSAM since November 1989.
James A. Fitzpatrick,* Age 33, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President of Goldman Sachs Asset Management since April 1997;
- ---------
Vice President and General Manager, First Data Corporation-Investor Services
Group prior thereto.
Scott M. Gilman,* Age 38, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990.
John M. Perlowski,* Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 37, 85 Broad Street, New York, New York 10004.
Secretary. General Counsel of the Mutual Funds Group of GSAM since December
- ---------
1997; Associate General Counsel of GSAM February 1994 to December 1997; Vice
President and Assistant General Counsel of Goldman Sachs since June 1992;
Counsel to the Funds Group, GSAM since June 1992; Partner, Hale and Dorr from
September 1991 to June 1992.
Howard B. Surloff,* Age 32, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Assistant General Counsel, Goldman Sachs Asset Management and
- ---------
Associate General Counsel to the Funds Group since December 1997; 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 32, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Assistant General Counsel, Goldman Sachs Asset Management
- --------------------
and Associate General Counsel to the Funds Group since December 1997; 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 34, 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 26, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman
- -------------------
B-67
<PAGE>
Sachs from January 1996 to Present. Secretary at Cleary, Gottlieb, Stein and
Hamilton from September 1990 to January 1994.
Kaysie P. Uniacke*, Age 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Managing Director, Goldman Sachs since December 1997; Vice
- -------------------
President and Senior Portfolio Manager, GSAM since 1988.
Elizabeth D. Anderson*, Age 28, 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 February 1, 1998,
the Trustees and officers as a group owned less than 1% of the outstanding
shares of beneficial interest of each Fund.
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, 1997:
Retirement Total
Pension or Benefits Compensation
Aggregate Accrued as from Goldman
Compensation Part of Sachs Trust
from the Trust's (including the
Funds/1/ Expenses Funds)/2/
--------------- ------------ ----------------
Name of Trustees
Ashok N. Bakhru $4,688 $0 $93,750
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
Mary P. McPherson 3,525 0 70,500
Alan A. Shuch 0 0 0
Jackson W. Smart 3,525 0 70,500
William H. Springer 3,525 0 70,500
Richard P. Strubel 3,525 0 70,500
- -------------------------
/1/ Reflects amount paid by Goldman Sachs Trust, a Delaware business trust,
during fiscal year ended October 31, 1997.
/2/ Goldman Sachs Trust consisted of 36 mutual funds, including eight fixed-
income Funds, on October 31, 1997.
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 Fixed
B-68
<PAGE>
Income pursuant to a management agreement. GSFM, One New York Plaza, New York,
New York 10004, serves as the investment adviser to Adjustable Rate Government
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 also 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 City,
Milan, Montreal, Osaka, Paris, Sao Paulo, Seoul, Shanghai, Singapore, Sydney,
Taipei, Tokyo, Toronto, Vancouver and Zurich. It has trading professionals
throughout the United States, as well as in London, Tokyo, Hong Kong and
Singapore. The active participation of Goldman Sachs in the world's financial
markets enhances its ability to identify attractive investments.
The 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, the Goldman Sachs Global 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 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
B-69
<PAGE>
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 $4.6
billion in tax-free securities in 1997, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
In structuring Adjustable Rate Government 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 Government 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 SMBS).
With respect to the Adjustable Rate Government Fund, Government Income
Fund, Short Duration Government Fund, High Yield Fund and Core Fixed Income
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
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and prepayment
B-70
<PAGE>
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 Government Fund,
Government Income Fund, Short Duration Government Fund and Core Fixed Income
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
B-71
<PAGE>
these services to third parties or using such services as a basis for trading
for its own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
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 the expectations of Goldman
Sachs' professionals expectations to produce an optimal currency and asset
allocation for the level of risk suitable for the Fund's investment objective
and criteria.
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. The
Management Agreements were most
B-72
<PAGE>
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 Management
Agreement was approved by the shareholders of Adjustable Rate Government 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 Fixed Income 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.
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:
Rate for Period or
Contractual Year Ended
Fund Rate* October 31, 1997
---- ---- ----------------
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .40% .40%
Core Fixed Income .40% .40%
High Yield .70% .65%
GSFM
Short Duration Government .50% .40%
Adjustable Rate Government .40% .40%
GSAMI .90% .59%
Global Income
_____________________
* With respect to the Government Income, Municipal Income and Global Income
Funds, a Management Agreement combining both advisory and administration
services (and subadvisory services in the case of Global Income Fund) was
adopted effective April 30, 1997. The Management Agreements for the other
Funds previously combined such services. The
B-73
<PAGE>
contractual rate set forth in the table is the rate payable under the
Management Agreements (and, in the case of Government Income, Municipal
Income and Global Income Funds, is identical to the aggregate advisory,
subadvisory and administration fee rate payable by such Funds under the
previously separate investment advisory, subadvisory and administration
agreements). For the fiscal year ended October 31, 1997, the annual rate
expressed is the combined advisory and administration fees paid (after
voluntary fee limitations).
For the fiscal years ended October 31, 1997, 1996 and 1995, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
1997 1996 1995
---- ---- ----
Adjustable Rate Government $2,293,118 $2,535,709 $2,947,492
Short Duration Government/1/ 422,632 411,360 517,091
Short Duration Tax-Free 144,157 169,796 260,970
Core Fixed Income 334,580 246,568 137,158
Global Income/2//5/ 1,415,050 1,117,226 706,460
Government Income/3//5/ 134,628 74,060 44,037
Municipal Income/4/ 320,868 211,283 154,707
High Yield/6/ 407,474 N/A N/A
_________________________
/1/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $528,290, $514,200 and $646,364
respectively, for such years.
/2/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of $0,
$837,920 and $1,412,921, respectively. If expense limitations had not been
in effect, Global Income Fund would have paid advisory and subadvisory fees
of $2,158,925 for the year ended October 31, 1997 and $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.
/3/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $350,034, $148,120 and $101,737 respectively,
for such years.
/4/ Had expense limitations not been in effect for the year ended October 31,
1995, Municipal Income Fund would have paid advisory fees of $200,207 for
the year.
/5/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
/6/ High Yield Fund commenced operations on August 1, 1997. Had expense
limitations not been in effect, High Yield Fund would have paid $438,819
for the period.
B-74
<PAGE>
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 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 both on a proprietary
basis and or 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
B-75
<PAGE>
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.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which the Advisers and/or their
affiliates are performing services or when position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods in
which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also possible.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Funds in certain emerging markets in which
limitations are imposed upon the
B-76
<PAGE>
aggregate amount of investment, in the aggregate or individual issuers, by
affiliated foreign investors.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income, High Yield and Core Fixed Income 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, ubject 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 Goldman Sachs or its affiliates to give advice to clients that
may cause these clients to take actions adverse to the interests of the client.
To the extent affiliated transactions are permitted, the Funds will deal with
Goldman Sachs and its affiliates on an arms-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit
B-77
<PAGE>
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 the Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
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 year ended October 31, 1995. No Class C Shares
were outstanding during the fiscal years ended October 31, 1995 and 1996.
Goldman Sachs retained approximately the following combined commissions on sales
of Class A, B and C Shares during the following periods:
1997 1996 1995
---- ---- ----
Adjustable Rate Government/1/ $ 156,000 $79,000 $40,000
Municipal Income/2/ 57,000 24,900 48,000
Government Income/2/ 193,000 17,300 22,000
Global Income/2/ 176,000 52,600 15,000
Short Duration Government/3/ 63,000 N/A N/A
Short Duration Tax-Free/3/ 6,000 N/A N/A
Core Fixed Income/3/ 14,000 N/A N/A
High Yield/3/ 3,194,000 N/A N/A
_____________________
/1/ The Adjustable Rate Government Fund does not offer Class B and C Shares.
B-78
<PAGE>
/2/ Prior to May 1, 1996 and August 15, 1997, the Municipal Income, Government
Income and Global Income Funds did not offer Class B and Class C Shares
respectively.
/3/ Prior to May 1, 1996 and August 15, 1997, Short Duration, Short Duration
Tax-Free, and Core Fixed Income Funds did not offer Class A and B and C
Shares, respectively. High Yield Fund commenced operations on August 1,
1997 with the exception of Class C Shares which commenced August 15, 1997.
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 assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs received fees for the fiscal years
ended October 31, 1997, 1996 and 1995 by each Fund then in existence as follows:
Fund 1997 1996 1995
- ---- ---- ---- ----
Adjustable Rate Government $272,449 $278,337 $306,662
Short Duration Government 77,989 0 0
Short Duration Tax-Free 61,185 16,980 26,098
Core Fixed Income 85,882 24,657 13,716
Global Income 106,886 121,212 106,764
Municipal Income 152,152 90,284 63,695
Government Income Fund 163,181 72,237 94,095
High Yield Fund/1/ 27,280 N/A N/A
________________________
/1/ High Yield Fund commenced operations on August 1, 1997.
The foregoing distribution and transfer agency agreements each provide that
Goldman Sachs may render similar services to others so long as the services each
provides thereunder to the Funds are not impaired thereby. Each such agreement
also provides that the Trust will indemnify Goldman Sachs against certain
liabilities.
B-79
<PAGE>
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser, the fees and expenses of
the Trust's custodian, transfer agent fees, brokerage fees and commissions,
filing fees for the registration or qualification of the Trust's shares under
federal or state securities laws, expenses of the organization of the Trust,
fees and expenses incurred by the Trust in connection with membership in
investment company organizations, taxes, interest, costs of liability insurance,
fidelity bonds or indemnification, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal, tax and auditing fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees in the case
of Global Income Fund and High Yield Fund and other extraordinary expenses) to
the following percentage of each Fund's average daily net assets:
Short Duration Government Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fixed Income 0.05%
Global Income Fund 0.06%
High Yield Fund 0.14%
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 years ended October 31, 1997,
B-80
<PAGE>
October 31, 1996 and October 31, 1995, Other Expenses of each Fund were reduced
by the Advisers in the following amounts:
1997 1996 1995
---- ---- ----
Adjustable Rate Government $191,739 $386,863 $551,405
Short Duration Government 285,329 169,069 219,994
Short Duration Tax-Free 282,291 238,097 213,139
Core Fixed Income 311,343 233,065 176,469
Municipal Income 299,884 238,203 196,265
Government Income 364,989 219,091 242,036
Global Income 223,969 337,079 70,195
High Yield* 200,097 N/A N/A
______________________
* High Yield Fund commenced operations on August 1, 1997.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by the
Advisers in performing certain accounting services not being provided by the
Trust's custodian.
CUSTODIAN AND SUB-CUSTODIANS
- ----------------------------
State Street Bank and Trust Company ("State Street"), 1776 Heritage Drive,
North Quincy, Massachusetts 02110, 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 Place,
Boston, Massachusetts 02110, have been selected as auditors of the Trust. In
addition to audit services, Arthur Andersen LLP prepares the Trust's federal and
state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a dealer is dealing with a Fund as
principal and receives compensation equal to the spread between the dealer's
cost for a given security and the resale price of such security). In certain
foreign countries, debt securities in which the Global Income Fund, Core Fixed
Income and High Yield Funds 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
B-81
<PAGE>
occasions when an Adviser deems the purchase or sale of a security to be in the
best interests of a Fund as well as its other customers (including any other
fund or other investment company or advisory account for which the Advisers or
an affiliate act as investment adviser), a Fund, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution. In
such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the applicable Adviser in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to the applicable Fund and such other customers. In some instances,
this procedure may adversely affect the size and price of the position
obtainable for a Fund. The Management Agreement permits each Adviser, in its
discretion, to purchase and sell portfolio securities to and from dealers who
provide the Trust with brokerage or research services in which dealers may
execute brokerage transactions at a higher cost to the Fund. Brokerage and
research services furnished by firms through which the Fund's effect their
securities transactions may be used by the Advisers in servicing other accounts
and not all of these services may be used by the Adviser in connection with the
specific Fund generating the brokerage credits. The fees received under the
Management Agreement are not reduced by reason of the Adviser receiving such
brokerage and research services. In addition, in selecting brokers and dealers,
the Advisers may take into account sales of shares of the Funds and other funds
in the Goldman Sachs Group of Funds by such brokers and dealers.
For the fiscal year ended October 31, 1995, the Funds then in existence
paid no brokerage commissions.
B-82
<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-83
<PAGE>
For the fiscal year ended October 31, 1997, 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, 1997:
Adjustable Rate Fund $61,000 $61,000(100%)/1/ $739,605,010(100%)/2/ N/A$
Short Duration Government Fund 19,000 19,000(100%)/1/ 494,733,847(100%)/2/ N/A
Core Fixed Income Fund 3,000 3,000(100%)/1/ 8,429,994(100%)/2/ N/A
Government Income Fund 2,400 2,400(100%)/1/ 26,765,840(100%)/2/ N/A
Municipal Income Fund 1,800 1,800(100%)/1/ 33,112,625(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-84
<PAGE>
During the fiscal year ended October 31, 1997, the Funds acquired and sold
securities of their regular broker-dealers: Smith Barnery, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Dresdner Bank, Sanwa
Securities, J.P. Morgan & Co., Inc., Bear Stearns & Co., Nomura Securities and
Morgan Stanley & Co.
At October 31, 1997, Short Duration Tax-Free Fund and Municipal Income Fund
held no securities of their regular broker-dealers. As of the same date, Short
Duration Government Fund, Global Income Fund, Adjustable Rate Government Fund,
Government Income Fund, Core Fixed Income Fund and High Yield Fund held the
following amounts of securities of their regular broker-dealers, as defined in
Rule 10b-1 under the Act, or their parents ($ in thousands): Short Duration
Government Fund: Lehman Brothers, Inc. ($1,350), Nomura Securities ($1,680) and
Bear Stearns ($1,680); Global Income: Morgan Stanley ($681); Adjustable Rate
Government Fund: Lehman Brothers, Inc. ($1,856), Bear Stearns ($2,310) and
Nomura Securities ($2,310); Government Income Fund: Lehman Brothers, Inc.
($6,209), Nomura Securities ($7,200), Bear Stearns ($7,200); Salomon Brothers
($959); J.P. Morgan & Co. ($523); Morgan Stanley & Co. ($523) and Merrill Lynch
($2,240); Core Fixed Income: Lehman Brothers, Inc. ($7,143), Nomura Securities
($8,100), Bear Stearns ($8,100), J.P. Morgan ($1,046) and Morgan Stanley & Co.
($943). High Yield Fund: Bear Stearns ($2,580) and Lehman Brothers, Inc.
($2,073).
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 Fixed Income:
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 Government 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, 1997, no Service Shares of the
Adjustable Rate Government Fund were outstanding; no Class A, Class B or Class C
Shares of Short Duration Government Fund, Short Duration Tax-Free Fund and Core
Fixed Income were outstanding; no Class C Shares of
B-85
<PAGE>
Government Income Fund and Municipal Income Fund were outstanding; and no shares
of High Yield Fund were outstanding.
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 among 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 series. 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 attributed 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
B-86
<PAGE>
also bear the cost of an Authorized Dealer Service Plan at an annual rate of up
to 0.25% of average daily net assets attributed to Class A Shares.
Class B and Class C 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 and
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 attributed to Class B and
Class C Shares. Class B and 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 attributed to Class B and 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, shares are fully paid and non-assessable. In the event of
liquidation of a Fund, shareholders of that Fund are entitled to share pro rata
in the net assets of the applicable class of the relevant Fund available for
distribution to such shareholders. All shares are freely transferable and have
no preemptive, subscription or conversion rights.
As of February 1, 1998, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following funds: Adjustable
Rate Government Fund -- First Trust of New York, 100 Wall Street, Suite 1600,
New York, NY (14.19%); State Treasurer/Nebraska Investment Council, 841 "O"
Street, Suite 500, Lincoln, NE 68508 (8.08%); First Security Bank of Idaho FBO,
Idaho Housing Agency, P.O. BOX 30007, Salt Lake City, UT 84130 (7.55%); Meadows
Foundation Inc., 3003 Swiss Avenue, Dallas, TX 75204 (5.15%); Regents of the
University oF Minnesota, 100 Church Street SE, Room 311A, Minneapolis, MN 55455
(5.08%); Short Duration Government Fund -- Central Carolina Bank & Trust Co.,
P.O. Box 931, Durham, NC 27702, (6.10%); State Street Bank & Trust Co.,
(29.64%); P.O. Box 1992, Boston, MA 02105 (24.69%);
B-87
<PAGE>
Richfield Bank & Trust Co., Kirchbak Co., 6625 Lyndale Avenue South, Richfield,
MN 55423 (5.50%); Norwest Bank Iowa NA, P.O. Box 1450 NW 8477, Minneapolis, MN
55480 (6.65%); Short Duration Tax-free Fund -- Donald R. Gant, Partner, Goldman,
Sachs & Co., 85 Broad Street, 22nd Floor, New York, NY 10004 (15.20%); K-G,
Inc., 166 Oak Knoll Terrace, Highland Park, IL 60035 (8.97%); Lafayette American
Bank C/o Hubco, 1000 Macarthur Blvd., Mahwah, NJ 07430 (7.34%); Nelda Start,
P.O. Box 909, Orange, TX 77631-0909 (6.62%); Government Income Fund -- Frontier
Trust Co., Inc. TR, FBO Dade County Public Schools, 1720 S. Gadsden Street,
Tallahassee, FL 32301-5547 (5.4%); Core Fixed Income -- Local 234 Electric
Workers Retirement Fund, 10300 Merritt Street, Castroville, CA 95012 (5.29%);
Vinson and Elkins Pension Plan C/o Banc One, 910 Travis Street, Fl 6, Houston,
TX 77002-5802 (7.88%); Vinson and Elkins Lawyers, Retirement Plan, Texas
Commerce Bank N.A., P.O. Box 2550, Houston, TX 77252 (25.48%) Norwest Bank Iowa,
P.O. Box 1450 NW 8477, Minneapolis, MN 55480 (5.25%); Global Income Fund --
First National Bank North Dakota, P.O. Box 6001, Grand Forks, ND 58206-6001
(5.4%); State Street Bank and Trust, GS Profit Sharing Master Trust, P.O. Box
1992, Boston, MA 02105-1992 (15.9%).
Rule 18f-2 under the Act provides that any matter required to be submitted
by the provisions of the Act or applicable state law, or otherwise, to the
holders of the outstanding voting securities of an investment company such as
the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of 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 as "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters
B-88
<PAGE>
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 with
substantially the same investment objective, restrictions and policies.
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
B-89
<PAGE>
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 an 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 of Delaware business trust
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 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 and to employ other advisers in considering the merits
of the request and shall require an undertaking by the shareholders making such
request to reimburse the Fund for the expense of any such advisers in the event
that the Trustees determine not to bring such action.
B-90
<PAGE>
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
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 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, but not always, 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 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
government 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 one dealer; (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 (if
quotations are unavailable from a pricing service or, if the quotations by the
Adviser are believed to be inaccurate, the contracts will be valued by
calculating the mean between the last bid and asked quotations supplied by at
least one 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 a broker identified by the
portfolio manager/trader.
B-91
<PAGE>
In addition, 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 will be valued at the mean between the closing bid and asked prices, or
if closing bid and asked prices are not available, at the exchange defined close
price on the exchange or system in which such securities are principally traded.
If the relevant exchange or system has not closed by the time for determining
the Fund's net asset value; the securities will be valued at the mean between
the bid and asked prices at the time the net asset value is determined. 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.
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 Fixed Income and
High Yield Funds calculate their net asset value. Occasionally, events affecting
the values of such securities may occur between the times at which they are
determined and the calculation of net asset value which will not be reflected in
the computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value, in which case an adjustment
may be made.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities,
B-92
<PAGE>
insurance companies and financial institutions. Each prospective shareholder is
urged to consult his own tax adviser with respect to the specific federal,
state, local and foreign tax consequences of investing in the Funds. This
summary is based on the laws in effect on the date of this Additional Statement,
which are subject to change.
GENERAL
-------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect to
be treated and intends to continue to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) a Fund derive at least 90% of its gross income
(including tax-exempt interest) for its taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stocks or securities, or foreign currencies or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"); and (b) 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.
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 Fixed Income'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
Fixed Income'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
B-93
<PAGE>
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, if any, over certain
disallowed deductions ("net tax-exempt interest"). A Fund may retain for
investment its "net capital gain" (which consists of the excess of its net long-
term capital gain over its net short-term capital loss). However, if a Fund
retains any investment company taxable income or net capital gain, it will be
subject to tax at regular corporate rates on the amount retained. If a Fund
retains any net capital gain, that Fund may designate the retained amount as
undistributed net capital gain in a notice to its shareholders who, if subject
to U.S. federal income tax on long-term capital gains, (i) will be required to
include in income for federal income tax purposes, as long-term capital gain,
their shares of such undistributed amount, and (ii) will be entitled to credit
their proportionate shares of the tax paid by that Fund against their U.S.
federal income tax liabilities, if any, and to claim refunds to the extent the
credit exceeds such liabilities. For U.S. federal income tax purposes, the tax
basis of shares owned by a shareholder of the Fund will be increased by an
amount equal under current law to 65% of the amount of undistributed net capital
gain included in the shareholder's gross income. Each Fund intends to distribute
for each taxable year to its shareholders all or substantially all of its
investment company taxable income (if any), net capital gain and any net tax-
exempt interest. Exchange control or other foreign laws, regulations or
practices may restrict repatriation of investment income, capital or the
proceeds of securities sales by foreign investors such as Global Income Fund or
Core Fixed Income and may therefore make it more difficult for Global Income
Fund or Core Fixed Income to satisfy the distribution requirements described
above, as well as the excise tax distribution requirements described below.
However, Global Income Fund and Core Fixed Income 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
B-94
<PAGE>
of the loss. At October 31, 1997, the Funds had approximately the following
amounts of capital loss carry forwards:
Years of
Amount Expiration
------ ----------
Adjustable Rate Government $49,069,000 2000-2004
Short Duration Government 14,144,000 2002-2004
Short Duration Tax-Free 4,058,000 2002-2003
Municipal Income 641,973 2004
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 that are actually paid
in January of the following year will be treated as if they were received by
shareholders on December 31 of the year declared.
The Tax Exempt Funds may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." The Tax Exempt Funds may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
that 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
B-95
<PAGE>
Service has also issued private letter rulings to certain taxpayers (which do
not serve as precedent for other taxpayers) to the effect that tax-exempt
interest received by a regulated investment company with respect to such
obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax Exempt Funds intends to take
the position that it is the owner of any municipal obligations acquired subject
to a standby commitment or other third party put and that tax-exempt interest
earned with respect to such municipal obligations will be tax-exempt in its
hands. There is no assurance that the Service will agree with such position in
any particular case. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the treatment of tender fees paid
by these Funds, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Tax Exempt
Funds' portfolios in a manner designed to minimize any adverse impact from the
tax rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging 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 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
B-96
<PAGE>
affect the amount, timing and character of income, gain or loss recognized by
Core Fixed Income and Global Income Fund. Under these rules, foreign exchange
gain or loss realized by Core Fixed Income 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 Fixed Income'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 Fixed Income, Global Income, and High Yield Funds may be subject to
foreign taxes on income (possibly including, in some cases, capital gains) from
foreign securities. Tax conventions between certain countries and the U.S. may
reduce or eliminate such taxes in some cases. Because more than 50% of Global
Income Fund's total assets at the close of any taxable year will generally
consist of stock or securities of foreign corporations, Global Income Fund will
generally qualify to file an election with the Internal Revenue Service pursuant
to which shareholders of Global Income Fund would be required to (i) include in
ordinary gross income (in addition to taxable dividends actually received) their
pro rata shares of foreign income taxes paid by Global Income Fund that are
treated as income taxes under U.S. tax regulations (which excludes, for example,
stamp taxes, securities transaction taxes, and similar taxes) even though not
actually received by such shareholders, and (ii) treat such respective pro rata
portions as foreign income taxes paid by them. Global Income Fund may or may
not make this election for any particular taxable year. Core Fixed Income and
High Yield Funds will not satisfy the 50% requirement described above and,
therefore, will not make this election. Core Fixed Income and High Yield Funds
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
B-97
<PAGE>
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 Fixed Income, Global Income or High Yield Funds acquire stock
(including, under proposed regulations, an option to acquire stock such as is
inherent in a convertible bond) in certain foreign corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, rents, royalties or capital gain) or hold at least 50% of their
assets in investments producing such passive income ("passive foreign investment
companies") Core Fixed Income, 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 Fixed
Income, Global Income or High Yield Funds is timely distributed to its
shareholders. Core Fixed Income, 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 Fixed Income, Global
Income or High Yield Funds to recognize taxable income or gain without the
concurrent receipt of cash. Core Fixed Income, Global Income or High Yield Funds
may limit and/or manage
B-98
<PAGE>
their holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
A Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark-to-market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS DISTRIBUTIONS
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations concerning the tax-exempt status of such obligations, nor does it
guarantee or represent that bond counsels' opinions are correct. Bond counsels'
opinions will generally be based in part upon covenants by the issuers and
related parties regarding continuing compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex 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
B-99
<PAGE>
availability of tax-exempt obligations and the value of a Tax Exempt Fund's
portfolio may be affected by restrictive federal income tax legislation enacted
in recent years or by similar, future legislation. If a Tax Exempt Fund
satisfies the applicable requirements, dividends paid by the Fund which are
attributable to tax exempt interest on Municipal Securities and designated by
the Fund as exempt-interest dividends in a written notice mailed to its
shareholders within sixty days after the close of its taxable year may be
treated by shareholders as items of interest excludable from their gross income
under Section 103(a) of the Code. Exempt-interest dividends a Tax Exempt Fund
receives from other regulated investment companies, including exempt-interest
dividends on auction rate preferred securities of such companies held by a Fund,
are treated as interest on Municipal Securities and may be distributed by a Tax
Exempt Fund as exempt-interest dividends. The recipient of tax-exempt income is
required to report such income on his federal income tax return. However, a
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain the exclusion under Section 103(a) if such
shareholder would be treated as a "substantial user" under Section 147(a)(1)
with respect to some or all of the tax-exempt obligations held by a Tax Exempt
Fund. The Code provides that interest on indebtedness incurred or continued to
purchase or carry shares of a Tax Exempt Fund is not deductible to the extent
attributable to exempt-interest dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions from investment company taxable income, as
defined above, are taxable to shareholders who are subject to tax as ordinary
income whether paid in cash or reinvested in additional shares. Taxable
distributions include distributions from any Fund, including Short Duration Tax-
Free Fund and Municipal Income Fund, that are attributable to (i) 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
B-100
<PAGE>
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 (20% or 28%, as applicable) whether
received in cash or additional shares and regardless of the length of time their
shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less than a
minimum period, generally 46 days. Receipt of certain distributions qualifying
for the deduction may result in reduction of the tax basis of the corporate
shareholder's shares and may give rise to or increase its liability for federal
corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes, will first reduce a
shareholder's basis in his shares and, after the shareholder's basis is reduced
to zero, will generally constitute capital gains to a shareholder who holds his
shares as capital assets. Amounts that are not allowable as a deduction in
computing taxable income, including expenses associated with earning tax-exempt
interest income, do not reduce a Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of Short Duration Tax-Free Fund's
or Municipal Income Fund's distributions from gross tax-exempt interest income
that exceeds its net tax-exempt interest would be taxable as ordinary income to
the extent of such disallowed deductions even though such excess portion may
represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash and will have a cost basis in the shares received equal
to such amount.
After the close of each calendar year, each Fund will inform shareholders
of the federal income tax status of its dividends and distributions for such
year, including the portion of such
B-101
<PAGE>
dividends, if any, that qualifies as tax-exempt or as capital gain, the portion,
if any, that should be treated as a tax preference item for purposes of the
federal alternative minimum tax and the foreign tax credits, if any, associated
with such dividends. 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.
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
Government 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
B-102
<PAGE>
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.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish the Funds with their correct taxpayer identification number and with
certain required certifications or if the Service or a broker notifies the Funds
that the number furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from Short
Duration Tax-Free Fund or Municipal Income Fund will not be subject to backup
withholding if the applicable Fund reasonably estimates that at least 95% of its
distributions will be exempt-interest dividends. A Fund may refuse to accept an
application that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment 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
B-103
<PAGE>
by an applicable tax treaty) unless the dividends are effectively connected with
a U.S. trade or business of the shareholder, in which case the dividends will be
subject to tax on a net income basis at the graduated rates applicable to U.S.
individuals or domestic corporations. Distributions of net capital gain,
including amounts retained by a Fund which are designated as undistributed
capital gains, to a shareholder who is not a U.S. person will not be subject to
U.S. federal income or withholding tax unless the distributions are effectively
connected with the shareholder's trade or business in the United States or, in
the case of a shareholder who is a nonresident alien individual, the shareholder
is present in the United States for 183 days or more during the taxable year and
certain other conditions are met. Non-U.S. shareholders may also be subject to
U.S. withholding tax on deemed income resulting from any election by Global
Income Fund to treat qualified foreign taxes it pays as passed through to
shareholders (as described above), but they may not be able to claim a U.S. tax
credit or deduction with respect to such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder
B-104
<PAGE>
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.
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
B-105
<PAGE>
Thirty-day yield, tax equivalent yield (Short Duration Tax- Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A, 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.
The Service Shares of Global Income Fund commenced operations on March 12,
1997; the Service Shares of Government Income and Municipal Income Funds
commenced operations on August 15, 1997. The Service Shares of these Funds had
no operating or performance history prior thereto. However, in accordance with
interpretive positions expressed by the staff of the SEC, each of these Funds
has adopted the performance records of its respective Class A shares from that
class' inception date (August 2, 1991, February 10, 1993 and July 20, 1993,
respectively) to the inception dates of the Service Shares stated above.
Quotations of performance data of these Funds relating to this period include
the performance record of the applicable Class A Shares (excluding the impact of
any applicable front-end sales charge). The performance records of the
applicable Class A Shares reflect the expenses actually incurred by the Fund.
These expenses include any asset-based sales charges (i.e., fees under
distribution and Authorized Dealer Service Plans) imposed and other operating
expenses. Total return quotations will be calculated pursuant to SEC-approved
methodology.
B-106
<PAGE>
YIELD
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield(1)
- ----------------------------------- ------------ -------------- -------------
30-Days
ended
10/31/97
ADJUSTABLE RATE GOVERNMENT FUND
Institutional Shares 5.98% 5.98%
Administration Shares 5.74% 5.74%
Service Shares(2) 5.48% 5.48%
Class A Shares
(assumes 1.5% sales charge) 5.64% 5.39%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.19% 5.82%
Administration Shares 5.93% 5.55%
Service Shares 5.68% 5.31%
Class A Shares(4)
(assumes 2.0% sales charge) 5.75% 5.14%
Class B Shares(4) 5.35% 4.82%
Class C Shares(5) N/A N/A
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.09% 3.30%
Administration Shares 3.84% 3.05%
Service Shares 3.59% 2.81%
Class A Shares(4)
(assumes 2.0% sales charge) 3.77% 2.78%
Class B Shares(4) 3.23% 2.28%
Class C Shares(5) N/A N/A
CORE FIXED INCOME
Institutional Shares 6.27% 5.89%
Administration Shares 6.03% 5.66%
Service Shares 5.76% 5.38%
Class A Shares(4)
(assumes 4.5% sales charge) 5.75% 5.14%
Class B Shares(4) 5.27% 4.89%
Class C Shares(5) 5.23% 4.82%
GLOBAL INCOME FUND
Institutional Shares 5.10% 4.66%
Service Shares(2) 4.59% 4.15%
Class A Shares
(assumes 4.5% sales charge) 4.36% 3.95%
Class B Shares 4.02% 3.64%
Class C Shares(7) 4.01% 3.63%
B-107
<PAGE>
YIELD
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield(1)
- ----------------------------------- ------------ -------------- -------------
30-Days
ended
10/31/97
MUNICIPAL INCOME FUND
Institutional Shares(6) N/A N/A
Service Shares (6) N/A N/A
Class A Shares 4.16% 3.42%
(assumes 4.5% sales charge)
Class B Shares 3.60% 3.08%
Class C Shares(7) 3.61% 2.97%
GOVERNMENT INCOME FUND
Institutional Shares(6) N/A N/A
Service Shares(6) N/A N/A
Class A Shares
(assumes 4.5% sales charge) 5.81% 4.54%
Class B Shares 5.33% 4.26%
Class C Shares(7) 5.31% 4.22%
HIGH YIELD FUND(8)
Institutional Shares N/A N/A
Service Shares N/A N/A
Class A Shares
(assumes 4.5% sales charge) N/A N/A
Class B Shares N/A N/A
Class C Shares(7) N/A N/A
B-108
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate(1)
- ----------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
30 Days
ended
10/31/97
ADJUSTABLE RATE GOVERMENT FUND
Institutional Shares 6.00% 6.00%
Administration Shares 5.75% 5.75%
Service Shares(2) 5.50% 5.50%
Class A Shares
assumes no sales charge 5.75% 5.47%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.15% 5.78%
Administration Shares 5.89% 5.51%
Service Shares 5.65% 5.28%
Class A Shares(4)
assumes no sales charge 5.90% 5.27%
Class B Shares(4) 5.29% 4.77%
Class C Shares(5) 5.13% 4.75%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.04% 3.25%
Administration Shares 3.79% 3.00%
Service Shares(4) 3.54% 2.76%
Class A Shares
assumes no sales charge 3.79% 2.79%
Class B Shares(4) 3.18% 2.24%
Class C Shares(5) 2.99% 2.03%
CORE FIXED INCOME
Institutional Shares 6.15% 5.77%
Administration Shares 5.90% 5.53%
Service Shares(4) 5.64% 5.27%
Class A Shares
assumes no sales charge 5.90% 5.27%
Class B Shares(4) 5.15% 4.77%
Class C Shares(5) 5.10% 4.69%
GLOBAL INCOME FUND
Institutional Shares 5.77% 5.38%
Service Shares(2) 5.35% 4.96%
Class A Shares
assumes no sales charge 5.24% 4.81%
Class B Shares 4.73% 4.34%
Class C Shares(7) 4.77% 4.39%
</TABLE>
B-109
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate(1)
- ----------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
30 Days
ended
10/31/97
MUNICIPAL INCOME FUND
Institutional Shares(6) 4.51% 4.45%
Service Shares(6) 4.04% 3.51%
Class A Shares
assumes no sales charge 4.29% 3.52%
Class B Shares 3.54% 3.02%
Class C Shares(7) 3.55% 2.92%
GOVERNMENT INCOME FUND
Institutional Shares(6) 6.32% 5.40%
Service Shares(6) 5.84% 4.77%
Class A Shares
assumes no sales charge 6.06% 4.74%
Class B Shares 5.31% 4.24%
Class C Shares(7) 5.29% 4.21%
HIGH YIELD FUND(8)
Institutional Shares 8.25% 7.87%
Service Shares 7.78% 7.39%
Class A Shares
assumes no sales charge 7.98% 7.35%
Class B Shares 7.21% 6.83%
Class C Shares(7) 7.17% 6.78%
</TABLE>
B-110
<PAGE>
TAX-EQUIVALENT YIELD(3)
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield(1)
- ---------------------------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
30 Days
ended
10/31/97
SHORT DURATION TAX-FREE FUND(3)
Institutional Shares 6.82% 5.49%
Administration Shares 6.40% 5.07%
Service Shares 5.98% 4.66%
Class A Shares
assumes no sales charge 6.40% 4.71%
Class B Shares 5.37% 3.78%
Class C Shares 5.05% 3.42%
MUNICIPAL INCOME FUND(3)
Institutional Shares 7.62% 7.52%
Service Shares 6.82% 5.93%
Class A Shares
assumes no sales charge 7.25% 5.95%
Class B Shares 5.98% 5.10%
Class C Shares 6.00% 4.93%
</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) Service Shares commenced operations on March 27, 1997 for Adjustable Rate
Government Fund, and March 12, 1997 for Global Income Fund.
(3) The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 40.8% (adjusted for the 3% phase out
of itemized deductions for individuals at high income levels) federal
income tax rate.
(4) Class A and B Shares of Short Duration Government, Short Duration Tax-Free
and Core Fixed Income commenced operations on May 1, 1997.
(5) Class C Shares commenced operations on August 15, 1997.
(6) Institutional and Service Shares of Municipal Income and Government Income
Funds commenced operations on August 15, 1997.
(7) Class C Shares commenced operations on August 15, 1997.
(8) High Yield Fund commenced operations on August 1, 1997.
The above tables should not be considered a representation of future
performance.
B-111
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
------------------------------------------------------------------
Investment Investment With Fee Without Fee
Date Period Reductions Reductions
Fund and/or and/or
- -------------------------------- Expense Expense
Limitations Limitations
------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
<S> <C> <C> <C> <C>
Institutional Shares 7/17/91/1a/ ended 10/31/97 5.54% 5.43%
one year ended
11/1/96 10/31/97 6.70% 6.67%
five years ended
11/1/92 10/31/97 5.25% 5.20%
Administration Shares 4/15/93/1b/ ended 10/31/97 5.07% 5.02%
one year ended
11/1/96 10/31/97 6.43% 6.40%
Service Shares 3/27/97/1c/ ended 10/31/97 3.81% 3.78%
Class A Shares 5/12/951d ended 10/31/97
assumes 1/5% sales charge 5.75% 5.43%
assumes no sales charge 6.41% 6.09%
one year ended
11/1/96 10/31/97
assumes 1.5% sales charge 4.83% 4.53%
assumes no sales charge 6.43% 6.13%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/97 7.22% 6.82%
one year ended
11/1/96 10/31/97 7.07% 6.68%
five years ended
11/1/92 10/31/97 5.83% 5.57%
Administration Shares 2/28/96/2b/ ended 10/31/97 6.53% 6.19%
one year ended
11/1/96 10/31/97 6.91% 6.52%
Service Shares 4/10/96/2b/ ended 10/31/97 7.07% 6.73%
11/1/96 one year ended
10/31/97 6.63% 6.24%
Class A Shares 5/1/97/2c/ ended 10/31/97
assumes 2.0% sales charge 2.06% 1.74%
assumes no sales charge 4.14% 3.82%
Class B Shares 5/1/97/2c/ ended 10/31/97 3.94% 3.65%
Class C Shares 8/15/97/2d/ ended 10/31/97 1.44% 1.36%
</TABLE>
B-112
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
------------------------------------------------------------------
Investment Investment With Fee Without Fee
Date Period Reductions Reductions
Fund and/or and/or
- -------------------------------- Expense Expense
Limitations Limitations
------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE
FUND
Institutional Shares 10/1/923a ended 10/31/97 4.44% 3.88%
11/1/96 one year ended 5.40% 4.59%
10/31/97
11/1/92 five years ended 4.59% 4.06%
10/31/97
Administration Shares 5/20/933b ended 10/31/97 3.87% 3.41%
11/1/96 one year ended 5.14% 4.33%
10/31/97
Service Shares 9/20/943c ended 10/31/97 4.49% 3.93%
11/1/96 one year ended 4.77% 3.96%
10/31/97
Class A Shares 5/1/973d ended 10/31/97
assumes 2.05% sales 1.35% 0.83%
charge
assumes no sales 3.39% 2.86%
charge
Class B Shares 5/1/973d ended 10/31/97 3.07% 2.59%
Class C Shares 8/15/973e ended 10/31/97 0.97% 0.80%
CORE FIXED INCOME
Institutional Shares 1/15/944a 10/31/97 7.08% 6.50%
11/1/96 one year ended
10/31/97 9.19% 8.78%
Administration Shares 2/28/964b ended 10/31/97 7.45% 7.05%
11/1/96 one year ended
10/31/97 8.92% 8.52%
Service Shares 3/13/964b ended 10/31/96 8.31% 7.93%
11/1/96 one year ended 8.65% 8.25%
10/31/97
Class A Shares 5/1/974c ended 10/31/974c
assumes 4/5% sales 2.10% 1.78%
charge
assumes no sales 6.94% 6.61%
charge
Class B Shares 5/1/974c ended 10/31/97 6.63% 6.42%
Class C Shares 8/15/974d ended 10/31/97 2.74% 2.64%
</TABLE>
B-113
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------------------
Investment Investment With Fee Without Fee
- -------------------------- Date Period Reductions Reductions
Fund and/or and/or
- -------------------------- Expense Expense
Limitations Limitations
---------------------------------------------------------------------
GLOBAL INCOME FUND/5c/
<S> <C> <C> <C> <C>
Class A Shares 8/2/91/5a/ ended 10/31/97
assumes 4.5% sales 7.49% 7.15%
charge
assumes no sales 8.28% 7.94%
charge
11/1/96 one year ended
10/31/97
assumes 4.5% sales 4.76% 4.31%
charge 9.66% 9.20%
assumes no sales
charge
11/1/92 five years ended
10/31/97
assumes 4.5% sales 7.20% 6.85%
charge 8.19% 7.83%
assumes no sales
charge
Class B Shares 5/1/96/5b/ ended 10/31/97 10.27% 9.84%
11/1/96 one year ended 9.04% 8.63%
ended 10/31/97
Institutional Shares 8/1/95/5d/ ended 10/31/97 11.75% 11.28%
11/1/96 one year ended 10.26% 9.83%
10/31/97
Service Shares 8/2/91/5e/ ended 10/31/97 8.28% 7.97%
11/1/96 one year ended 9.66% 9.38%
10/31/97
11/1/92 five years ended 8.19% 7.87%
10/31/97
Class C Shares 8/15/97/5f/ ended 10/31/97 3.03% 2.96%
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/97
assumes 4.5% sales 5.04% 4.06%
charge
assumes no sales 6.18% 5.18%
charge
11/1/96 one year ended
10/31/97
assumes 4.5% sales 4.29% 3.50%
charge
assumes no sales 9.23% 8.40%
charge
Class B Shares 5/1/96/6b/ ended 10/31/97 8.63% 8.02%
11/1/96 one year ended
10/31/97 8.48% 7.92%
Class C Shares 8/15/97/6c/ ended 10/31/97 1.75% 1.61%
</TABLE>
B-114
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------------------
Investment Investment With Fee Without Fee
- -------------------------- Date Period Reductions Reductions
Fund and/or and/or
- -------------------------- Expense Expense
Limitations Limitations
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Shares 8/15/97/6c/ ended 10/31/97 2.10% 1.50%
Service 7/20/93 ended 10/31/97 6.17% 5.23%
11/1/96 one year ended 9.18% 8.60%
10/31/97
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/97
assume 4.5% sales 6.10% 3.84%
charge
assumes no sales 7.14% 4.85%
charge
11/1/96 one year ended
10/31/97
assumes 4.5% sales 3.80% 2.45%
charge
assumes no sales 8.72% 7.30%
charge
Class B Shares 5/1/96/7b/ ended 10/31/97 8.59% 7.36%
11/1/96 one year ended 7.96% 6.82%
10/31/97
Class C Shares 8/15/97/7c/ ended 10/31/97 2.72% 2.49%
Institutional Shares 8/15/97/7c/ ended 10/31/97 2.94% 2.72%
Service Shares 2/10/93/7c/ ended 10/31/97 7.13% 4.91%
11/1/96 one year ended 8.67% 7.55%
10/31/97
HIGH YIELD FUND
Class A Shares 8/1/97/8a/ ended 10/31/97
assumes 4.5% sales (3.06%) (3.21%)
charge
assumes no sales 1.50% 1.35%
charge
Class B Shares 8/1/97/8a/ ended 10/31/97 1.31% 1.21%
Class C Shares 8/15/97/8b/ ended 10/31/97 1.46% 1.38%
Institutional Shares 8/1/97/8a/ ended 10/31/97 1.58% 1.48%
Service Shares 8/1/97/8a/ ended 10/31/97 1.46% 1.36%
</TABLE>
_____________________________
1a Institutional Shares of Adjustable Rate Government Fund commenced
operations on July 17, 1991.
1b Administration Shares of Adjustable Rate Government Fund commended
operations on April 15, 1993.
115
<PAGE>
1c Service Shares of Adjustable Rate Government Fund commenced operations on
March 27, 1997.
1d Class A shares of Adjustable Rate Government 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.
2c Class A and Class B Shares of Short Duration Government Fund commenced
operations on May 1, 1997. An aggregate total return (not annualized) is
shown instead of an average annual total return since Class A and Class B
Shares have not completed a full 12 months of operation as of October 31,
1997.
2d Class C Shares of Short Duration Government Fund commenced operations on
August 15, 1997. An aggregate total return (not annualized) is shown instead
of an average annual total return since Class C Shares have not completed a
full 12 months of operation as of October 31, 1997.
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.
3d Class A and Class B Shares of Short Duration Tax-Free Fund commenced
operations on May 1, 1997. An aggregate total return (not annualized) is
shown instead of an average annual total return since Class A and Class B
shares have not completed a full 12 months of operation as of October 31,
1997.
3e Class C Shares of Short Duration Tax-Free Fund commenced operations on August
15, 1997. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class C Shares have not completed a full 12
months of operation as of October 31, 1997.
4a Institutional Shares of Core Fixed Income commenced operations on January 5,
1994.
4b Administration Shares of Core Fixed Income commenced operations on February
28, 1996. Service Shares of Core Fixed Income commenced operations on March
13, 1996.
4c Class A and Class B Shares of Core Fixed Income commenced operations on May
1, 1997. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class A and Class B Shares have not
completed a full 12 months of operation as of October 31, 1997.
4d Class C Shares of Core Fixed Income commenced operations on August 15, 1997.
An aggregate total return (not annualized) is shown instead of an average
annual total return since Class C Shares have not completed a full 12 months
of operation as of October 31, 1997.
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 Institutional Shares of Global Income Fund commenced operations on August 1,
1995.
B-116
<PAGE>
5e Service Shares of Global Income Fund commenced operations on March 12, 1997.
5f Class C Shares of Global Income Fund commenced operations August 15, 1997. An
aggregate total return (not annualized) is shown instead of an average annual
total return since Class C Shares have not completed a full 12 months of
operation as of October 31, 1997.
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.
6c Class C, Institutional and Service Shares of the Municipal Income Fund
commenced operations on August 15, 1997.
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.
7c Class C, Institutional and Service Shares of the Government Income Fund
commenced operations on August 15, 1997.
8a Class A, Class B, Institutional and Service Shares, Shares of High Yield Fund
commenced operations on August 1, 1997. An aggregate total return (not
annualized) is shown instead of an average annual total return Since Class A,
Class B, Institutional and Service Shares of High Yield Fund have not
completed a full 12 months of operation as of October 31, 1997.
8b Class C Shares of High Yield Fund commenced operations on August 15, 1997. An
aggregate total return (not annualized) is shown instead of an average annual
total return since Class C Shares of High Yield Fund have not completed a
full 12 months of operation as of October 31, 1997.
The above table should not be considered a representation of future performance.
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.
- -------------- ----------------- -------------------------------- -----
B-117
<PAGE>
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 Fixed Income, 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 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
B-118
<PAGE>
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:
o 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;
o 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;
o Credit Ratings of domestic government bonds in various countries;
o Price volatility comparisons of types of securities over different periods
of time; and
o 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
B-119
<PAGE>
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
Shares of the Funds are offered and sold on a continuous basis by the
Trust's Distributor, Goldman Sachs, acting as agent. As described in the
Prospectus, shares of the Funds are redeemed at their net asset value as next
determined after receipt of the purchase or redemption order.
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90- day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net asset value of 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 may incur
transaction costs upon the disposition of the securities received in the
redemption.
B-120
<PAGE>
The right of a shareholder to redeem shares and the date of payment by each
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for such Fund to dispose of securities owned by it
or fairly to determine the value of its net assets; or for such other period as
the SEC may by order permit for the protection of shareholders of such Fund.
(The Trust may also suspend or postpone the recommendation of the transfer of
shares upon the occurrence of any of the foregoing conditions).
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 1997 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. No other
portions of the Fund's Annual Report are incorporated herein by reference.
OTHER INFORMATION REGARDING PURCHASES
The Adviser, Distributor and/or their affiliates may pay, out of their own
assets, compensation to Service Organizations and other persons in connection
with the sale and/or servicing of shares of the Funds and other investment
portfolios of the Trust. 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 shareholder servicing and
processing. These Additional Payments may take the form of "due
B-121
<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 Service Organizations and other persons in connection
with the sale and/or servicing of shares of the Funds and other investment
portfolios of the Trust. 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 shareholder servicing and
processing. These Additional Payments may take the form of "due diligence"
payments for an institution's examination of the Funds and payments for
providing extra employee training and information relating to the Funds;
"listing" fees for the placement of the Funds on a dealer's list of mutual funds
available for purchase by
B-122
<PAGE>
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' shares; and payments for the sale of shares and/or the maintenance
of share 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 any 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 institution, or may
be based on a percentage of the value of shares sold to, or held by, customers
of the institutions involved, and may be different for different institutions.
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 Service
Organizations and other institutions 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
B-123
<PAGE>
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 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 organizations
(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. In addition, in connection
with SIMPLE IRA accounts, cumulative quantity discounts are available on a per
plan basis if (1) your employee has been assigned a cumulative discount number
by Goldman Sachs, and (2) your account, alone or in combination with the
accounts of other plan participants also invested in Class A shares of the
Goldman Sachs Funds totals the requisite aggregate amount as described in the
Prospectus.
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-124
<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 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
B-125
<PAGE>
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 Income, Municipal Income, Core Fixed Income,
Global Income and High Yield Funds are sold at a maximum sales charge of 4.5%,
Adjustable Rate Government Fund at 1.5% and Short Duration Government and Short
Duration Tax-Free Funds at 2%. Using the offering price as of October 31, 1997,
the maximum offering price of the Class A shares of each Fund's shares then in
existence would be as follows:
<TABLE>
<CAPTION>
Net Asset Maximum Sales Offering Price
Value Charge to Public
_____ ______ _________
<S> <C> <C> <C>
Adjustable Rate $ 9.88 $0.15 $10.03
Government
Municipal Income 14.99 0.71 15.70
Government Income 14.59 0.68 15.27
Global Income 15.10 0.71 15.81
Short Duration 9.88 0.20 10.08
Government
Short Duration Tax-Free 10.08 0.21 10.29
Core Fixed Income 10.06 0.47 10.53
High Yield 9.97 0.47 10.44
</TABLE>
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
CLASS A DISTRIBUTION PLANS. As described in the Prospectus, the Trust with
--------------------------
respect to the Class A Shares of each Fund has adopted a distribution plan (the
"Class A Plans") pursuant to Rule 12b-1 under the Act. See "Distribution and
Authorized Dealer Service Plans" in the Prospectus.
The Class A Plans were most recently approved on April 23, 1997 by a majority
vote of the Trustees of the Trust, including a majority of the Trustees who are
not interested Trustees of the Trust, and have no direct or indirect financial
interest in the Class A Plans (the "non-interested Trustees"), 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.
B-126
<PAGE>
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, 1997, 1996 and 1995, each Fund paid Goldman Sachs
the following amounts under the Class A Plans:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- --------------
<S> <C> <C> <C>
Adjustable Rate Government
with fee waivers $ 0 $ 0 $ 0
without fee waivers 81,928 30,905 17,967
Municipal Income
with fee waivers 0 0 70,023
without fee waivers 143,712 131,925 195,152
Government Income
with fee waivers 0 0 25,630
without fee waivers 125,705 73,949 76,499
Global Income
with fee waivers 382,046 493,170 645,259
without fee waivers 454,906 549,164 1,257,211
Core Fixed Income/(1)/
with fee waivers 0
without fee waivers 4,437 N/A N/A
Short Duration Government/(1)/
with fee waivers 0
without fee waivers 3,709 N/A N/A
Short Duration Tax-Free/(1)/
with fee waivers 0
without fee waivers 2,364 N/A N/A
</TABLE>
B-127
<PAGE>
<TABLE>
<S> <C> <C> <C>
High Yield/(2)/ N/A N/A
with fee waivers 0
without fee waivers 152,945
</TABLE>
______________________
/1/ Class A Shares of the Core Fixed Income, Short Duration Government and
Short Duration Tax-Free Funds commenced operations on May 1, 1997.
/2/ High Yield Fund commenced operations on August 1, 1997.
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 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, 1997, Goldman Sachs incurred the
following distribution expenses under the Class A Plan on behalf of Adjustable
Rate Government, Government Income, Municipal Income, Global Income Short
Duration Government, Short Duration Tax-Free, Core Fixed Income, and High Yield
Funds (Goldman Sachs used the fees, if any, received under the Plan in the same
Aproportion to the amounts set forth below).
<TABLE>
<CAPTION>
Compensation Allocable Printing and Preparation
and Expenses Overhead, Mailing of and
of the Telephone and Prospectuses to Distribution
Fiscal Year Distributor Travel Other than of Sales
ended October Compensation to and its Sales Expenses Current Literature and
31, 1997 Dealers Personnel Shareholders Advertising
- --------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Adjustable Rate
Government/(1)/ N/A N/A N/A N/A N/A
Municipal N/A N/A N/A N/A N/A
Income/(2)/
Government N/A N/A N/A N/A N/A
Income/(2)/
Global Income $126,000 $88,000 $109,000 $15,000 $38,000
</TABLE>
B-128
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Short Duration N/A N/A N/A N/A N/A
Government/(1)/
Short Duration N/A N/A N/A N/A N/A
Tax-Free/(1)/
Core Fixed N/A N/A N/A N/A N/A
Income/(1)/
High Yield/(1)/ N/A N/A N/A N/A N/A
</TABLE>
- -------------------------
/1/ Since inception of this class, Goldman Sachs has waived the 0.25% Class A
Plan fee, as no distribution revenue has therefore been earned, no expenses
are reflected above.
/2/ Commencing June 1, 1995, Goldman Sachs is waiving the 0.25% Class A Plan
fee; as no distribution revenue has therefore been earned after June 1,
1995, no expenses are reflected above.
Under the Class A Plans, Goldman Sachs, as distributor of each Fund's Class
A Shares, will provide to the Trustees of the Trust for their review, and the
Trustees of the Trust will review at least quarterly a written report of the
services provided and 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 each 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 by a
majority vote of the Trust's Board of Trustees, including the non-interested
Trustees and have no direct or
B-129
<PAGE>
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.
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 each
Fund other than the Short Duration Government and Short Duration Tax-Free Funds.
With respect to these Funds, Goldman Sachs has voluntarily agreed to limit such
fee to 0.60% of the Funds' average daily net assets. The fees received by
Goldman Sachs under the Class B Plans and contingent deferred sales charge on
Class B Shares may be sold by Goldman Sachs as distributor to entities which
provide financing for payments to Authorized Dealers in respect of sales of
Class B Shares. To the extent such fee is not paid to such dealers, Goldman
Sachs may retain such fee as compensation for its services and expenses of
distributing the Funds' Class B Shares. If such fee exceeds its expenses,
Goldman Sachs may realize a profit from these arrangements.
For the fiscal years ended October 31, 1997 and October 31, 1996, each Fund
paid Goldman Sachs the following amounts under the Class B Plans:
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
<S> <C> <C>
Municipal Income
with fee waivers 6,660 378
without fee waivers 6,660 378
Government Income
with fee waivers 25,662 332
without fee waivers 25,662 332
Global Income
with fee waivers 10,696 374
without fee waivers 10,696 374
Core Fixed Income/(1)/
with fee waivers 1,016 N/A
without fee waivers 1,016 N/A
Short Duration Government/(1)/
with fee waivers 1,363 N/A
without fee waivers 1,704 N/A
Short Duration Tax-Free/(1)/
with fee waivers 149 N/A
without fee waivers 186 N/A
</TABLE>
B-130
<PAGE>
<TABLE>
<S> <C> <C>
High Yield/(2)/
with fee waivers 10,016 N/A
without fee waivers 10,016 N/A
</TABLE>
________________________
/(1)/ Class B Shares of Core Fixed Income, Short Duration and Short Duration
Tax-Free commenced operations on May 1, 1997.
/(2)/ High Yield Fund commenced operations on August 1, 1997. No Class B shares
were outstanding as of October 31, 1995.
* No Class B Shares were outstanding as of October 31, 1995.
Goldman Sachs may pay up to the entire amount of such fee under the Plans
to Authorized Dealers for providing services in connection with the sale of each
Fund's shares. To the extent such fee is not paid to such dealers, Goldman
Sachs may retain such fee as compensation for its services and expenses incurred
in accordance with the Plans of distributing a Fund's shares. If such fee
exceeds its expenses, Goldman Sachs may realize a profit from these
arrangements.
The Class B Plans are compensation plans which provide for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class B Plans were terminated by the Trust's
Board of Trustees and no successor plan were adopted, the Funds would cease to
make distribution payments to Goldman Sachs and Goldman Sachs would be unable to
recover the amount of any of its unreimbursed distribution expenditures.
During the fiscal year ended October 31, 1997, Goldman Sachs incurred the
following expenses in connection with distribution under the Class B Plan on
behalf of each Fund (Goldman Sachs used the fees, if any, received under the
Plan in the same proportion to the amounts set forth below).
<TABLE>
<CAPTION>
Compensation
and Preparation
Expenses Printing and and
of the Allocable Mailing of Distribution
Fiscal Year Distributor Overhead, Prospectuses of Sales
ended and its Telephone to Other than Literature
October 31, Compensation Sales and Travel Current and
1997 to Dealers Personnel Expenses Shareholders Advertising
- --------------- ------------------ --------------- ------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Adjustable Rate
Government/(1)/ N/A N/A N/A N/A N/A
Municipal $ 5,534/(1)/ N/A N/A N/A N/A
Income
Government $20,309/(1)/ N/A N/A N/A N/A
Income
Global Income $8,575/(1)/ N/A N/A N/A N/A
Short Duration 862 N/A N/A N/A N/A
Government
Fund/(1)//(2)/
</TABLE>
B-131
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Short Duration
Tax-Free N/A N/A N/A N/A N/A
Fund/(1)//(2)/
Core Fixed 605 N/A N/A N/A N/A
Income
Fund/(1)//(2)/
High Yield 3,626 N/A N/A N/A N/A
Fund/(1)//(3)/
</TABLE>
_______________________
/(1)/ Advance commissions paid to dealers of 4% on Class B shares are
considered deferred assets which are amortized over a period of six
years; amounts presented above reflect amortization expense recorded
during the period presented.
/(2)/ Class B Shares for Core Fixed Income, Short Duration Government and Short
Duration Tax-Free Funds commenced operations on May 1, 1997.
/(3)/ High Yield Fund commenced operations on August 1, 1997.
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 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
B-132
<PAGE>
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 each Fund. The fees received by Goldman Sachs under the Class
C Plans and contingent deferred sales charge on Class C Shares may be sold by
Goldman Sachs as distributor to entities which provide financing for payments to
Authorized Dealers in respect of sales of Class C 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 C
Shares. If such fee exceeds its expenses, Goldman Sachs may realize a profit
from these arrangements.
For the fiscal year ended October 31, 1997, each Fund paid Goldman Sachs
the following amounts under the Class C Plans:
<TABLE>
<CAPTION>
1997/(1)/
------------------
<S> <C>
Municipal Income $ 40
with fee waivers 40
without fee waivers
Government Income
with fee waivers 827
without fee waivers 827
Global Income
with fee waivers 285
without fee waivers 285
Core Fixed Income
with fee waivers 145
without fee waivers 145
Short Duration Government
with fee waivers 83
without fee waivers 83
Short Duration Tax-Free
with fee waivers 12
without fee waivers 12
High Yield
with fee waivers 1,296
without fee waivers 1,296
</TABLE>
________________________
/(1)/ Class C Shares of each Fund commenced operations on August 15, 1997.
B-133
<PAGE>
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 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.
During the fiscal year ended October 31, 1997, Goldman Sachs incurred the
following expenses in connection with distribution under the Class C Plan on
behalf of each Fund (Goldman Sachs used the fees, if any, received under the
Plan in the same proportion to the amounts set forth below).
<TABLE>
<CAPTION>
Printing and
Allocable Mailing of
Compensation Overhead, Prospectuses to Preparation and
and Expenses of Telephone Other than Distribution of
Fiscal Year ended Compensation the Distributor and Travel Current Sales Literature
October 31, 1997 to Dealers and its Sales Expenses Shareholders and Advertising
--------------- ------------------ --------------- ------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Municipal Income $ 175 N/A N/A N/A N/A
Government Income 2,004 N/A N/A N/A N/A
Global Income 1,082 N/A N/A N/A N/A
Short Duration
Government Fund/(1)/ 237 N/A N/A N/A N/A
Short Duration
Tax-Free Fund/(1)/ 33 N/A N/A N/A N/A
Core Fixed Income 585 N/A N/A N/A N/A
Fund
High Yield Fund/(2)/ 3,508 N/A N/A N/A N/A
</TABLE>
_______________________
/(1)/ Advance commissions paid to dealers of 1% on Class C Shares are
considered deferred assets which are amortized over a period of one year;
amounts presented above reflect amortization expense recorded during the
period presented.
/(2)/ High Yield Fund commenced operations on August 1, 1997.
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
B-134
<PAGE>
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.
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, 1997 and October 31, 1996 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 their Class A Shares and Class B Shares*:
B-135
<PAGE>
<TABLE>
<CAPTION>
CLASS A Class B Class C
1997 1996 1995 1997 1996 1997
------------ ------------ ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Adjustable
Rate Government 81,928 30,905 17,967 N/A N/A N/A
Municipal Income 143,714 131,925 55,106 2,222 126 13
Government Income 125,744 74,060 25,239 8,546 111 273
Global Income 454,817 549,164 281,949 3,565 125 95
Core Fixed Income/(1)/ 4,437 N/A N/A 346 N/A 49
Short Duration 36
Government/(1)/ 3,709 N/A N/A 568 N/A
Short Duration 4
Tax-Free/(1)/ 2,364 N/A N/A 62 N/A
High Yield/(2)/ 152,941 N/A N/A 3,342 N/A 432
</TABLE>
_______________________
/1/ Class A and Class B Shares commenced operations on May 1, 1997.
/2/ High Yield Fund commenced operations on August 1, 1997.
* No Class C Shares were outstanding as of October 31, 1995 and 1996.
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-136
<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
_____________________
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of a Fund's fiscal
year end.
1-A
<PAGE>
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
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 one
year, unless explicitly noted.
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 three 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 senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, 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.
3-A
<PAGE>
STANDARD & POOR'S RATINGS GROUP
Aaa: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to meet the financial commitment on the obligation is
extremely strong.
Aa: Bonds and debt rated AA have a very strong capacity to meet the
financial commitment on the obligation and differ from the higher rated issues
only in small degree.
A: Bonds and debt rated A have a strong capacity to meet the financial
commitment on the obligation 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 meet the financial commitment on the obligation. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligtor.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded
as having significant speculative characteristics with respect to the capacity
meet the financial commitment on the obligation. 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 vulnerability to non-payment than
other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to the obligtor's inadequate capacity to meet the financial
commitment on the obligation.
B: Bonds and debt rated B are more vulnerable to non-payment but the
obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to meet its financial commitment on the
obligation.
CCC: Bonds and debt rated CCC is currently vulnerable to non-payment, and
are dependent upon favorable business, financial, and economic conditions to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, such securities are not likely to
have the capacity to meet its financial commitment on the obligation.
CC: The rating CC is typically applied to bonds and debt that are
currently highly vulnerable to non-payment.
4-A
<PAGE>
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but debt service
payments on this obligation are continued.
D: Bonds and debt rated D are in payment default. The D rating category
is used when payments on an obligation 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.
R This rating is attached to highlight derivative, hybrid, and certain
other obligations that Standard & Poor's believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies, certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
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 commercial paper rating categories are as follows:
A-1 Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 Obligations are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations rated "A-1".
However, the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.
A-3 Obligations exhibit adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
B- Obligations are regarded as having significant speculative
characteristics. The obligor currently has the
5-A
<PAGE>
capacity to meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C - Obligations are currently vulnerable to nonpayment and are dependent
on favorable business, financial, and economic conditions for the obligor to
meet its financial obligation.
D - Obligations are in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless Standard & Poor's believes such
payments will be made during such grace period. The "D" rating will also be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
FITCH IBCA, INC.
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 capacity for
timely payment at financial commitments, which is unlikely to be adversely
affected by reasonably foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very high
credit quality. These ratings denote a very low expectation of investment risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
A: Bonds rated A are considered to be investment grade and of high
credit quality. These ratings denote a low expectation of investment risk and
indicate strong capacity of timely payment of financial commitments.
BBB: Bonds rated BBB are considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse circumstances and in economic conditions are more likely
to impair this category.
6-A
<PAGE>
BB: Bonds are considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic changes over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B: Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
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. The Fitch IBCA
ratings from and including "AA" to "b" may be modified by the addition of a plus
or minus sign.
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch IBCA's short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations or up to three years for
U.S. public finance securities.
F 1: Highest Credit Quality. Issues assigned this rating reflect the
strongest capacity for timely payment of financial commitments; may
have an added "+" to denote any exceptionally strong credit feature.
F 2: Good Credit Quality. Issues assigned this rating have a satisfactory
capacity for timely payment of financial commitments, but the margin
of safety is not as great as for issues assigned F 1 ratings.
7-A
<PAGE>
F 3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C Securities possess high default risk. This designation indicates that
the capacity for meeting financial commitments is solely reliant upon
a sustained, favorable business and economic environment.
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.
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 economic conditions.
However, risk factors are more variable and greater in periods of stress.
A=, A, A-: Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for
8-A
<PAGE>
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.
D: Defaulted debt obligation.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
D-1+: 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.
D-1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors
are very small.
D-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.
D-3: Satisfactory liquidity and other protection factors qualify issues as
investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
D-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.
D-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.
9-A
<PAGE>
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") and variable rate demand obligations
are designated Variable Moody's Investment Grade ("VMIG"). Such ratings
recognize the differences between short-term credit risk and long-term risk.
Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality enjoying 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.
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 carrying specific
risk but having protection commonly regarded as required of an investment
security and not distinctly or predominantly speculative.
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.
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Those issues determined
to possess very strong characteristics will be given a plus (+)
designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
10-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.
o Privately owned and ranked among Wall Street's best capitalized firms,
with partners' capital of approximately $__________billion as of November ,
1997.
o With thirty-four offices worldwide Goldman Sachs employs over 9,000
professionals focused on opportunities in major markets.
o The number one underwriter of all international equity issues FROM 1993-
1996.
o A research budget of $200 million for 1997.
o Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
o The number one lead manager of U.S. common stock offerings for the past
eight years (1989-1996).*
o The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1996).
* Source: Securities Data Corporation. Common stock ranking excludes REITS,
-----------------------------------
Investment 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 Roebuck & Co. 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
ADMINISTRATION SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
GOLDMAN SACHS CORE FIXED INCOME FIXED INCOME FUND
(EACH A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is not a
prospectus. This Additional Statement should be read in conjunction with the
prospectuses for the Administration Shares of each of Goldman Sachs Adjustable
Rate Government Fund, Goldman Sachs Short Duration Government Fund, Goldman
Sachs Short Duration Tax-Free Fund and Goldman Sachs Core Fixed Income Fixed
Income, each dated March 1, 1998, as amended and/or supplemented from time to
time (each a "Prospectus"), which may be obtained without charge from
institutions ("Service Organizations") that hold Administration Shares for the
benefit of their customers, or from Goldman, Sachs & Co. by calling the
telephone number, or writing to one of the addresses, listed below. Goldman
Sachs Global Income Fund does not offer Administration Shares.
TABLE OF CONTENTS
Introduction B-3
Investment Objectives and Policies B-4
Other Investments and Practices B-12
Investment Restrictions B-62
Management B-65
Portfolio Transactions B-81
Shares of the Trust B-85
Net Asset Value B-91
Taxation B-92
Performance Information B-104
Other Information B-120
Financial Statements B-121
Other Information Regarding Purchases B-121
Administration Plan B-123
Appendix A 1-A
Appendix B 1-B
Appendix C 1-C
The date of this Additional Statement is March 1, 1998.
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
Adviser to Goldman Sachs Distributor
SHORT DURATION TAX-FREE FUND 85 BROAD STREET
AND GOLDMAN SACHS CORE FIXED NEW YORK, NEW YORK 10004
INCOME FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN, SACHS & CO.
MANAGEMENT, L.P. TRANSFER AGENT
ADVISER TO GOLDMAN SACHS 4900 SEARS TOWER
ADJUSTABLE RATE GOVERNMENT FUND CHICAGO, ILLINOIS 60606
AND GOLDMAN SACHS SHORT DURATION
GOVERNMENT FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
TOLL FREE .......800-621-2550
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") is an open-end Management Investment
Company. 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 Government Fund"), Goldman Sachs Core Fixed Income Fund ("Core
Fixed Income"), 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 34 other series of shares. Adjustable Rate Government Fund,
Core Fixed Income, 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 Fixed Income 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 Government 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
Fixed Income, 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 Government
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
B-3
<PAGE>
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, 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.
INVESTMENT OBJECTIVES AND POLICIES
ADJUSTABLE RATE GOVERNMENT FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Government 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 Government and Short Duration Government Funds 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 Government 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
B-4
<PAGE>
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 Government Fund
-------------------------------------
seeks to minimize net asset value fluctuations by investing primarily in
adjustable rate mortgage pass-through securities and other mortgage securities
with periodic interest rate resets, maintaining a maximum duration of two years
and a target duration equal to that of a six-month to one-year U.S. Treasury
security, and utilizing certain active management techniques to seek to hedge
interest rate risk. Short Duration Government Fund seeks to minimize net asset
value fluctuations by utilizing certain interest rate hedging techniques and by
maintaining a maximum duration of not more than three years. The duration
target of the Short Duration Government Fund is that of the 2-year U.S. Treasury
Security plus or minus .5 years. There is no assurance that these strategies
for the Adjustable Rate Government 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
B-5
<PAGE>
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 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
B-6
<PAGE>
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 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:
o 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;
o 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;
o 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
o Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
designed to provide this diversification.
B-7
<PAGE>
CORE FIXED INCOME
Core Fixed Income 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 Fixed Income 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.
Core Fixed Income's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fixed Income's return is likely to increase. Conversely, when interest
rates increase, Core Fixed Income'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 Fixed Income'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 Fixed Income than from shorter-term investments.
A number of investment strategies will be used to achieve the Core Fixed
Income'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
usually 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 Fixed Income will attempt to
----------------------------------
control its exposure to interest rate risk, including overall market exposure
and the spread risk of particular sectors
B-8
<PAGE>
and securities, through active portfolio management techniques. Core Fixed
Income'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 Fixed Income'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 Fixed Income's investment portfolio. In determining Core Fixed
Income's investment strategy and making market timing decisions, the Adviser
will have 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
managers 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.
B-9
<PAGE>
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 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
B-10
<PAGE>
its balance sheet, its ability to withstand economic downturns and its potential
to generate ample cash flow to service its debt. The ability to analyze
accurately 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 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
B-11
<PAGE>
rate risk: when interest rates increase, the value of fixed income securities
tends to decline.
OTHER INVESTMENTS OBJECTIVES 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 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) right of the issuer to
borrow from the Treasury (such as securities of Federal Home Loan Banks), (b)
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 (c) 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 invest in custodial receipts in respect of securities issued
or guaranteed as to principal and interest by the U.S. government, its agencies
instrumentalities, political
B-12
<PAGE>
subdivisions or authorities. Such custodial receipts evidence ownership of
future interest payments, principal payments or both on certain notes or bonds
issued or guaranteed as to principal and interest by the U.S. government, its
agencies, instrumentalities, political subdivisions or authorities. These
custodial receipts are known by various names, including "Treasury Receipts,"
"Treasury Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on
Treasury Securities" ("CATs"). For certain securities law purposes, custodial
receipts are not considered U.S. Government Securities.
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
Adjustable Rate, Short Duration Government, Core Fixed Income 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, if a Fund purchases Mortgaged Backed Securities
at a premium, a faster than expected prepayment rate will reduce both the market
value and the yield to maturity from those which were anticipated. A prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if a Fund purchases Mortgage-
Backed Securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce yield to maturity and market
values. To the extent that a Fund invests in Mortgage-Backed securities, its
investment adviser may seek to manage these
B-13
<PAGE>
potential risks by investing in a variety of Mortgage-Backed Securities and by
using certain hedging techniques.
Adjustable Rate Mortgage Loans ("ARMs"). ARMs generally provide for a
---------------------------------------
fixed initial mortgage interest rate for a specified period of time.
Thereafter, the interest rates (the "Mortgage Interest Rates") may be subject to
periodic adjustment based on changes in the applicable index rate (the "Index
Rate"). The adjusted rate would be equal to the Index Rate plus a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some mortgagors
may find difficult to make. However, certain ARMs may provide that the Mortgage
Interest Rate may not be adjusted to a rate above an applicable lifetime maximum
rate or below an applicable lifetime minimum rate for such ARM. Certain ARMs
may also be subject to limitations on the maximum amount by which the 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
B-14
<PAGE>
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost
of Funds, the National Median Cost of Funds, the one-month, three-month, six-
month or one-year London Interbank Offered Rate, the prime rate of a specific
bank or commercial paper rates. Some indices, such as the one-year constant
maturity Treasury rate, closely mirror changes in market interest rate levels.
Others, such as the 11th District Federal Home Loan Bank Cost of Funds index,
tend to lag behind changes in market rate levels and tend to be somewhat less
volatile. The degree of volatility in the market value of each Taxable Fund's
portfolio and therefore in the net asset value of each Taxable Fund's shares
will be a function of the length of the interest rate reset periods and the
degree of volatility in the applicable indices.
FIXED-RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans included
-------------------------
in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple interest
at fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed-Rate Mortgage Loans generally provide for monthly payments of
principal and interest in substantially equal installments for the term of 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.
B-15
<PAGE>
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may also
reduce the monthly payments due under such mortgage loan, change the rate
of interest, reduce the principal balance of the loan to the then-current
appraised value of the related mortgaged property, alter the mortgage loan
repayment schedule and grant priority of certain liens over the lien of the
mortgage loan. If a court relieves a borrower's obligation to repay
amounts otherwise due on a mortgage loan, the mortgage loan servicer will
not be required to advance such amounts, and any loss may be borne by the
holders of securities backed by such loans. In addition, numerous federal
and state consumer protection laws impose 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.
B-16
<PAGE>
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States. Ginnie Mae is authorized to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration ("FHA Loans"), or guaranteed by the Veterans Administration ("VA
Loans"), or by pools of other eligible mortgage loans. In order to meet its
obligations under any guarantee, Ginnie Mae is authorized to borrow from the
United States Treasury in an unlimited amount.
Fannie Mae Certificates. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the United States Congress. Each Fannie Mae
Certificate is issued and guaranteed by Fannie Mae and represents an undivided
interest in a pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool
consists of residential mortgage loans ("Mortgage Loans") either previously
owned by Fannie Mae or purchased by it in connection with the formation of the
Pool. The Mortgage Loans may be either conventional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. government agency) or Mortgage Loans that are
either insured by the 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 participation 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
B-17
<PAGE>
received on the underlying loans). Freddie Mac also guarantees to each
registered Certificate holder ultimate collection of all principal of the
related mortgage loans, without any offset or deduction, but does not,
generally, guarantee the timely payment of scheduled principal. The obligations
of Freddie Mac under its guaranty of Freddie Mac Certificates are obligations
solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one-to-four-family residential properties or
multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac
Certificate group may include whole loans, participation interests in whole
loans, undivided interests in whole loans and participations comprising another
Freddie Mac Certificate group.
Conventional Mortgage Loans. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-
rate mortgage loans with original terms to maturity of between five and thirty
years. Substantially all of these mortgage loans are secured by first liens on
one- to four-family residential properties or multi-family projects. Each
mortgage loan must meet the applicable standards set forth in the law creating
Freddie Mac or Fannie Mae. A Freddie Mac Certificate 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 both
--------------------------------
government guaranteed and privately issued 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
B-18
<PAGE>
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be 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.
These securities may be issued by U.S. government agencies and instrumentalities
such as Fannie Mae or sponsored enterprises such as Freddie Mac or, in the case
of Core Fixed Income, 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.
B-19
<PAGE>
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class Mortgage-Backed Securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed Mortgage-Backed Securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans
or the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to
B-20
<PAGE>
apply principal payments and prepayments of the Mortgage Assets to two or more
classes concurrently on a proportionate or disproportionate basis. These
simultaneous payments are taken into account in calculating the final
distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments
of the Mortgage Assets are then required to be applied to one or more other
classes of the Certificates. The scheduled principal payments for the PAC
Certificates generally have the highest priority on each payment date after
interest due has been paid to all classes entitled to receive interest
currently. Shortfalls, if any, are added to the amount payable on the next
payment date. The PAC Certificate payment schedule is taken into account in
calculating the final distribution date of each class of PAC. In order to
create PAC tranches, one or more tranches generally must be created that absorb
most of the volatility in the underlying Mortgage Assets. These tranches tend to
have market prices and yields that are much more volatile than other PAC
classes.
Stripped Mortgage-Backed Securities. The Taxable Funds may invest in
-----------------------------------
Stripped Mortgage-Backed Securities ("SMBS"), which are derivative multiclass
mortgage securities, issued or guaranteed by the U.S. government, its agencies
or instrumentalities. Core Fixed Income, 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. 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.
B-21
<PAGE>
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
Ratings. The ratings assigned by a rating organization to Mortgage Pass-
-------
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
Credit Enhancement. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things,
payment guarantees, letters of credit, pool insurance, subordination, or any
combination thereof.
Subordination; Shifting of Interest; Reserve Fund. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage 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
B-22
<PAGE>
certificates is intended to preserve the availability of the subordination
provided by the subordinate certificates. In addition, because the senior
certificate-holders in a shifting interest credit enhancement structure are
entitled to receive a percentage of principal prepayments which is greater than
their proportionate interest in the trust fund, the rate of principal
prepayments on the mortgage loans will have an even greater effect on the rate
of principal payments and the amount of interest payments on, and the yield to
maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due to them and
will protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event that the Reserve Fund is depleted before
the subordinated amount is reduced to zero, senior certificate-holders will
nevertheless have a preferential right to receive current distributions from the
mortgage pool to the extent of the then outstanding subordinated amount. Unless
otherwise specified, until the subordinated amount is reduced to zero, on any
distribution date any amount otherwise distributable to the subordinate
certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--- ----
all certificate-holders 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
B-23
<PAGE>
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
Asset-backed securities represent participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property, receivables
from revolving credit (credit card) agreements and other categories of
receivables. Such assets are securitiized through the use of trusts and special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation, or other credit enhancements may be present.
Core Fixed Income, 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. To the extent that a Fund
invests in asset-backed securities, the values of such Fund's portfolio
securities will vary with changes in market interest rates generally and the
differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by Mortgage-Backed Securities because asset-backed securities
generally do not have the benefit of a security
B-24
<PAGE>
interest in collateral that is comparable to Mortgage Assets. Credit card
receivables are generally unsecured and the debtors on such receivables are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set-off certain amounts owed
on the credit cards, thereby reducing the balance due. Automobile receivables
generally are secured, but by automobiles rather than residential real property.
Most issuers of automobile receivables permit the loan servicers to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the asset-backed securities. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that, in some cases, recoveries
on repossessed collateral may not be available to support payments on these
securities.
LOAN PARTICIPATIONS
The High Yield Fund may invest in loan participations. Such loans must be
to issuers in whose obligations the High Yield Fund may invest. A loan
participation is an interest in a loan to a U.S. or foreign company or other
borrower which is administered and sold by a financial intermediary. In a
typical corporate loan syndication, a number of lenders, usually banks (co-
lenders), lend a corporate borrower a specified sum pursuant to the terms and
conditions of a loan agreement. One of the co-lenders usually agrees to act as
the agent bank with respect to the loan.
Participation interests acquired by the High Yield Fund may take the form
of a direct or co-lending relationship with the corporate borrower, an
assignment of an interest in the loan by a co-lender or another participant, or
a participation in the seller's share of the loan. When the High Yield Fund
acts as co-lender in connection with a participation interest or when the High
Yield Fund acquires certain participation interests, the High Yield Fund will
have direct recourse against the borrower if the borrower fails to pay scheduled
principal and interest. In cases where the High Yield Fund lacks direct
recourse, it will look to the agent bank to enforce appropriate credit remedies
against the borrower. In these cases, the High Yield Fund may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Fund had purchased a direct obligation (such as commercial
paper) of such borrower. For example, in the event of the bankruptcy or
insolvency of the corporate borrower, a loan participation may be subject to
certain defenses by the borrower as a result of improper conduct by the agent
bank. Moreover, under the terms of the loan participation, the High Yield Fund
may be regarded as a creditor of the agent bank (rather than of the underlying
corporate borrower), so that the High Yield Fund may also be subject to the risk
that the agent bank may
B-25
<PAGE>
become insolvent. The secondary market, if any, for these loan participations is
limited and any loan participations purchased by the High Yield Fund will be
regarded as illiquid.
For purposes of certain investment limitations pertaining to
diversification of the High Yield Fund's portfolio investments, the issuer of a
loan participation will be the underlying borrower. However, in cases where the
High Yield Fund does not have recourse directly against the borrower, both the
borrower and each agent bank and co-lender interposed between the High Yield
Fund and the borrower will be deemed issuers of a loan participation.
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
B-26
<PAGE>
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."
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.
B-27
<PAGE>
CORPORATE DEBT OBLIGATIONS
Core Fixed Income 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.
Fixed income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions or
changing circumstances may weaken their issuers' capacity to pay interest and
repay principal. Medium to lower rated and comparable non-rated securities tend
to offer higher yields than higher rated securities with the same maturities
because the historical financial condition of the issuers of such securities may
not have been as strong as that of other issuers. Since medium to lower rated
securities generally involve greater risks of loss of income and principal than
higher rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Funds' investment
advisers will attempt to reduce these risks through portfolio diversification
and by analysis of each issuer and its ability to make timely payments of income
and principal, as well as broad economic trends and corporate developments.
TRUST PREFERREDS. The Government Income, Core Fixed Income, Global Income
----------------
and High Yield Funds may invest in trust preferred securities. A trust
preferred or capital security is a long dated bond (for example 30 years) with
preferred features. The preferred features are that payment of interest can be
deferred for a specified period without initiating a default event. From a
bondholder's viewpoint, the securities are senior in claim to standard preferred
but are junior to other bondholders. From the issuer's viewpoint, the
securities are attractive because their interest is deductible for tax purposes
like other types of debt instruments.
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-28
<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 IBCA, inc. 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
B-29
<PAGE>
subsequent to their acquisition will not affect cash income from such securities
but will be reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield Fixed-Income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace such
security with a lower-yielding security, resulting in
B-30
<PAGE>
a decreased return for investors. In addition, if the High Yield Fund
experiences unexpected net redemptions of the High Yield Fund's shares, it may
be forced to sell its higher-rated securities, resulting in a decline in the
overall credit quality of the High Yield Fund's portfolio and increasing the
exposure of the High Yield Fund to the risks of high yield securities. The High
Yield Fund may also incur additional expenses to the extent that it is required
to seek recovery upon a default in the payment of principal or interest on a
portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment grade
and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Fixed Income 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
B-31
<PAGE>
arising from possible financial difficulties of borrowers play an important part
in the operations of this industry.
Municipal Securities
Core Fixed Income, 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 Fixed
Income 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
B-32
<PAGE>
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 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 Fixed Income 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 Fixed Income, 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
B-33
<PAGE>
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 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 Fixed Income, 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.
B-34
<PAGE>
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 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
B-35
<PAGE>
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
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 Fixed Income 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 Fixed Income'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
B-36
<PAGE>
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 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 Fixed Income, 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.
B-37
<PAGE>
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 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
B-38
<PAGE>
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 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 Fixed Income, 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
B-39
<PAGE>
certain special considerations, including those set forth below, which are not
typically associated with investing in U.S. issuers. Investments in the
securities of foreign issuers usually involve currencies of foreign countries,
and since Core Fixed Income, High Yield and Global Income Funds may temporarily
hold funds in bank deposits in foreign currencies during completion of
investment programs, Core Fixed Income, 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. A Fund may be subject to currency exposure
independent of its securities positions.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad. To the extent that a
substantial portion of a Fund's total assets, adjusted to reflect the Fund's net
position after giving effect to currency transactions, is denominated or quoted
in the currencies of foreign countries, the Fund will be more susceptible to the
risk of adverse economic and political developments within those countries. A
Fund's net currency positions may expose it to risks independent of its
securities positions. In addition, if the payment declines in value against the
U.S. dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a comparable U.S.
company. Volume and liquidity in most foreign bond markets are less than in the
United States markets and securities of many foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Fixed
commissions on foreign securities exchanges are generally higher than negotiated
commissions on U.S. exchanges, although each Fund endeavors to achieve the most
favorable net results on its portfolio transactions. There is generally less
government supervision and regulation of securities markets and exchanges,
brokers, dealers and listed and unlisted 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.
B-40
<PAGE>
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 Fixed Income, High Yield Fund or
Global Income Fund is uninvested and no return is earned on such assets. The
inability of Core Fixed Income, 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
Fixed Income, High Yield Fund or Global Income Fund due to subsequent declines
in value of the portfolio securities, or, if Core Fixed Income, 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 Fixed Income 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 price accurately its portfolio securities or
to dispose of such securities at the times determined to be appropriate. The
risks associated with reduced liquidity may be particularly acute to the extent
that 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
B-41
<PAGE>
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 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.
B-42
<PAGE>
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 Fixed Income 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 Fixed Income may either accept or make delivery of the currency
specified in the contract or, at or prior to maturity, enter into a closing
purchase transaction involving the purchase or sale of an offsetting contract.
Closing purchase transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract.
B-43
<PAGE>
Global Income, High Yield or Core Fixed Income Incomes may enter into
forward foreign currency exchange contracts in several circumstances. First,
when Global Income, High Yield or Core Fixed Income 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 Fixed Income 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 Fixed Income 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 Fixed Income 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 Fixed Income Fund 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 Fixed Income may also
purchase and sell forward contracts to seek to increase total return when the
Advisers anticipate that the foreign currency will appreciate or depreciate in
value, but securities quoted or denominated in that currency do not present
attractive investment opportunities and are not held in a Fund's portfolio.
B-44
<PAGE>
Global Income, High Yield and Core Fixed Income 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 Fixed Income and High Yield Funds will not enter into a
forward contract with a term of greater than one year.
While Global Income, Core Fixed Income 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
Fixed Income 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 Fixed Income 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.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. Since a forward foreign currency exchange contract
is not guaranteed by an exchange or clearinghouse, a default on the contract
would deprive an Underlying Fund of unrealized profits or force the Fund to
cover its commitments for purchase or resale, if any, at the current market
price.
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-
B-45
<PAGE>
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 Fixed Income, Adjustable Rate, Government Income, Short Duration
Government, Global Income and High Yield Funds may enter into mortgage swaps and
Core Fixed Income 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. To the extent that the net amount payable under an
B-46
<PAGE>
interest rate, index or mortgage swap and the entire amount of the payment
stream payable by a Fund under a currency swap or an interest rate floor, cap or
collar is held in a segregated account consisting of cash or liquid assets the
Funds and their investment advisers believe that transactions do not constitute
senior securities under the Act and, accordingly, will not treat them as being
subject to a Fund's borrowing restrictions.
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 investment advisers, under the supervision of the Board of Trustees, are
responsible for determining and monitoring the liquidity of the Funds'
transactions in swaps, caps, floors and collars.
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 such Fund to sell specified securities
to the holder of the option at a specified price if the option is exercised at
any time before the expiration date. All call options written by a Fund are
covered, which means that such Fund will own the securities subject to the
option so long as the option is outstanding or such Fund will use the other
methods described below. The Fund's purpose in writing covered call options is
to realize greater income than would be realized on portfolio securities
transactions alone. However, a
B-47
<PAGE>
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. All put options written by a
Fund would be covered, which means that such Fund would have deposited with its
custodian cash or liquid assets with a value at least equal to the exercise
price of the put option. The purpose of writing such options is to generate
additional income for the Fund. However, in return for the option premium, each
Fund accepts the risk that it may be required to purchase the underlying
securities at a price in excess of the securities' market value at the time of
purchase.
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 Fixed Income 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
B-48
<PAGE>
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 options 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 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
B-49
<PAGE>
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 Fixed Income,
----------------------------------------------------
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
Fixed Income 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, Fixed Income and High Yield Funds may
purchase call options on currency to seek to increase total return when the
Advisers anticipate that the currency will appreciate in value, but the
securities denominated or quoted in that currency do not present attractive
investment opportunities and are not included in the Fund's portfolios.
A call option written by Core Fixed Income, 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 Fixed Income, 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;
B-50
<PAGE>
otherwise the Fund would realize either no gain or a loss on the purchase of the
call option.
Core Fixed Income, 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 Fixed
Income, 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.
In addition to using options for the hedging purposes described above, Core
Fixed Income, 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
Fixed Income 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 Fixed Income 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
Fixed Income 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 Fixed Income 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
Fixed Income 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 Fixed
Income 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
Fixed Income for the purpose of benefiting from a decline in the value of
currencies which it does not own. Global Income, High Yield and Core Fixed
Income 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
B-51
<PAGE>
Fixed Income 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 differential between two securities. Such transactions are referred
to as "yield curve" options. In contrast to other types of options, a yield
curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
A Fund may purchase or write yield curve options 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 the Fund 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 in an effort to increase current income
if, in the judgment of the Adviser, the Fund will be able to profit from
movements in the spread between the yields of the underlying securities. The
trading of yield curve options is subject to all of the risks associated with
the trading of other types of options. In addition, however, such options
present a risk of loss even if the yield of one of the underlying securities
remains constant, or if the spread moves in a direction or to an extent which
was not anticipated.
Yield curve options written by a Fund will 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 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
B-52
<PAGE>
securities or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing sale
transaction with respect to options it has purchased, it will have to exercise
the options in order to realize any profit and will incur transaction costs upon
the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
A Fund may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded over-the-counter with broker-dealers who
make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations.
Transactions by an Underlying Fund in options on securities and indices
will be subject to limitations established by each of the exchanges, boards of
trade or other trading facilities 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
or trade or other trading facilities or are held or written in one or more
accounts or through one of 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 or the Funds' investment advisers. An
exchange, board of trade or other trading facility may order the liquidation of
positions found to be in excess of these limits, and it may impose certain other
sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging
B-53
<PAGE>
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 Fixed Income 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 Fixed Income 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 Fixed Income, Global
Income and High Yield Funds may each seek to offset anticipated changes in the
value of a currency in which its portfolio securities, or securities that it
intends to purchase, are quoted or denominated by purchasing and selling futures
contracts on such currencies.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation
B-54
<PAGE>
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 Fixed Income, 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.
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,
B-55
<PAGE>
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 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
B-56
<PAGE>
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.
In addition to bona fide hedging definition, a CFTC regulation permits the
Funds to engage in other futures transactions if the aggregate initial margin
and premiums required to establish such positions in futures contracts and
options on futures do 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.
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government Securities. The only
futures contracts available to hedge a Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies. In
addition, it is not possible to hedge fully or protect against currency
fluctuations affecting the value of securities denominated in foreign currencies
because the value of such securities is likely to fluctuate as a result of
independent factors not related to currency fluctuations.
B-57
<PAGE>
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. 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
B-58
<PAGE>
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 rank senior
to common stocks in an issuer's capital structure and consequently entail less
risk than the issuer's common stock.
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 at an amount at least equal to the market value of the securities
loaned. A Fund would be required to have the right to call a loan and obtain the
securities loaned at any time on five days' notice. For the duration of a loan,
a Fund would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned and would also receive compensation
from investment of the collateral. A Fund would not have the right to vote any
securities having voting rights during the existence of the loan, but a Fund
would call the loan in anticipation of an important vote to be taken among
holders of the securities or the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovering, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the 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, it is
intended that the value of the securities loaned would 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, certain SMBS, municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted Securities, unless the
Board of Trustees determines, based upon a continuing review of the trading
markets for the specific Restricted Securities, that such Restricted
B-59
<PAGE>
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.
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 may
reflect a discount from the price at which such securities trade when they are
not restricted, since the restriction make 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 may also sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Funds may also 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 and liquid assets in an amount sufficient to meet the
purchase price. Alternatively, each Fund may enter into offsetting contracts
for the forward sale of other securities that it owns. Securities purchased or
sold on a when-issued or forward commitment basis involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date or
if the value of the security to be sold increases prior to the settlement date.
B-60
<PAGE>
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 or any of its affiliates 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 its affiliates.
The Core Fixed Income, 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
Fixed Income High Yield and Global Income Funds may invest in World Equity
Benchmark Shares ("WEB") 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 is maintained by each Fund's custodian. The repurchase
price may be higher than the purchase price, the difference being income to a
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to a Fund together with the repurchase price on repurchase. In
either case, the income to a Fund is unrelated to the interest rate on the
security subject to the repurchase agreement.
For purposes of the Act and, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event
of commencement of bankruptcy or insolvency proceedings with respect to the
seller of the security before repurchase of the security under a repurchase
agreement, a Fund may encounter delay and incur costs before being able to sell
the security. Such a
B-61
<PAGE>
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 following investment restrictions have been adopted by the Trust as
fundamental policies that cannot be changed without the affirmative vote of the
holders of a majority as defined in the Act of the outstanding voting securities
of the 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 Trust or a Fund present
at a meeting, if the holders of more than 50% of the outstanding shares of the
Trust or a Fund are present or represented by proxy or, (b) more than 50% of the
shares of the Trust or a Fund.
For the purposes of the limitations (except for the asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered
B-62
<PAGE>
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by, a Fund. With respect to the Tax Exempt Funds, the identification
of the issuer of a Municipal Security that is not a general obligation is made
by the Adviser based on the characteristics of the Municipal Security, the most
important of which is the source of funds for the payment of principal and
interest on such securities.
AS A MATTER OF FUNDAMENTAL POLICY, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
Government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in municipal securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other municipal securities. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations;
B-63
<PAGE>
(3) borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% of its total assets (including the amount borrowed), (b)
the Fund may, to the extent permitted by applicable law borrow up to
an additional 5% of its total assets for temporary purposes, (c) the
Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities, (d) the
Fund may purchase securities on margin to the extent permitted by
applicable law and (e) the Fund may engage 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 Fixed Income, 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 Fixed Income, 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; and
(8) issue senior securities to the extent such issuance would violate
applicable law.
Notwithstanding any other fundamental investment restriction or policy,
each Fund may invest some or all of its assets in a single open-end investment
company or series thereof with
B-64
<PAGE>
substantially the same fundamental investment objective, restrictions and
policies as the Fund.
In addition, to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of Shareholders.
A 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 (excluding
covered mortgage dollar rolls) exceed 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 55, 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.
B-65
<PAGE>
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Managing Director, Goldman Sachs since May 1996;
- ---------------------
President, MFS Retirement Services Inc., of Massachusetts Financial Services
prior thereto.
John P. McNulty,* Age 45, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
Mary P. McPherson, Age 62, 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 67, 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 68, 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 Director, Baker, Fentress & Co. (a closed-end non-diversified management
investment company) April 1992 to present.
Richard P. Strubel, Age 58, 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 48, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
B-66
<PAGE>
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since April 1, 1985; Manager,
- ---------
Shareholder Services for GSAM since November 1989.
James A. Fitzpatrick,* Age 33, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President of Goldman Sachs Asset Management since April 1997;
- ---------
Vice President and General Manager, First Data Corporation-Investor Services
Group prior thereto.
Scott M. Gilman,* Age 38, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990.
John M. Perlowski,* Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 37, 85 Broad Street, New York, New York 10004.
Secretary. General Counsel of the Mutual Funds Group of GSAM since December
- ---------
1997; Associate General Counsel of GSAM February 1994 to December 1997; Vice
President and Assistant General Counsel of Goldman Sachs since June 1992;
Counsel to the Funds Group, GSAM since June 1992; Partner, Hale and Dorr from
September 1991 to June 1992.
Howard B. Surloff,* Age 32, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Assistant General Counsel, Goldman Sachs Asset Management and
- ---------
Associate General Counsel to the Funds Group since December 1997; 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 32, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Assistant General Counsel, Goldman Sachs Asset Management
- --------------------
and Associate General Counsel to the Funds Group since December 1997; 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 34, 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 26, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman
- -------------------
B-67
<PAGE>
Sachs from January 1996 to Present. Secretary at Cleary, Gottlieb, Stein and
Hamilton from September 1990 to January 1994.
Kaysie P. Uniacke*, Age 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Managing Director, Goldman Sachs since December 1997; Vice
- -------------------
President and Senior Portfolio Manager, GSAM since 1988.
Elizabeth D. Anderson*, Age 28, 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 February 1, 1998,
the Trustees and officers as a group owned less than 1% of the outstanding
shares of beneficial interest of each Fund.
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, 1997:
Retirement Total
Pension or Benefits Compensation
Aggregate Accrued as from Goldman
Compensation Part of Sachs Trust
from the Trust's (including the
Funds/1/ Expenses Funds)/2/
--------------- ------------ ----------------
Name of Trustees
Ashok N. Bakhru $4,688 $0 $93,750
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
Mary P. McPherson 3,525 0 70,500
Alan A. Shuch 0 0 0
Jackson W. Smart 3,525 0 70,500
William H. Springer 3,525 0 70,500
Richard P. Strubel 3,525 0 70,500
- -------------------------
/1/ Reflects amount paid by Goldman Sachs Trust, a Delaware business trust,
during fiscal year ended October 31, 1997.
/2/ Goldman Sachs Trust consisted of 36 mutual funds, including eight fixed-
income Funds, on October 31, 1997.
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 Fixed
B-68
<PAGE>
Income pursuant to a management agreement. GSFM, One New York Plaza, New York,
New York 10004, serves as the investment adviser to Adjustable Rate Government
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 also 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 City,
Milan, Montreal, Osaka, Paris, Sao Paulo, Seoul, Shanghai, Singapore, Sydney,
Taipei, Tokyo, Toronto, Vancouver and Zurich. It has trading professionals
throughout the United States, as well as in London, Tokyo, Hong Kong and
Singapore. The active participation of Goldman Sachs in the world's financial
markets enhances its ability to identify attractive investments.
The 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, the Goldman Sachs Global 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 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
B-69
<PAGE>
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 $4.6
billion in tax-free securities in 1997, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
In structuring Adjustable Rate Government 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 Government 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 SMBS).
With respect to the Adjustable Rate Government Fund, Government Income
Fund, Short Duration Government Fund, High Yield Fund and Core Fixed Income
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
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and prepayment
B-70
<PAGE>
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 Government Fund,
Government Income Fund, Short Duration Government Fund and Core Fixed Income
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
B-71
<PAGE>
these services to third parties or using such services as a basis for trading
for its own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
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 the expectations of Goldman
Sachs' professionals expectations to produce an optimal currency and asset
allocation for the level of risk suitable for the Fund's investment objective
and criteria.
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. The
Management Agreements were most
B-72
<PAGE>
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 Management
Agreement was approved by the shareholders of Adjustable Rate Government 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 Fixed Income 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.
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:
Rate for Period or
Contractual Year Ended
Fund Rate* October 31, 1997
---- ---- ----------------
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .40% .40%
Core Fixed Income .40% .40%
High Yield .70% .65%
GSFM
Short Duration Government .50% .40%
Adjustable Rate Government .40% .40%
GSAMI .90% .59%
Global Income
_____________________
* With respect to the Government Income, Municipal Income and Global Income
Funds, a Management Agreement combining both advisory and administration
services (and subadvisory services in the case of Global Income Fund) was
adopted effective April 30, 1997. The Management Agreements for the other
Funds previously combined such services. The
B-73
<PAGE>
contractual rate set forth in the table is the rate payable under the
Management Agreements (and, in the case of Government Income, Municipal
Income and Global Income Funds, is identical to the aggregate advisory,
subadvisory and administration fee rate payable by such Funds under the
previously separate investment advisory, subadvisory and administration
agreements). For the fiscal year ended October 31, 1997, the annual rate
expressed is the combined advisory and administration fees paid (after
voluntary fee limitations).
For the fiscal years ended October 31, 1997, 1996 and 1995, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
1997 1996 1995
---- ---- ----
Adjustable Rate Government $2,293,118 $2,535,709 $2,947,492
Short Duration Government/1/ 422,632 411,360 517,091
Short Duration Tax-Free 144,157 169,796 260,970
Core Fixed Income 334,580 246,568 137,158
Global Income/2//5/ 1,415,050 1,117,226 706,460
Government Income/3//5/ 134,628 74,060 44,037
Municipal Income/4/ 320,868 211,283 154,707
High Yield/6/ 407,474 N/A N/A
_________________________
/1/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $528,290, $514,200 and $646,364
respectively, for such years.
/2/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of $0,
$837,920 and $1,412,921, respectively. If expense limitations had not been
in effect, Global Income Fund would have paid advisory and subadvisory fees
of $2,158,925 for the year ended October 31, 1997 and $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.
/3/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $350,034, $148,120 and $101,737 respectively,
for such years.
/4/ Had expense limitations not been in effect for the year ended October 31,
1995, Municipal Income Fund would have paid advisory fees of $200,207 for
the year.
/5/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
/6/ High Yield Fund commenced operations on August 1, 1997. Had expense
limitations not been in effect, High Yield Fund would have paid $438,819
for the period.
B-74
<PAGE>
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 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 both on a proprietary
basis and or 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
B-75
<PAGE>
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.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which the Advisers and/or their
affiliates are performing services or when position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods in
which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also possible.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Funds in certain emerging markets in which
limitations are imposed upon the
B-76
<PAGE>
aggregate amount of investment, in the aggregate or individual issuers, by
affiliated foreign investors.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income, High Yield and Core Fixed Income 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, ubject 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 Goldman Sachs or its affiliates to give advice to clients that
may cause these clients to take actions adverse to the interests of the client.
To the extent affiliated transactions are permitted, the Funds will deal with
Goldman Sachs and its affiliates on an arms-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit
B-77
<PAGE>
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 the Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
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 year ended October 31, 1995. No Class C Shares
were outstanding during the fiscal years ended October 31, 1995 and 1996.
Goldman Sachs retained approximately the following combined commissions on sales
of Class A, B and C Shares during the following periods:
1997 1996 1995
---- ---- ----
Adjustable Rate Government/1/ $ 156,000 $79,000 $40,000
Municipal Income/2/ 57,000 24,900 48,000
Government Income/2/ 193,000 17,300 22,000
Global Income/2/ 176,000 52,600 15,000
Short Duration Government/3/ 63,000 N/A N/A
Short Duration Tax-Free/3/ 6,000 N/A N/A
Core Fixed Income/3/ 14,000 N/A N/A
High Yield/3/ 3,194,000 N/A N/A
_____________________
/1/ The Adjustable Rate Government Fund does not offer Class B and C Shares.
B-78
<PAGE>
/2/ Prior to May 1, 1996 and August 15, 1997, the Municipal Income, Government
Income and Global Income Funds did not offer Class B and Class C Shares
respectively.
/3/ Prior to May 1, 1996 and August 15, 1997, Short Duration, Short Duration
Tax-Free, and Core Fixed Income Funds did not offer Class A and B and C
Shares, respectively. High Yield Fund commenced operations on August 1,
1997 with the exception of Class C Shares which commenced August 15, 1997.
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 assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs received fees for the fiscal years
ended October 31, 1997, 1996 and 1995 by each Fund then in existence as follows:
Fund 1997 1996 1995
- ---- ---- ---- ----
Adjustable Rate Government $272,449 $278,337 $306,662
Short Duration Government 77,989 0 0
Short Duration Tax-Free 61,185 16,980 26,098
Core Fixed Income 85,882 24,657 13,716
Global Income 106,886 121,212 106,764
Municipal Income 152,152 90,284 63,695
Government Income Fund 163,181 72,237 94,095
High Yield Fund/1/ 27,280 N/A N/A
________________________
/1/ High Yield Fund commenced operations on August 1, 1997.
The foregoing distribution and transfer agency agreements each provide that
Goldman Sachs may render similar services to others so long as the services each
provides thereunder to the Funds are not impaired thereby. Each such agreement
also provides that the Trust will indemnify Goldman Sachs against certain
liabilities.
B-79
<PAGE>
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser, the fees and expenses of
the Trust's custodian, transfer agent fees, brokerage fees and commissions,
filing fees for the registration or qualification of the Trust's shares under
federal or state securities laws, expenses of the organization of the Trust,
fees and expenses incurred by the Trust in connection with membership in
investment company organizations, taxes, interest, costs of liability insurance,
fidelity bonds or indemnification, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal, tax and auditing fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees in the case
of Global Income Fund and High Yield Fund and other extraordinary expenses) to
the following percentage of each Fund's average daily net assets:
Short Duration Government Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fixed Income 0.05%
Global Income Fund 0.06%
High Yield Fund 0.14%
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 years ended October 31, 1997,
B-80
<PAGE>
October 31, 1996 and October 31, 1995, Other Expenses of each Fund were reduced
by the Advisers in the following amounts:
1997 1996 1995
---- ---- ----
Adjustable Rate Government $191,739 $386,863 $551,405
Short Duration Government 285,329 169,069 219,994
Short Duration Tax-Free 282,291 238,097 213,139
Core Fixed Income 311,343 233,065 176,469
Municipal Income 299,884 238,203 196,265
Government Income 364,989 219,091 242,036
Global Income 223,969 337,079 70,195
High Yield* 200,097 N/A N/A
______________________
* High Yield Fund commenced operations on August 1, 1997.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by the
Advisers in performing certain accounting services not being provided by the
Trust's custodian.
CUSTODIAN AND SUB-CUSTODIANS
- ----------------------------
State Street Bank and Trust Company ("State Street"), 1776 Heritage Drive,
North Quincy, Massachusetts 02110, 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 Place,
Boston, Massachusetts 02110, have been selected as auditors of the Trust. In
addition to audit services, Arthur Andersen LLP prepares the Trust's federal and
state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a dealer is dealing with a Fund as
principal and receives compensation equal to the spread between the dealer's
cost for a given security and the resale price of such security). In certain
foreign countries, debt securities in which the Global Income Fund, Core Fixed
Income and High Yield Funds 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
B-81
<PAGE>
occasions when an Adviser deems the purchase or sale of a security to be in the
best interests of a Fund as well as its other customers (including any other
fund or other investment company or advisory account for which the Advisers or
an affiliate act as investment adviser), a Fund, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution. In
such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the applicable Adviser in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to the applicable Fund and such other customers. In some instances,
this procedure may adversely affect the size and price of the position
obtainable for a Fund. The Management Agreement permits each Adviser, in its
discretion, to purchase and sell portfolio securities to and from dealers who
provide the Trust with brokerage or research services in which dealers may
execute brokerage transactions at a higher cost to the Fund. Brokerage and
research services furnished by firms through which the Fund's effect their
securities transactions may be used by the Advisers in servicing other accounts
and not all of these services may be used by the Adviser in connection with the
specific Fund generating the brokerage credits. The fees received under the
Management Agreement are not reduced by reason of the Adviser receiving such
brokerage and research services. In addition, in selecting brokers and dealers,
the Advisers may take into account sales of shares of the Funds and other funds
in the Goldman Sachs Group of Funds by such brokers and dealers.
For the fiscal year ended October 31, 1995, the Funds then in existence
paid no brokerage commissions.
B-82
<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-83
<PAGE>
For the fiscal year ended October 31, 1997, 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, 1997:
Adjustable Rate Fund $61,000 $61,000(100%)/1/ $739,605,010(100%)/2/ N/A$
Short Duration Government Fund 19,000 19,000(100%)/1/ 494,733,847(100%)/2/ N/A
Core Fixed Income Fund 3,000 3,000(100%)/1/ 8,429,994(100%)/2/ N/A
Government Income Fund 2,400 2,400(100%)/1/ 26,765,840(100%)/2/ N/A
Municipal Income Fund 1,800 1,800(100%)/1/ 33,112,625(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-84
<PAGE>
During the fiscal year ended October 31, 1997, the Funds acquired and sold
securities of their regular broker-dealers: Smith Barnery, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Dresdner Bank, Sanwa
Securities, J.P. Morgan & Co., Inc., Bear Stearns & Co., Nomura Securities and
Morgan Stanley & Co.
At October 31, 1997, Short Duration Tax-Free Fund and Municipal Income Fund
held no securities of their regular broker-dealers. As of the same date, Short
Duration Government Fund, Global Income Fund, Adjustable Rate Government Fund,
Government Income Fund, Core Fixed Income Fund and High Yield Fund held the
following amounts of securities of their regular broker-dealers, as defined in
Rule 10b-1 under the Act, or their parents ($ in thousands): Short Duration
Government Fund: Lehman Brothers, Inc. ($1,350), Nomura Securities ($1,680) and
Bear Stearns ($1,680); Global Income: Morgan Stanley ($681); Adjustable Rate
Government Fund: Lehman Brothers, Inc. ($1,856), Bear Stearns ($2,310) and
Nomura Securities ($2,310); Government Income Fund: Lehman Brothers, Inc.
($6,209), Nomura Securities ($7,200), Bear Stearns ($7,200); Salomon Brothers
($959); J.P. Morgan & Co. ($523); Morgan Stanley & Co. ($523) and Merrill Lynch
($2,240); Core Fixed Income: Lehman Brothers, Inc. ($7,143), Nomura Securities
($8,100), Bear Stearns ($8,100), J.P. Morgan ($1,046) and Morgan Stanley & Co.
($943). High Yield Fund: Bear Stearns ($2,580) and Lehman Brothers, Inc.
($2,073).
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 Fixed Income:
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 Government 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, 1997, no Service Shares of the
Adjustable Rate Government Fund were outstanding; no Class A, Class B or Class C
Shares of Short Duration Government Fund, Short Duration Tax-Free Fund and Core
Fixed Income were outstanding; no Class C Shares of
B-85
<PAGE>
Government Income Fund and Municipal Income Fund were outstanding; and no shares
of High Yield Fund were outstanding.
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 among 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 series. 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 attributed 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
B-86
<PAGE>
also bear the cost of an Authorized Dealer Service Plan at an annual rate of up
to 0.25% of average daily net assets attributed to Class A Shares.
Class B and Class C 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 and
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 attributed to Class B and
Class C Shares. Class B and 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 attributed to Class B and 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, shares are fully paid and non-assessable. In the event of
liquidation of a Fund, shareholders of that Fund are entitled to share pro rata
in the net assets of the applicable class of the relevant Fund available for
distribution to such shareholders. All shares are freely transferable and have
no preemptive, subscription or conversion rights.
As of February 1, 1998, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following funds: Adjustable
Rate Government Fund -- First Trust of New York, 100 Wall Street, Suite 1600,
New York, NY (14.19%); State Treasurer/Nebraska Investment Council, 841 "O"
Street, Suite 500, Lincoln, NE 68508 (8.08%); First Security Bank of Idaho FBO,
Idaho Housing Agency, P.O. BOX 30007, Salt Lake City, UT 84130 (7.55%); Meadows
Foundation Inc., 3003 Swiss Avenue, Dallas, TX 75204 (5.15%); Regents of the
University oF Minnesota, 100 Church Street SE, Room 311A, Minneapolis, MN 55455
(5.08%); Short Duration Government Fund -- Central Carolina Bank & Trust Co.,
P.O. Box 931, Durham, NC 27702, (6.10%); State Street Bank & Trust Co.,
(29.64%); P.O. Box 1992, Boston, MA 02105 (24.69%);
B-87
<PAGE>
Richfield Bank & Trust Co., Kirchbak Co., 6625 Lyndale Avenue South, Richfield,
MN 55423 (5.50%); Norwest Bank Iowa NA, P.O. Box 1450 NW 8477, Minneapolis, MN
55480 (6.65%); Short Duration Tax-free Fund -- Donald R. Gant, Partner, Goldman,
Sachs & Co., 85 Broad Street, 22nd Floor, New York, NY 10004 (15.20%); K-G,
Inc., 166 Oak Knoll Terrace, Highland Park, IL 60035 (8.97%); Lafayette American
Bank C/o Hubco, 1000 Macarthur Blvd., Mahwah, NJ 07430 (7.34%); Nelda Start,
P.O. Box 909, Orange, TX 77631-0909 (6.62%); Government Income Fund -- Frontier
Trust Co., Inc. TR, FBO Dade County Public Schools, 1720 S. Gadsden Street,
Tallahassee, FL 32301-5547 (5.4%); Core Fixed Income -- Local 234 Electric
Workers Retirement Fund, 10300 Merritt Street, Castroville, CA 95012 (5.29%);
Vinson and Elkins Pension Plan C/o Banc One, 910 Travis Street, Fl 6, Houston,
TX 77002-5802 (7.88%); Vinson and Elkins Lawyers, Retirement Plan, Texas
Commerce Bank N.A., P.O. Box 2550, Houston, TX 77252 (25.48%) Norwest Bank Iowa,
P.O. Box 1450 NW 8477, Minneapolis, MN 55480 (5.25%); Global Income Fund --
First National Bank North Dakota, P.O. Box 6001, Grand Forks, ND 58206-6001
(5.4%); State Street Bank and Trust, GS Profit Sharing Master Trust, P.O. Box
1992, Boston, MA 02105-1992 (15.9%).
Rule 18f-2 under the Act provides that any matter required to be submitted
by the provisions of the Act or applicable state law, or otherwise, to the
holders of the outstanding voting securities of an investment company such as
the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of 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 as "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters
B-88
<PAGE>
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 with
substantially the same investment objective, restrictions and policies.
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
B-89
<PAGE>
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 an 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 of Delaware business trust
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 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 and to employ other advisers in considering the merits
of the request and shall require an undertaking by the shareholders making such
request to reimburse the Fund for the expense of any such advisers in the event
that the Trustees determine not to bring such action.
B-90
<PAGE>
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
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 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, but not always, 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 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
government 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 one dealer; (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 (if
quotations are unavailable from a pricing service or, if the quotations by the
Adviser are believed to be inaccurate, the contracts will be valued by
calculating the mean between the last bid and asked quotations supplied by at
least one 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 a broker identified by the
portfolio manager/trader.
B-91
<PAGE>
In addition, 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 will be valued at the mean between the closing bid and asked prices, or
if closing bid and asked prices are not available, at the exchange defined close
price on the exchange or system in which such securities are principally traded.
If the relevant exchange or system has not closed by the time for determining
the Fund's net asset value; the securities will be valued at the mean between
the bid and asked prices at the time the net asset value is determined. 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.
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 Fixed Income and
High Yield Funds calculate their net asset value. Occasionally, events affecting
the values of such securities may occur between the times at which they are
determined and the calculation of net asset value which will not be reflected in
the computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value, in which case an adjustment
may be made.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities,
B-92
<PAGE>
insurance companies and financial institutions. Each prospective shareholder is
urged to consult his own tax adviser with respect to the specific federal,
state, local and foreign tax consequences of investing in the Funds. This
summary is based on the laws in effect on the date of this Additional Statement,
which are subject to change.
GENERAL
-------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect to
be treated and intends to continue to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) a Fund derive at least 90% of its gross income
(including tax-exempt interest) for its taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stocks or securities, or foreign currencies or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"); and (b) 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.
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 Fixed Income'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
Fixed Income'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
B-93
<PAGE>
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, if any, over certain
disallowed deductions ("net tax-exempt interest"). A Fund may retain for
investment its "net capital gain" (which consists of the excess of its net long-
term capital gain over its net short-term capital loss). However, if a Fund
retains any investment company taxable income or net capital gain, it will be
subject to tax at regular corporate rates on the amount retained. If a Fund
retains any net capital gain, that Fund may designate the retained amount as
undistributed net capital gain in a notice to its shareholders who, if subject
to U.S. federal income tax on long-term capital gains, (i) will be required to
include in income for federal income tax purposes, as long-term capital gain,
their shares of such undistributed amount, and (ii) will be entitled to credit
their proportionate shares of the tax paid by that Fund against their U.S.
federal income tax liabilities, if any, and to claim refunds to the extent the
credit exceeds such liabilities. For U.S. federal income tax purposes, the tax
basis of shares owned by a shareholder of the Fund will be increased by an
amount equal under current law to 65% of the amount of undistributed net capital
gain included in the shareholder's gross income. Each Fund intends to distribute
for each taxable year to its shareholders all or substantially all of its
investment company taxable income (if any), net capital gain and any net tax-
exempt interest. Exchange control or other foreign laws, regulations or
practices may restrict repatriation of investment income, capital or the
proceeds of securities sales by foreign investors such as Global Income Fund or
Core Fixed Income and may therefore make it more difficult for Global Income
Fund or Core Fixed Income to satisfy the distribution requirements described
above, as well as the excise tax distribution requirements described below.
However, Global Income Fund and Core Fixed Income 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
B-94
<PAGE>
of the loss. At October 31, 1997, the Funds had approximately the following
amounts of capital loss carry forwards:
Years of
Amount Expiration
------ ----------
Adjustable Rate Government $49,069,000 2000-2004
Short Duration Government 14,144,000 2002-2004
Short Duration Tax-Free 4,058,000 2002-2003
Municipal Income 641,973 2004
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 that are actually paid
in January of the following year will be treated as if they were received by
shareholders on December 31 of the year declared.
The Tax Exempt Funds may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." The Tax Exempt Funds may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
that 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
B-95
<PAGE>
Service has also issued private letter rulings to certain taxpayers (which do
not serve as precedent for other taxpayers) to the effect that tax-exempt
interest received by a regulated investment company with respect to such
obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax Exempt Funds intends to take
the position that it is the owner of any municipal obligations acquired subject
to a standby commitment or other third party put and that tax-exempt interest
earned with respect to such municipal obligations will be tax-exempt in its
hands. There is no assurance that the Service will agree with such position in
any particular case. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the treatment of tender fees paid
by these Funds, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Tax Exempt
Funds' portfolios in a manner designed to minimize any adverse impact from the
tax rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging 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 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
B-96
<PAGE>
affect the amount, timing and character of income, gain or loss recognized by
Core Fixed Income and Global Income Fund. Under these rules, foreign exchange
gain or loss realized by Core Fixed Income 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 Fixed Income'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 Fixed Income, Global Income, and High Yield Funds may be subject to
foreign taxes on income (possibly including, in some cases, capital gains) from
foreign securities. Tax conventions between certain countries and the U.S. may
reduce or eliminate such taxes in some cases. Because more than 50% of Global
Income Fund's total assets at the close of any taxable year will generally
consist of stock or securities of foreign corporations, Global Income Fund will
generally qualify to file an election with the Internal Revenue Service pursuant
to which shareholders of Global Income Fund would be required to (i) include in
ordinary gross income (in addition to taxable dividends actually received) their
pro rata shares of foreign income taxes paid by Global Income Fund that are
treated as income taxes under U.S. tax regulations (which excludes, for example,
stamp taxes, securities transaction taxes, and similar taxes) even though not
actually received by such shareholders, and (ii) treat such respective pro rata
portions as foreign income taxes paid by them. Global Income Fund may or may
not make this election for any particular taxable year. Core Fixed Income and
High Yield Funds will not satisfy the 50% requirement described above and,
therefore, will not make this election. Core Fixed Income and High Yield Funds
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
B-97
<PAGE>
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 Fixed Income, Global Income or High Yield Funds acquire stock
(including, under proposed regulations, an option to acquire stock such as is
inherent in a convertible bond) in certain foreign corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, rents, royalties or capital gain) or hold at least 50% of their
assets in investments producing such passive income ("passive foreign investment
companies") Core Fixed Income, 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 Fixed
Income, Global Income or High Yield Funds is timely distributed to its
shareholders. Core Fixed Income, 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 Fixed Income, Global
Income or High Yield Funds to recognize taxable income or gain without the
concurrent receipt of cash. Core Fixed Income, Global Income or High Yield Funds
may limit and/or manage
B-98
<PAGE>
their holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
A Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark-to-market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS DISTRIBUTIONS
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations concerning the tax-exempt status of such obligations, nor does it
guarantee or represent that bond counsels' opinions are correct. Bond counsels'
opinions will generally be based in part upon covenants by the issuers and
related parties regarding continuing compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex 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
B-99
<PAGE>
availability of tax-exempt obligations and the value of a Tax Exempt Fund's
portfolio may be affected by restrictive federal income tax legislation enacted
in recent years or by similar, future legislation. If a Tax Exempt Fund
satisfies the applicable requirements, dividends paid by the Fund which are
attributable to tax exempt interest on Municipal Securities and designated by
the Fund as exempt-interest dividends in a written notice mailed to its
shareholders within sixty days after the close of its taxable year may be
treated by shareholders as items of interest excludable from their gross income
under Section 103(a) of the Code. Exempt-interest dividends a Tax Exempt Fund
receives from other regulated investment companies, including exempt-interest
dividends on auction rate preferred securities of such companies held by a Fund,
are treated as interest on Municipal Securities and may be distributed by a Tax
Exempt Fund as exempt-interest dividends. The recipient of tax-exempt income is
required to report such income on his federal income tax return. However, a
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain the exclusion under Section 103(a) if such
shareholder would be treated as a "substantial user" under Section 147(a)(1)
with respect to some or all of the tax-exempt obligations held by a Tax Exempt
Fund. The Code provides that interest on indebtedness incurred or continued to
purchase or carry shares of a Tax Exempt Fund is not deductible to the extent
attributable to exempt-interest dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions from investment company taxable income, as
defined above, are taxable to shareholders who are subject to tax as ordinary
income whether paid in cash or reinvested in additional shares. Taxable
distributions include distributions from any Fund, including Short Duration Tax-
Free Fund and Municipal Income Fund, that are attributable to (i) 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
B-100
<PAGE>
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 (20% or 28%, as applicable) whether
received in cash or additional shares and regardless of the length of time their
shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less than a
minimum period, generally 46 days. Receipt of certain distributions qualifying
for the deduction may result in reduction of the tax basis of the corporate
shareholder's shares and may give rise to or increase its liability for federal
corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes, will first reduce a
shareholder's basis in his shares and, after the shareholder's basis is reduced
to zero, will generally constitute capital gains to a shareholder who holds his
shares as capital assets. Amounts that are not allowable as a deduction in
computing taxable income, including expenses associated with earning tax-exempt
interest income, do not reduce a Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of Short Duration Tax-Free Fund's
or Municipal Income Fund's distributions from gross tax-exempt interest income
that exceeds its net tax-exempt interest would be taxable as ordinary income to
the extent of such disallowed deductions even though such excess portion may
represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash and will have a cost basis in the shares received equal
to such amount.
After the close of each calendar year, each Fund will inform shareholders
of the federal income tax status of its dividends and distributions for such
year, including the portion of such
B-101
<PAGE>
dividends, if any, that qualifies as tax-exempt or as capital gain, the portion,
if any, that should be treated as a tax preference item for purposes of the
federal alternative minimum tax and the foreign tax credits, if any, associated
with such dividends. 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.
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
Government 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
B-102
<PAGE>
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.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish the Funds with their correct taxpayer identification number and with
certain required certifications or if the Service or a broker notifies the Funds
that the number furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from Short
Duration Tax-Free Fund or Municipal Income Fund will not be subject to backup
withholding if the applicable Fund reasonably estimates that at least 95% of its
distributions will be exempt-interest dividends. A Fund may refuse to accept an
application that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment 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
B-103
<PAGE>
by an applicable tax treaty) unless the dividends are effectively connected with
a U.S. trade or business of the shareholder, in which case the dividends will be
subject to tax on a net income basis at the graduated rates applicable to U.S.
individuals or domestic corporations. Distributions of net capital gain,
including amounts retained by a Fund which are designated as undistributed
capital gains, to a shareholder who is not a U.S. person will not be subject to
U.S. federal income or withholding tax unless the distributions are effectively
connected with the shareholder's trade or business in the United States or, in
the case of a shareholder who is a nonresident alien individual, the shareholder
is present in the United States for 183 days or more during the taxable year and
certain other conditions are met. Non-U.S. shareholders may also be subject to
U.S. withholding tax on deemed income resulting from any election by Global
Income Fund to treat qualified foreign taxes it pays as passed through to
shareholders (as described above), but they may not be able to claim a U.S. tax
credit or deduction with respect to such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder
B-104
<PAGE>
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.
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
B-105
<PAGE>
Thirty-day yield, tax equivalent yield (Short Duration Tax- Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A, 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.
The Service Shares of Global Income Fund commenced operations on March 12,
1997; the Service Shares of Government Income and Municipal Income Funds
commenced operations on August 15, 1997. The Service Shares of these Funds had
no operating or performance history prior thereto. However, in accordance with
interpretive positions expressed by the staff of the SEC, each of these Funds
has adopted the performance records of its respective Class A shares from that
class' inception date (August 2, 1991, February 10, 1993 and July 20, 1993,
respectively) to the inception dates of the Service Shares stated above.
Quotations of performance data of these Funds relating to this period include
the performance record of the applicable Class A Shares (excluding the impact of
any applicable front-end sales charge). The performance records of the
applicable Class A Shares reflect the expenses actually incurred by the Fund.
These expenses include any asset-based sales charges (i.e., fees under
distribution and Authorized Dealer Service Plans) imposed and other operating
expenses. Total return quotations will be calculated pursuant to SEC-approved
methodology.
B-106
<PAGE>
YIELD
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield(1)
- ----------------------------------- ------------ -------------- -------------
30-Days
ended
10/31/97
ADJUSTABLE RATE GOVERNMENT FUND
Institutional Shares 5.98% 5.98%
Administration Shares 5.74% 5.74%
Service Shares(2) 5.48% 5.48%
Class A Shares
(assumes 1.5% sales charge) 5.64% 5.39%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.19% 5.82%
Administration Shares 5.93% 5.55%
Service Shares 5.68% 5.31%
Class A Shares(4)
(assumes 2.0% sales charge) 5.75% 5.14%
Class B Shares(4) 5.35% 4.82%
Class C Shares(5) N/A N/A
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.09% 3.30%
Administration Shares 3.84% 3.05%
Service Shares 3.59% 2.81%
Class A Shares(4)
(assumes 2.0% sales charge) 3.77% 2.78%
Class B Shares(4) 3.23% 2.28%
Class C Shares(5) N/A N/A
CORE FIXED INCOME
Institutional Shares 6.27% 5.89%
Administration Shares 6.03% 5.66%
Service Shares 5.76% 5.38%
Class A Shares(4)
(assumes 4.5% sales charge) 5.75% 5.14%
Class B Shares(4) 5.27% 4.89%
Class C Shares(5) 5.23% 4.82%
GLOBAL INCOME FUND
Institutional Shares 5.10% 4.66%
Service Shares(2) 4.59% 4.15%
Class A Shares
(assumes 4.5% sales charge) 4.36% 3.95%
Class B Shares 4.02% 3.64%
Class C Shares(7) 4.01% 3.63%
B-107
<PAGE>
YIELD
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield(1)
- ----------------------------------- ------------ -------------- -------------
30-Days
ended
10/31/97
MUNICIPAL INCOME FUND
Institutional Shares(6) N/A N/A
Service Shares (6) N/A N/A
Class A Shares 4.16% 3.42%
(assumes 4.5% sales charge)
Class B Shares 3.60% 3.08%
Class C Shares(7) 3.61% 2.97%
GOVERNMENT INCOME FUND
Institutional Shares(6) N/A N/A
Service Shares(6) N/A N/A
Class A Shares
(assumes 4.5% sales charge) 5.81% 4.54%
Class B Shares 5.33% 4.26%
Class C Shares(7) 5.31% 4.22%
HIGH YIELD FUND(8)
Institutional Shares N/A N/A
Service Shares N/A N/A
Class A Shares
(assumes 4.5% sales charge) N/A N/A
Class B Shares N/A N/A
Class C Shares(7) N/A N/A
B-108
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate(1)
- ----------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
30 Days
ended
10/31/97
ADJUSTABLE RATE GOVERMENT FUND
Institutional Shares 6.00% 6.00%
Administration Shares 5.75% 5.75%
Service Shares(2) 5.50% 5.50%
Class A Shares
assumes no sales charge 5.75% 5.47%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.15% 5.78%
Administration Shares 5.89% 5.51%
Service Shares 5.65% 5.28%
Class A Shares(4)
assumes no sales charge 5.90% 5.27%
Class B Shares(4) 5.29% 4.77%
Class C Shares(5) 5.13% 4.75%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.04% 3.25%
Administration Shares 3.79% 3.00%
Service Shares(4) 3.54% 2.76%
Class A Shares
assumes no sales charge 3.79% 2.79%
Class B Shares(4) 3.18% 2.24%
Class C Shares(5) 2.99% 2.03%
CORE FIXED INCOME
Institutional Shares 6.15% 5.77%
Administration Shares 5.90% 5.53%
Service Shares(4) 5.64% 5.27%
Class A Shares
assumes no sales charge 5.90% 5.27%
Class B Shares(4) 5.15% 4.77%
Class C Shares(5) 5.10% 4.69%
GLOBAL INCOME FUND
Institutional Shares 5.77% 5.38%
Service Shares(2) 5.35% 4.96%
Class A Shares
assumes no sales charge 5.24% 4.81%
Class B Shares 4.73% 4.34%
Class C Shares(7) 4.77% 4.39%
</TABLE>
B-109
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate(1)
- ----------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
30 Days
ended
10/31/97
MUNICIPAL INCOME FUND
Institutional Shares(6) 4.51% 4.45%
Service Shares(6) 4.04% 3.51%
Class A Shares
assumes no sales charge 4.29% 3.52%
Class B Shares 3.54% 3.02%
Class C Shares(7) 3.55% 2.92%
GOVERNMENT INCOME FUND
Institutional Shares(6) 6.32% 5.40%
Service Shares(6) 5.84% 4.77%
Class A Shares
assumes no sales charge 6.06% 4.74%
Class B Shares 5.31% 4.24%
Class C Shares(7) 5.29% 4.21%
HIGH YIELD FUND(8)
Institutional Shares 8.25% 7.87%
Service Shares 7.78% 7.39%
Class A Shares
assumes no sales charge 7.98% 7.35%
Class B Shares 7.21% 6.83%
Class C Shares(7) 7.17% 6.78%
</TABLE>
B-110
<PAGE>
TAX-EQUIVALENT YIELD(3)
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield(1)
- ---------------------------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
30 Days
ended
10/31/97
SHORT DURATION TAX-FREE FUND(3)
Institutional Shares 6.82% 5.49%
Administration Shares 6.40% 5.07%
Service Shares 5.98% 4.66%
Class A Shares
assumes no sales charge 6.40% 4.71%
Class B Shares 5.37% 3.78%
Class C Shares 5.05% 3.42%
MUNICIPAL INCOME FUND(3)
Institutional Shares 7.62% 7.52%
Service Shares 6.82% 5.93%
Class A Shares
assumes no sales charge 7.25% 5.95%
Class B Shares 5.98% 5.10%
Class C Shares 6.00% 4.93%
</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) Service Shares commenced operations on March 27, 1997 for Adjustable Rate
Government Fund, and March 12, 1997 for Global Income Fund.
(3) The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 40.8% (adjusted for the 3% phase out
of itemized deductions for individuals at high income levels) federal
income tax rate.
(4) Class A and B Shares of Short Duration Government, Short Duration Tax-Free
and Core Fixed Income commenced operations on May 1, 1997.
(5) Class C Shares commenced operations on August 15, 1997.
(6) Institutional and Service Shares of Municipal Income and Government Income
Funds commenced operations on August 15, 1997.
(7) Class C Shares commenced operations on August 15, 1997.
(8) High Yield Fund commenced operations on August 1, 1997.
The above tables should not be considered a representation of future
performance.
B-111
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
------------------------------------------------------------------
Investment Investment With Fee Without Fee
Date Period Reductions Reductions
Fund and/or and/or
- -------------------------------- Expense Expense
Limitations Limitations
------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
<S> <C> <C> <C> <C>
Institutional Shares 7/17/91/1a/ ended 10/31/97 5.54% 5.43%
one year ended
11/1/96 10/31/97 6.70% 6.67%
five years ended
11/1/92 10/31/97 5.25% 5.20%
Administration Shares 4/15/93/1b/ ended 10/31/97 5.07% 5.02%
one year ended
11/1/96 10/31/97 6.43% 6.40%
Service Shares 3/27/97/1c/ ended 10/31/97 3.81% 3.78%
Class A Shares 5/12/951d ended 10/31/97
assumes 1/5% sales charge 5.75% 5.43%
assumes no sales charge 6.41% 6.09%
one year ended
11/1/96 10/31/97
assumes 1.5% sales charge 4.83% 4.53%
assumes no sales charge 6.43% 6.13%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/97 7.22% 6.82%
one year ended
11/1/96 10/31/97 7.07% 6.68%
five years ended
11/1/92 10/31/97 5.83% 5.57%
Administration Shares 2/28/96/2b/ ended 10/31/97 6.53% 6.19%
one year ended
11/1/96 10/31/97 6.91% 6.52%
Service Shares 4/10/96/2b/ ended 10/31/97 7.07% 6.73%
11/1/96 one year ended
10/31/97 6.63% 6.24%
Class A Shares 5/1/97/2c/ ended 10/31/97
assumes 2.0% sales charge 2.06% 1.74%
assumes no sales charge 4.14% 3.82%
Class B Shares 5/1/97/2c/ ended 10/31/97 3.94% 3.65%
Class C Shares 8/15/97/2d/ ended 10/31/97 1.44% 1.36%
</TABLE>
B-112
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
------------------------------------------------------------------
Investment Investment With Fee Without Fee
Date Period Reductions Reductions
Fund and/or and/or
- -------------------------------- Expense Expense
Limitations Limitations
------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE
FUND
Institutional Shares 10/1/923a ended 10/31/97 4.44% 3.88%
11/1/96 one year ended 5.40% 4.59%
10/31/97
11/1/92 five years ended 4.59% 4.06%
10/31/97
Administration Shares 5/20/933b ended 10/31/97 3.87% 3.41%
11/1/96 one year ended 5.14% 4.33%
10/31/97
Service Shares 9/20/943c ended 10/31/97 4.49% 3.93%
11/1/96 one year ended 4.77% 3.96%
10/31/97
Class A Shares 5/1/973d ended 10/31/97
assumes 2.05% sales 1.35% 0.83%
charge
assumes no sales 3.39% 2.86%
charge
Class B Shares 5/1/973d ended 10/31/97 3.07% 2.59%
Class C Shares 8/15/973e ended 10/31/97 0.97% 0.80%
CORE FIXED INCOME
Institutional Shares 1/15/944a 10/31/97 7.08% 6.50%
11/1/96 one year ended
10/31/97 9.19% 8.78%
Administration Shares 2/28/964b ended 10/31/97 7.45% 7.05%
11/1/96 one year ended
10/31/97 8.92% 8.52%
Service Shares 3/13/964b ended 10/31/96 8.31% 7.93%
11/1/96 one year ended 8.65% 8.25%
10/31/97
Class A Shares 5/1/974c ended 10/31/974c
assumes 4/5% sales 2.10% 1.78%
charge
assumes no sales 6.94% 6.61%
charge
Class B Shares 5/1/974c ended 10/31/97 6.63% 6.42%
Class C Shares 8/15/974d ended 10/31/97 2.74% 2.64%
</TABLE>
B-113
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------------------
Investment Investment With Fee Without Fee
- -------------------------- Date Period Reductions Reductions
Fund and/or and/or
- -------------------------- Expense Expense
Limitations Limitations
---------------------------------------------------------------------
GLOBAL INCOME FUND/5c/
<S> <C> <C> <C> <C>
Class A Shares 8/2/91/5a/ ended 10/31/97
assumes 4.5% sales 7.49% 7.15%
charge
assumes no sales 8.28% 7.94%
charge
11/1/96 one year ended
10/31/97
assumes 4.5% sales 4.76% 4.31%
charge 9.66% 9.20%
assumes no sales
charge
11/1/92 five years ended
10/31/97
assumes 4.5% sales 7.20% 6.85%
charge 8.19% 7.83%
assumes no sales
charge
Class B Shares 5/1/96/5b/ ended 10/31/97 10.27% 9.84%
11/1/96 one year ended 9.04% 8.63%
ended 10/31/97
Institutional Shares 8/1/95/5d/ ended 10/31/97 11.75% 11.28%
11/1/96 one year ended 10.26% 9.83%
10/31/97
Service Shares 8/2/91/5e/ ended 10/31/97 8.28% 7.97%
11/1/96 one year ended 9.66% 9.38%
10/31/97
11/1/92 five years ended 8.19% 7.87%
10/31/97
Class C Shares 8/15/97/5f/ ended 10/31/97 3.03% 2.96%
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/97
assumes 4.5% sales 5.04% 4.06%
charge
assumes no sales 6.18% 5.18%
charge
11/1/96 one year ended
10/31/97
assumes 4.5% sales 4.29% 3.50%
charge
assumes no sales 9.23% 8.40%
charge
Class B Shares 5/1/96/6b/ ended 10/31/97 8.63% 8.02%
11/1/96 one year ended
10/31/97 8.48% 7.92%
Class C Shares 8/15/97/6c/ ended 10/31/97 1.75% 1.61%
</TABLE>
B-114
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------------------
Investment Investment With Fee Without Fee
- -------------------------- Date Period Reductions Reductions
Fund and/or and/or
- -------------------------- Expense Expense
Limitations Limitations
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Shares 8/15/97/6c/ ended 10/31/97 2.10% 1.50%
Service 7/20/93 ended 10/31/97 6.17% 5.23%
11/1/96 one year ended 9.18% 8.60%
10/31/97
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/97
assume 4.5% sales 6.10% 3.84%
charge
assumes no sales 7.14% 4.85%
charge
11/1/96 one year ended
10/31/97
assumes 4.5% sales 3.80% 2.45%
charge
assumes no sales 8.72% 7.30%
charge
Class B Shares 5/1/96/7b/ ended 10/31/97 8.59% 7.36%
11/1/96 one year ended 7.96% 6.82%
10/31/97
Class C Shares 8/15/97/7c/ ended 10/31/97 2.72% 2.49%
Institutional Shares 8/15/97/7c/ ended 10/31/97 2.94% 2.72%
Service Shares 2/10/93/7c/ ended 10/31/97 7.13% 4.91%
11/1/96 one year ended 8.67% 7.55%
10/31/97
HIGH YIELD FUND
Class A Shares 8/1/97/8a/ ended 10/31/97
assumes 4.5% sales (3.06%) (3.21%)
charge
assumes no sales 1.50% 1.35%
charge
Class B Shares 8/1/97/8a/ ended 10/31/97 1.31% 1.21%
Class C Shares 8/15/97/8b/ ended 10/31/97 1.46% 1.38%
Institutional Shares 8/1/97/8a/ ended 10/31/97 1.58% 1.48%
Service Shares 8/1/97/8a/ ended 10/31/97 1.46% 1.36%
</TABLE>
_____________________________
1a Institutional Shares of Adjustable Rate Government Fund commenced
operations on July 17, 1991.
1b Administration Shares of Adjustable Rate Government Fund commended
operations on April 15, 1993.
115
<PAGE>
1c Service Shares of Adjustable Rate Government Fund commenced operations on
March 27, 1997.
1d Class A shares of Adjustable Rate Government 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.
2c Class A and Class B Shares of Short Duration Government Fund commenced
operations on May 1, 1997. An aggregate total return (not annualized) is
shown instead of an average annual total return since Class A and Class B
Shares have not completed a full 12 months of operation as of October 31,
1997.
2d Class C Shares of Short Duration Government Fund commenced operations on
August 15, 1997. An aggregate total return (not annualized) is shown instead
of an average annual total return since Class C Shares have not completed a
full 12 months of operation as of October 31, 1997.
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.
3d Class A and Class B Shares of Short Duration Tax-Free Fund commenced
operations on May 1, 1997. An aggregate total return (not annualized) is
shown instead of an average annual total return since Class A and Class B
shares have not completed a full 12 months of operation as of October 31,
1997.
3e Class C Shares of Short Duration Tax-Free Fund commenced operations on August
15, 1997. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class C Shares have not completed a full 12
months of operation as of October 31, 1997.
4a Institutional Shares of Core Fixed Income commenced operations on January 5,
1994.
4b Administration Shares of Core Fixed Income commenced operations on February
28, 1996. Service Shares of Core Fixed Income commenced operations on March
13, 1996.
4c Class A and Class B Shares of Core Fixed Income commenced operations on May
1, 1997. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class A and Class B Shares have not
completed a full 12 months of operation as of October 31, 1997.
4d Class C Shares of Core Fixed Income commenced operations on August 15, 1997.
An aggregate total return (not annualized) is shown instead of an average
annual total return since Class C Shares have not completed a full 12 months
of operation as of October 31, 1997.
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 Institutional Shares of Global Income Fund commenced operations on August 1,
1995.
B-116
<PAGE>
5e Service Shares of Global Income Fund commenced operations on March 12, 1997.
5f Class C Shares of Global Income Fund commenced operations August 15, 1997. An
aggregate total return (not annualized) is shown instead of an average annual
total return since Class C Shares have not completed a full 12 months of
operation as of October 31, 1997.
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.
6c Class C, Institutional and Service Shares of the Municipal Income Fund
commenced operations on August 15, 1997.
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.
7c Class C, Institutional and Service Shares of the Government Income Fund
commenced operations on August 15, 1997.
8a Class A, Class B, Institutional and Service Shares, Shares of High Yield Fund
commenced operations on August 1, 1997. An aggregate total return (not
annualized) is shown instead of an average annual total return Since Class A,
Class B, Institutional and Service Shares of High Yield Fund have not
completed a full 12 months of operation as of October 31, 1997.
8b Class C Shares of High Yield Fund commenced operations on August 15, 1997. An
aggregate total return (not annualized) is shown instead of an average annual
total return since Class C Shares of High Yield Fund have not completed a
full 12 months of operation as of October 31, 1997.
The above table should not be considered a representation of future performance.
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.
- -------------- ----------------- -------------------------------- -----
B-117
<PAGE>
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 Fixed Income, 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 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
B-118
<PAGE>
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:
o 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;
o 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;
o Credit Ratings of domestic government bonds in various countries;
o Price volatility comparisons of types of securities over different periods
of time; and
o 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
B-119
<PAGE>
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
Shares of the Funds are offered and sold on a continuous basis by the
Trust's Distributor, Goldman Sachs, acting as agent. As described in the
Prospectus, shares of the Funds are redeemed at their net asset value as next
determined after receipt of the purchase or redemption order.
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90- day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net asset value of 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 may incur
transaction costs upon the disposition of the securities received in the
redemption.
B-120
<PAGE>
The right of a shareholder to redeem shares and the date of payment by each
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for such Fund to dispose of securities owned by it
or fairly to determine the value of its net assets; or for such other period as
the SEC may by order permit for the protection of shareholders of such Fund.
(The Trust may also suspend or postpone the recommendation of the transfer of
shares upon the occurrence of any of the foregoing conditions).
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 1997 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. No other
portions of the Fund's Annual Report are incorporated herein by reference.
OTHER INFORMATION REGARDING PURCHASES
The Adviser, Distributor and/or their affiliates may pay, out of their own
assets, compensation to Service Organizations and other persons in connection
with the sale and/or servicing of shares of the Funds and other investment
portfolios of the Trust. 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 shareholder servicing and
processing. These Additional Payments may take the form of "due
B-121
<PAGE>
diligence" payments for an institution's examination of the Funds and payments
for providing extra employee training and information relating to the Funds;
"listing" fees for the placement of the Funds on a dealer's list of mutual funds
available for purchase by its customers; "marketing support" fees for providing
assistance in promoting the sale of the Funds' shares; and payments for the sale
of shares and/or the maintenance of share 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 any 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 institution, or may be based on a percentage of the value of
shares sold to, or held by, customers of the institution involved, and may be
different for different institutions. 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 Service Organizations and other institutions 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.
B-122
<PAGE>
ADMINISTRATION PLAN
Each Fund has adopted an administration plan (the "Plan") with respect to
its Administration Shares which authorizes it to compensate Service
Organizations for providing certain account administration services to their
customers who are beneficial owners of such Shares. Pursuant to the Plans, a
Fund enters into agreements with Service Organizations which purchase
Administration Shares on behalf of their customers ("Service Agreements").
Under such Service Agreements the Service Organizations may perform some or all
of the following services: (a) act, directly or through an agent, as the sole
shareholder of record and nominee for all customers, (b) maintain account
records for each customer who beneficially owns Administration Shares of a Fund,
(c) answer questions and handle correspondence from customers regarding their
accounts, (d) process customer orders to purchase, redeem and exchange
Administration Shares of a Fund and handle the transmission of funds
representing the customers' purchase price or redemption proceeds, and (e) issue
confirmations for transactions in shares by customers. As compensation for such
services, a Fund will pay each Service Organization an account administration
fee in an amount up to 0.25% (on an annualized basis) of the average daily net
assets of the Administration Shares of such Fund attributable to or held in the
name of such Service Organization. For the fiscal years ended October 31, 1997,
1996 and 1995, administration fees accrued by the Funds were as follows:
Fund 1997 1996 1995
- ---- ---- ---- ----
Adjustable Rate Government $ 9,699 $9,833 $12,632
Core Fixed Income 14,647 741 *
Short Duration Government 3,203 107 425
Short Duration Tax-Free 222 129 1,244
__________________
* No Administration Shares of Core Fixed Income Fund were outstanding at
October 31, 1995.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in Administration Shares of a Fund. Service Organizations, including
banks regulated by the Comptroller of the Currency, the Federal Reserve Board or
the Federal Deposit Insurance Corporation, and investment advisers and other
money managers subject to the jurisdiction of the SEC, the Department of Labor
or state securities commissions, are urged to consult legal advisers before
investing fiduciary assets in Administration Shares of a Fund. In addition,
under some state securities laws, banks and other
B-123
<PAGE>
financial institutions purchasing Administration Shares on behalf of their
customers may be required to register as dealers.
The Plans with respect to Adjustable Rate Government Fund, Short Duration
Government Fund, Short Duration Tax-Free Fund and Core Fixed Income Fund were
approved by The Goldman Sachs Group, L.P., as the sole shareholder of
Administration Shares of each Fund. The Board of Trustees, including a majority
of the Trustees who are not interested persons of the Trust and who have no
direct or indirect financial interest in the operation of the Plans or the
related Service Agreements, most recently voted to approve each Plan and Service
Agreements at a meeting called for the purpose of voting on such Plans and
Service Agreements on April 23, 1997. The Plans and Service Agreements will
remain in effect until April 30, 1998 and will continue in effect thereafter
only if such continuance is specifically approved annually by a vote of the
Board of Trustees in the manner described above. No Plan may be amended to
increase materially the amount to be spent for the services described therein
without approval of the Administration Shareholders of the applicable Fund and
all material amendments of the Plans must also be approved by the Board of
Trustees in the manner described above. Each Plan may be terminated at any time
by a majority of the Board of Trustees as described above or by vote of a
majority of the outstanding Administration Shares of the applicable Fund. The
Service Agreements may be terminated at any time, without payment of any
penalty, by a vote of a majority of the Board of Trustees as described above or
by a vote of a majority of the outstanding Administration Shares of the
applicable Fund on not more than sixty (60) days' written notice to any other
party to the Service Agreements. The Service Agreements will terminate
automatically if assigned. So long as the Plans are in effect, the selection
and nomination of those Trustees who are not interested persons will be
committed to the discretion of the Trust's Nominating Committee, which consists
of all of the non-interested members of the Board of Trustees. The Board of
Trustees has determined that, in its judgment, there is a reasonable likelihood
that each Fund's Plan will benefit such Fund and the holders of its
Administration Shares. In the Board of Trustees' quarterly review of the Plans
and Service Agreements, the Board will consider continued appropriateness and
the level of compensation provided therein.
B-124
<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
_____________________
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of a Fund's fiscal
year end.
1-A
<PAGE>
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
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 one
year, unless explicitly noted.
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 three 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 senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, 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.
3-A
<PAGE>
STANDARD & POOR'S RATINGS GROUP
Aaa: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to meet the financial commitment on the obligation is
extremely strong.
Aa: Bonds and debt rated AA have a very strong capacity to meet the
financial commitment on the obligation and differ from the higher rated issues
only in small degree.
A: Bonds and debt rated A have a strong capacity to meet the financial
commitment on the obligation 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 meet the financial commitment on the obligation. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligtor.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded
as having significant speculative characteristics with respect to the capacity
meet the financial commitment on the obligation. 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 vulnerability to non-payment than
other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to the obligtor's inadequate capacity to meet the financial
commitment on the obligation.
B: Bonds and debt rated B are more vulnerable to non-payment but the
obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to meet its financial commitment on the
obligation.
CCC: Bonds and debt rated CCC is currently vulnerable to non-payment, and
are dependent upon favorable business, financial, and economic conditions to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, such securities are not likely to
have the capacity to meet its financial commitment on the obligation.
CC: The rating CC is typically applied to bonds and debt that are
currently highly vulnerable to non-payment.
4-A
<PAGE>
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but debt service
payments on this obligation are continued.
D: Bonds and debt rated D are in payment default. The D rating category
is used when payments on an obligation 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.
R This rating is attached to highlight derivative, hybrid, and certain
other obligations that Standard & Poor's believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies, certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
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 commercial paper rating categories are as follows:
A-1 Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 Obligations are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations rated "A-1".
However, the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.
A-3 Obligations exhibit adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
B- Obligations are regarded as having significant speculative
characteristics. The obligor currently has the
5-A
<PAGE>
capacity to meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C - Obligations are currently vulnerable to nonpayment and are dependent
on favorable business, financial, and economic conditions for the obligor to
meet its financial obligation.
D - Obligations are in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless Standard & Poor's believes such
payments will be made during such grace period. The "D" rating will also be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
FITCH IBCA, INC.
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 capacity for
timely payment at financial commitments, which is unlikely to be adversely
affected by reasonably foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very high
credit quality. These ratings denote a very low expectation of investment risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
A: Bonds rated A are considered to be investment grade and of high
credit quality. These ratings denote a low expectation of investment risk and
indicate strong capacity of timely payment of financial commitments.
BBB: Bonds rated BBB are considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse circumstances and in economic conditions are more likely
to impair this category.
6-A
<PAGE>
BB: Bonds are considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic changes over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B: Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
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. The Fitch IBCA
ratings from and including "AA" to "b" may be modified by the addition of a plus
or minus sign.
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch IBCA's short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations or up to three years for
U.S. public finance securities.
F 1: Highest Credit Quality. Issues assigned this rating reflect the
strongest capacity for timely payment of financial commitments; may
have an added "+" to denote any exceptionally strong credit feature.
F 2: Good Credit Quality. Issues assigned this rating have a satisfactory
capacity for timely payment of financial commitments, but the margin
of safety is not as great as for issues assigned F 1 ratings.
7-A
<PAGE>
F 3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C Securities possess high default risk. This designation indicates that
the capacity for meeting financial commitments is solely reliant upon
a sustained, favorable business and economic environment.
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.
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 economic conditions.
However, risk factors are more variable and greater in periods of stress.
A=, A, A-: Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for
8-A
<PAGE>
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.
D: Defaulted debt obligation.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
D-1+: 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.
D-1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors
are very small.
D-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.
D-3: Satisfactory liquidity and other protection factors qualify issues as
investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
D-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.
D-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.
9-A
<PAGE>
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") and variable rate demand obligations
are designated Variable Moody's Investment Grade ("VMIG"). Such ratings
recognize the differences between short-term credit risk and long-term risk.
Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality enjoying 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.
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 carrying specific
risk but having protection commonly regarded as required of an investment
security and not distinctly or predominantly speculative.
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.
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Those issues determined
to possess very strong characteristics will be given a plus (+)
designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
10-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.
o Privately owned and ranked among Wall Street's best capitalized firms,
with partners' capital of approximately $__________billion as of November ,
1997.
o With thirty-four offices worldwide Goldman Sachs employs over 9,000
professionals focused on opportunities in major markets.
o The number one underwriter of all international equity issues FROM 1993-
1996.
o A research budget of $200 million for 1997.
o Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
o The number one lead manager of U.S. common stock offerings for the past
eight years (1989-1996).*
o The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1996).
* Source: Securities Data Corporation. Common stock ranking excludes REITS,
-----------------------------------
Investment 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 Roebuck & Co. 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>
The Goldman Sachs
FIXED INCOME FUNDS
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
Goldman Sachs High Yield Fund
ANNUAL REPORT Goldman Sachs
October 31, 1997
<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------- ---------------------------------------
DEAR SHAREHOLDERS:
We are pleased to present the annual report for the Goldman Sachs Fixed
Income Funds for the fiscal year ended October 31, 1997. In addition to
reviewing the performance and activity of the Goldman Sachs Fixed Income Funds
during this period, we will also provide a brief overview of the economy and
bond market to help put their performance in perspective. Though the U.S.
economy continued to grow at a healthy pace, inflation remained subdued and the
fixed income markets achieved favorable results.
ECONOMIC REVIEW
The U.S. economy was strong throughout the period under review, but during
the summer and fall, growth cooled slightly from the torrid pace of earlier in
the year. Annualized real Gross Domestic Product (GDP) climbed 3.8% for the
fourth quarter of 1996 and a dramatic 4.9% for the first quarter of 1997,
fueled by a sharp increase in retail sales, rising factory orders and buoyant
construction outlays. To curb potential overheating, the Federal Reserve raised
the Federal funds rate a quarter-percentage point to 5.50% at the end of March.
During the second quarter, real GDP moderated to a 3.3% rate (annualized) when
an unusually cool spring impacted weather-sensitive sectors such as retail
sales and construction. Though consumer consumption picked up significantly
during the summer, overall economic growth was somewhat restrained because of
weaker export growth and a slower rate of inventory accumulation. As a result,
third-quarter GDP expanded at a 3.3% annual rate, the same pace as the prior
quarter. In October, the pattern of economic activity remained robust, as
retail sales held firm, consumer confidence remained high and the unemployment
rate sank to a 24-year low. Despite continued economic strength, consumer
inflation shrank to 2.1% over the 12-month period, its lowest level since 1986.
FIXED INCOME MARKET REVIEW
When the Funds' fiscal year began in November 1996, bonds rallied on
expectations of a continuation of the slow-growth, low-inflation environment.
However, this optimistic view quickly soured when a steady flow of stronger-
than-expected economic data revived inflation fears. From December through
March, bond yields climbed as investors feared that the acceleration would
prompt the Fed to raise rates. When the Fed eventually increased the Federal
funds rate, the move was perceived as the first in a series of hikes.
During the second quarter of 1997, prospects for the bond market brightened
due to slowing economic growth. As the threat of inflation receded, the need
for additional rate hikes subsided and bonds began to recoup their earlier
losses. However, fixed income investors remained wary of reports suggesting
that the economy was reaccelerating. In this skittish environment, the bond
market came under renewed pressure when signs of strengthening activity emerged
during the summer. The decline proved to be short-lived: Bonds quickly
recovered on the back of reassuring inflation data and a surge of buying
interest. Treasury prices continued to rise sharply through the end of the
period, when demand soared as investors sought a safe haven in the wake of
steep sell-offs in global equity markets. By the end of October, Treasury
yields fell to 20-month lows.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Market Overview 1
Goldman Sachs Government Income Fund 3
Goldman Sachs Global Income Fund 11
Goldman Sachs Municipal Income Fund 20
</TABLE>
<TABLE>
<S> <C>
Goldman Sachs High Yield Fund 29
Financial Statements 38
Notes to Financial Statements 42
Financial Highlights 51
</TABLE>
---------------------------------------
- ---------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
THE YIELD CURVE SHIFTED LOWER FOR MOST MATURITIES
During the period under review, the yield on six-month Treasury bills rose
from 5.26% on October 31, 1996 to approximately 5.31% on October 31, 1997. For
the same period, the yield on the 30-year U.S. Treasury bond fell from 6.64% to
6.15%.
HISTORICAL TREASURY YIELD CURVE
[GRAPH]
10/31/96 10/31/97
3-Month 0.0514 0.0519
6-Month 0.0526 0.0531
1-Year 0.054 0.0535
2-Year 0.0573 0.0561
3-Year 0.0586 0.0568
5-Year 0.0607 0.0572
10-Year 0.0634 0.0583
30-Year 0.0664 0.0615
Source: Bloomberg, L.P.
The one- to 30-year portion of the yield curve shifted downward while the short
end of the curve rose slightly.
OUTLOOK: FED IS LIKELY TO REMAIN ON HOLD WHILE IT ASSESSES THE IMPACT OF THE
ASIAN FINANCIAL CRISIS
Uncertainty regarding the U.S. economic and financial outlook has climbed
sharply recently, as the tug-of-war between a strong domestic economy and the
expected trade drag from emerging market economies has intensified. Though most
domestic economic indicators continue to point toward considerable forward
momentum, Federal Reserve officials are likely to defer any rate hikes until
they can assess the potential impact of Asia's financial crisis on U.S.
economic activity. If evidence mounts that the repercussions from the recent
turmoil will be insufficient to slow U.S. growth to a sustainable long-term
pace, Goldman Sachs' economists expect the Fed to resume tightening in 1998.
We thank you for your investment in the Goldman Sachs Fixed Income Funds, and
we look forward to continuing to help you achieve your investment goals 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 28, 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.
NEW SHARE CLASSES
To accommodate different clients' needs and preferences, the fund added three
new share classes as of August 15, 1997: Class C, Institutional and Service
shares.
MORTGAGE-BACKED SECURITIES PERFORMED WELL, BUOYED BY LOW VOLATILITY AND STRONG
INVESTOR DEMAND
Mortgage-backed securities (MBS) performed well throughout the 12-month
period under review, supported by an accommodative interest rate environment.
During most of the period, rates remained within a generally narrow range,
which reassured investors that the pace of mortgage refinancing was likely to
remain subdued. (In contrast, declining interest rates tend to accelerate the
pace of mortgage refinancing, which depresses MBS prices.) As a result, the MBS
sector enjoyed strong demand from a wide range of investors, who viewed these
securities as a yield-enhanced alternative to Treasuries. Most of the MBS
sector's gains were achieved during the first half of the period, when yield
spreads relative to Treasuries narrowed significantly. Although the sector's
outperformance slowed during the balance of the period, spreads remained firm
due to low volatility and MBS's continued attractiveness relative to Treasuries
and agencies.
PERFORMANCE REVIEW
The fund's strongest performers during the period under review were its
investments in collateralized mortgage obligations (CMOs), which benefited
along with other mortgage-backed securities in the favorable interest rate
environment.
We are pleased to report that the fund performed well relative to its peers.
For the 12-month period ended October 31, 1997, the fund's Class A shares
ranked within
PERFORMANCE SUMMARY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C* INSTITUTIONAL* SERVICE*
(10/31/96- (10/31/96- (8/15/97- (8/15/97- (8/15/97-
10/31/97) 10/31/97) 10/31/97) 10/ 31/97) 10/31/97)
---------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Total Return (based on 8.72% 7.96% 2.72% 2.94% 2.85%
net asset value [NAV])
Return From Monthly 7.04% 6.22% 1.19% 1.40%
Distributions 1.31%
Return From Price 1.68% 1.74% 1.53% 1.54% 1.54%
Appreciation
Total Return of Lehman
Brothers Government /
Mortgage Index 8.82% 8.82% 2.93% 2.93% 2.93%
NAV (as of 10/31/97) $14.59 $14.61 $14.60 $14.59 $14.59
NAV Change +$0.23 +$0.24 +$0.22 +$0.22 +$0.22
Total Distributions Paid
Per Share+ $0.97 $0.86 $0.17 $0.20 $0.19
</TABLE>
* New share class opened during the period. Performance and NAV change are
cumulative from inception date.
+ 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.
The fund's NAV and yield are not guaranteed by the U.S. government or by its
agencies, instrumentalities or sponsored enterprises. All performance figures
represent past performance and in no way guarantee future results, which will
fluctuate as market conditions change. The investment return and principal
value of an investment in the fund will fluctuate, and therefore an investor's
shares when redeemed may be worth more or less than their original cost.
Goldman, Sachs & Co., the distributor of the fund, is not a bank, and fund
shares distributed by Goldman, Sachs & Co. are not deposits or obligations of,
or endorsed or guaranteed by, any bank or depository institution, nor are they
insured by the Federal Deposit Insurance Corporation (FDIC), the Federal
Reserve Board or any other government agency.
---------------------------------------
- ---------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
the top 20% of intermediate U.S. government income funds (16th out of 123)
based on total return, according to Lipper Analytical Services, Inc. In
addition, the fund's Class B shares were ranked in the top third of its
category, 39th out of 123 funds, for the same period. (Please note that Lipper
rankings do not take sales charges into account and that past performance is
not a guarantee of future results. Class C, Institutional and Service shares
were not ranked for this period because they have been in existence less than
12 months.)
PORTFOLIO COMPOSITION AND INVESTMENT STRATEGIES
During the period, we adhered to our strategy of focusing on securities that
we believed would fare well relative to the overall market regardless of the
direction of interest rates. Our investment philosophy is to match the fund's
duration (4.2 years as of October 31) to that of its benchmark and seek excess
return over the benchmark through sector weightings and specific security
selection.
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 1997*
[PIE CHART]
Fixed Rate Mortgage Pass-Throughs 29.6%
U.S. Treasuries 22.7%
CMOs 18.6%
Asset-Backed Securities 17.9%
U.S. Government Agency Obligations 8.2%
Municipal Bonds 2.7%
Repos/Cash Equivalents 0.3%
* 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. As of October 31, fixed rate mortgage
pass-throughs represented 29.6% of the portfolio, compared with 40.4% a year
earlier. After yield spreads between pass-throughs and Treasuries narrowed
during the period due to the favorable market environment and strong investor
demand, we reduced the fund's allocation to the sector in favor of more
attractively valued securities.
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 high-grade liquid assets equal to the
dollar amount of the forward commitment in a segregated account with the fund's
custodian.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio
held a 22.7% allocation in U.S. Treasuries as of October 31, up from 16.2% a
year earlier. We added to the fund's holdings in Treasuries as we trimmed its
exposure to alternative sectors, such as pass-throughs, that had become more
fully valued and appeared to have limited potential for further outperformance.
The fund's repurchase agreement/cash equivalent holdings, which accounted for
1.1% of the portfolio a year ago, represented a scant 0.3% by the end of the
period.
. CMOs. CMO securities performed well during the period as the sector benefited
from the same favorable influences as other mortgage-backed securities. During
the period, we trimmed the CMO allocation to 18.6%, down from 22.0% last
October, as these securities became more fully valued. Within the sector,
planned amortization class (PAC) CMOs were 9.0% of the portfolio, sequential-
pay/support CMOs were 7.1% of the portfolio and the remainder was invested in a
variety of other CMO structures, discussed below.
- --------------------------------------- ---------------------------------------
4
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS GOVERNMENT INCOME FUND (continued)
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
. Asset-Backed Securities (ABS). As of October 31, 17.9% of the portfolio was
invested in asset-backed securities. ABSs continued to perform well during the
period, but heavy issuance during the second half of the period caused yield
spreads to widen and restrained the sector's relative performance.
. U.S. Government Agency Obligations. During the period, the fund's allocation
to agency obligations was raised to 8.2%, up from 0.4% a year ago, as we added
securities backed by Small Business Administration (SBA) loans. These
securities are guaranteed by the U.S. government and offer nearly twice the
yield spread of conventional (i.e., GNMA, FNMA, FHLMC) agencies.
. Municipal Bonds. We added a small position in municipal bonds (2.7% as of
October 31) to take advantage of seasonal supply imbalances in the municipal
sector. We expect to "unwind" this trade when equilibrium is restored.
. Issuer Composition. The portfolio composition of the fund's mortgage-backed
security holdings by issuer was 16.5% in Federal National Mortgage Association
(FNMA) issues, 11.5% in Federal Home Loan Mortgage Corporation (FHLMC) issues
and 10.6% in Government National Mortgage Association (GNMA) issues.
. Credit Quality. As of October 31, 69.5% of the portfolio was invested in U.S.
government and agency securities, 27.5% of the portfolio was invested in
triple-A-rated securities, 2.7% was invested in municipal bond issues and 0.3%
was invested in repurchase agreements/cash equivalents.
. Prudent Use of Derivatives. As noted, the portfolio held PAC CMOs and
sequential-pay/support CMOs, which are generally considered to be lower risk
derivative instruments. The portfolio also had small positions in higher risk
derivative securities, which we used in seeking to enhance return without
incurring undue risk. These included inverse floaters, interest-only (IO) CMOs
and principal-only (PO) CMOs, and their combined position accounted for 2.5% of
the portfolio as of the end of the period. In addition, we used futures in
seeking to manage the duration to approximate that of the benchmark.
MARKET OUTLOOK
We believe Federal Reserve officials are likely to keep monetary policy on
hold until the first half of 1998, when tight labor markets may generate
sufficient wage pressures to prompt the Fed to raise rates.
In terms of individual fixed income sectors, the recent turmoil in the
financial markets caused the spreads of mortgage pass-throughs to widen
relative to Treasuries. Lower coupon pass-throughs underperformed higher coupon
pass-throughs during this volatile period and, as a result, currently represent
a more attractive risk/return trade-off. In the CMO sector, liquidity is poor
in the wake of the recent gyrations in the financial markets, largely due to
investor attention being diverted elsewhere rather than sector-specific
reasons. Similarly, the ABS sector also came under pressure at the end of the
period due to supply pressures and general uncertainty related to the Asian
financial crisis. Although investors have been buying selectively at these
wider yield spread levels, we believe the sector may remain soft through year-
end.
/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 28, 1997
5
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
GOLDMAN SACHS GOVERNMENT INCOME FUND
October 31, 1997
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1997. The
performance for each class of 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 appropriate redemption fee and no redemption fee for the Class B
and Class C 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.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares (a) Class A Shares (a) Lehman Gov't/MBS Lehman U.S. Gov't
(No Sales Charge) (W/Sales Charge) Index Index
<S> <C> <C> <C> <C>
3/1/93 10000 9550 10000 10000
10/31/93 10506 10033 10584 10699
10/31/94 10192 9734 10267 10220
10/31/95 11710 11183 11819 11792
10/31/96 12392 11834 12500 12395
10/31/97 13472 12866 13603 13468
</TABLE>
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares Lehman Gov't/MBS Lehman U.S. Gov't
(W/out redempt. charge) (W/redempt. charge) Index Index
<S> <C> <C> <C> <C>
5/1/96 10000 10000 10000 10000
10/31/96 10485 10485 10512 10508
10/31/97 11319 10919 11439 11418
</TABLE>
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class C Shares Class C Shares Lehman Gov't/MBS Lehman U.S. Gov't
(W/out redempt. charge) (W/redempt. charge) Index Index
<S> <C> <C> <C> <C>
8/15/97 10000 10000 10000 10000
10/31/97 10272 10172 10293 10326
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
GOLDMAN SACHS GOVERNMENT INCOME FUND
October 31, 1997
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
Institutional Shares Lehman Gov't/MBS Index Lehman U.S. Gov't
8/15/97 50000 50000 50000
10/31/97 51470 51465 51630
[GRAPH APPEARS HERE]
Service Shares Lehman Gov't/MBS Index Lehman U.S. Gov't
8/15/97 50000 50000 50000
10/31/97 51425 51465 51630
------------------------
<TABLE>
<CAPTION>
Average Annual Total
Return
------------------------
Since
One Year Inception(b)
<S> <C> <C>
Class A Shares, excluding sales
charge 8.72% 7.14%
--------------------------------------------------
Class A Shares, including sales
charge 2.45% 6.06%
--------------------------------------------------
Class B Shares, excluding
redemption charge 7.96% 8.59%
--------------------------------------------------
Class B Shares, including
redemption charge 3.19% 4.59%
--------------------------------------------------
Class C Shares, excluding
redemption charge N/A 2.72%(c)
--------------------------------------------------
Class C Shares, including
redemption charge N/A 1.72%(c)
--------------------------------------------------
Institutional Shares N/A 2.94%(c)
--------------------------------------------------
Service Shares N/A 2.85%(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, Class B, Class C, Institutional and Service shares commenced
operations February 10, 1993, May 1, 1996, August 15, 1997, August 15, 1997
and August 15, 1997, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Class C, Institutional and Service had not
completed a full twelve months of operations.
- --------------------------------------- ---------------------------------------
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS GOVERNMENT INCOME FUND
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MORTGAGE BACKED OBLIGATIONS--47.3%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC)--5.0%
$ 1,000,000 7.00% TBA-15 Yr(a) $ 1,014,060
2,000,000 6.50 TBA-15 Yr(a) 1,999,360
1,000,000 7.50 TBA-30 Yr(a) 1,022,180
- ----------------------------------------------------------------------------------------------
$ 4,035,600
- ----------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)--13.7%
$ 493,919 6.50% 08/01/25 $ 488,051
273,298 6.50 09/01/25 269,712
319,238 6.50 10/01/25 315,050
376,084 6.50 11/01/25 371,150
69,575 6.50 12/01/25 68,510
405,889 6.50 12/01/25 400,478
2,000,000 6.50 TBA-7 Yr(a) 2,004,360
1,000,000 7.50 TBA-15 Yr(a) 1,025,620
6,000,000 7.00 TBA-30 Yr(a) 6,018,720
- ----------------------------------------------------------------------------------------------
$10,961,651
- ----------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--10.3%
$ 216,326 9.00% 10/15/19 $ 234,443
92,691 9.00 12/15/19 100,338
290,474 7.50 04/15/23 297,916
306,387 7.00 05/15/23 308,970
330,300 7.00 06/15/23 333,084
330,759 7.00 07/15/23 333,547
521,822 7.50 07/15/23 535,191
161,311 8.00 12/15/26 167,410
470,106 8.00 12/15/26 487,881
330,803 8.00 12/15/26 343,209
1,000,000 7.00 TBA-30 Yr(a) 1,005,620
3,000,000 7.50 TBA-30 Yr(a) 3,067,500
1,000,000 8.00 TBA-30 Yr(a) 1,037,810
- ----------------------------------------------------------------------------------------------
$ 8,252,919
- ----------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--18.3%
INTEREST ONLY--0.2%
FNMA Interest-Only Stripped Security, Series 151, Class 2
$ 574,420 9.50%(b) 07/25/22 $ 163,164
- ----------------------------------------------------------------------------------------------
$ 163,164
- ----------------------------------------------------------------------------------------------
INVERSE FLOATER--1.8%
FHLMC Series 1666, Class SB
$ 1,082,875 6.24%(c) 01/15/24 $ 1,030,984
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MORTGAGE BACKED OBLIGATIONS (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
INVERSE FLOATER (CONTINUED)
FNMA Remic Trust, Series 1992-62, Class S
$ 404,038 9.42%(c) 05/25/99 $ 410,220
- ------------------------------------------------------------------------------------------------
$ 1,441,204
- ------------------------------------------------------------------------------------------------
NON-AGENCY COMMERCIAL MBS--1.9%
First Union--Lehman Brothers Commercial Mortgage Services
Series 1997-C1, Class A2
$ 400,000 7.30% 12/18/06 $ 422,469
JP Morgan Commercial Mortgage Finance Corp., Series 1997-C4
500,000 7.32 12/26/28 522,813
Morgan Stanley Capital Commercial Mortgage, Inc. Series 1997-C1
500,000 7.46 05/15/06 524,063
- ------------------------------------------------------------------------------------------------
$ 1,469,345
- ------------------------------------------------------------------------------------------------
PLANNED AMORTIZATION CLASS (PAC) CMOS--8.9%
FHLMC Series 1919, Class D
$ 3,000,000 6.50% 06/15/22 $ 3,007,020
FHLMC Series 1985, Class PC
1,000,000 6.35 05/17/18 1,005,310
FNMA Remic Trust, Series 1997-9, Class B
1,000,000 6.50 10/25/22 1,005,580
GE Capital Mortgage Services, Inc. Series 1997-8, Class A13
2,000,000 7.25 10/25/27 2,054,000
- ------------------------------------------------------------------------------------------------
$ 7,071,910
- ------------------------------------------------------------------------------------------------
PRINCIPAL ONLY--0.5%
FNMA Remic Trust, Series G-35, Class N
$ 521,085 6.30%(d) 10/25/21 $ 423,595
- ------------------------------------------------------------------------------------------------
$ 423,595
- ------------------------------------------------------------------------------------------------
SEQUENTIAL FIXED RATE CMOS--2.1%
Citicorp Mortgage Securities Inc. Series 1993-11, Class A6
$ 743,151 6.25% 09/25/08 $ 737,005
GE Capital Mortgage Services, Inc., Series 1994-10, Class A22
996,703 6.50 03/25/24 932,196
- ------------------------------------------------------------------------------------------------
$ 1,669,201
- ------------------------------------------------------------------------------------------------
SUPPORT--2.9%
Housing Securities, Inc., Series 1994-1, Class A13
$ 1,455,585 6.50% 03/25/09 $ 1,415,105
</TABLE>
---------------------------------------
- ---------------------------------------
The accompanying notes are an integral
part of these financial statements.
8
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS GOVERNMENT INCOME FUND (continued)
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MORTGAGE BACKED OBLIGATIONS (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Salomon Brothers Mortgage Securities
$ 1,000,000 6.00% 09/30/08 $ 959,490
- --------------------------------------------------------------------------------------------------
$ 2,374,595
- --------------------------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS $14,613,014
- --------------------------------------------------------------------------------------------------
TOTAL MORTGAGE BACKED OBLIGATIONS (COST $37,315,183) $37,863,184
- --------------------------------------------------------------------------------------------------
AGENCY DEBENTURES--2.9%
Sri Lanka Aid
$ 2,375,000 5.84% 02/21/16 $ 2,356,000
- --------------------------------------------------------------------------------------------------
TOTAL AGENCY DEBENTURES
(COST $2,339,375) $ 2,356,000
- --------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES--17.4%
AESOP Funding Series 1997-1, Class A2(g)
$ 1,350,000 6.40% 10/20/03 $ 1,364,573
AFC Series 1997-1, Class A
1,307,028 5.88 07/25/27 1,302,532
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
720,000 6.23 06/15/03 723,370
CPS Auto Grantor Trust
737,835 6.30 08/15/02 740,115
Fasco Auto Trust, Series 1996-1
940,730 6.65 11/15/01 953,693
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 594,053
First Merchants Auto Trust Series 1996-B, Class A1
846,804 5.74 03/15/00 846,279
First USA Credit Card Master Trust Series 1997-6, Class A
1,600,000 6.42 03/17/05 1,616,992
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 636,591
Merrill Lynch Mortgage Investments, Inc. Series 1997-FF2, Class A
2,240,134 5.93 08/25/28 2,240,134
Mid-State Trust Series 4, Class A
1,138,418 8.33 04/01/30 1,227,977
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
313,954 6.85 06/15/01 318,912
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSET-BACKED SECURITIES (CONTINUED)
Premier Auto Trust, Series 1993-6, Class A2
$ 159,891 4.65% 11/02/99 $ 158,692
Premier Auto Trust, Series 1994-1, Class A3
65,058 4.75 02/02/00 64,935
Prudential Securities, Series 1995-2, Class A
630,842 6.02 11/15/15 632,817
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 475,953
- -----------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(COST $13,870,581) $13,897,618
- -----------------------------------------------------------------------------------------------
INSURED REVENUE BONDS--2.7%
New Jersey Economic Development Authority Series A
$ 2,000,000 7.43% 02/15/29 $ 2,171,840
- -----------------------------------------------------------------------------------------------
TOTAL INSURED REVENUE BONDS
(COST $2,000,000) $ 2,171,840
- -----------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS--5.0%
Small Business Administration
$ 1,676,696 7.15% 03/01/17 $ 1,737,543
1,380,207 7.50 04/01/17 1,456,022
800,000 7.30 05/01/17 834,128
- -----------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $3,856,903) $ 4,027,693
- -----------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS--22.0%
United States Treasury Bonds
$ 450,000 7.50% 11/15/16 $ 514,899
2,120,000 8.75 05/15/20 2,763,950
700,000 7.88 02/15/21 840,112
100,000(e) 8.13 05/15/21 123,187
690,000 7.63 02/15/25 817,001
United States Treasury Notes
3,400,000 6.00 08/15/99 3,419,652
2,310,000(e) 6.88 08/31/99 2,358,371
3,900,000 5.63 11/30/00 3,888,417
1,750,000 6.63 07/31/01 1,800,855
United States Treasury Principal Only Stripped Securities(d)
950,000 5.93 11/15/04 630,069
1,850,000 5.96 05/15/20 450,826
- -----------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $17,086,592) $17,607,339
- -----------------------------------------------------------------------------------------------
</TABLE>
---------------------------------------
- ---------------------------------------
The accompanying notes are an integral
part of these financial statements.
9
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT--25.3%
Joint Repurchase Agreement Account(e)
$20,200,000 5.76% 11/03/97 $20,200,000
- -------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(COST $20,200,000) $20,200,000
- -------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $96,668,634(F)) $98,123,674
- -------------------------------------------------------------------------------------------------
</TABLE>
Futures contracts open at October 31, 1997 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Unrealized
Type Long (Short)(h) Settlement Month Gain (Loss)
- --------------------------- --------------- ---------------- -----------
<S> <C> <C> <C>
5 Year U.S. Treasury Notes 31 December 1997 $ 24,594
10 Year U.S. Treasury Notes (21) December 1997 (20,938)
U.S. 20 Year Long Term Bond 9 December 1997 55,162
----------
$ 58,818
- --------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in which value
exceeds cost $1,557,196
Gross unrealized loss for investments in which cost
exceeds value (102,858)
- --------------------------------------------------------------------------
Net unrealized gain $1,454,338
- --------------------------------------------------------------------------
</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 coupon due to
the amortization of related premiums.
(c) Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 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 $96,669,336.
(g) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. Such securities may be resold, normally to qualified institutional
buyers in transactions exempt from registration. Total market value of the
Rule 144A securities amounted to $1,364,573 as of October 31, 1997.
(h) Each 5-Year and 10-Year U.S. Treasury Note and each U.S. Long 20-Year Term
Bond contract represents $100,000 in notional par value. The total notional
amount and market value at risk are $6,100,000 and $3,412,969,
respectively. The determination of notional amounts 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. All securities purchased by the
fund will be rated, at the time of investment, at least BBB by S&P or Baa by
Moody's. The fund will invest at least 50% of its total assets in securities
rated AAA by S&P or Aaa by Moody's, at the time of investment. 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.
NEW SHARE CLASSES
To accommodate different clients' needs and preferences, the fund added
Service shares on March 12, 1997 and Class C shares on August 15, 1997.
MOST GLOBAL BONDS PERFORMED WELL, SUPPORTED BY FAVORABLE ECONOMIC CONDITIONS
AND EMU-RELATED YIELD CONVERGENCE
Global bonds performed well during the period under review. Though fears of
rising inflation impacted several major markets during the first quarter of
1997, most of these bonds subsequently rebounded. Government bonds in the U.S.
and Europe closed the period on a particularly strong note. Demand for these
securities surged when they were perceived as a safe haven in the wake of the
spreading Asian financial crisis.
In Europe, the U.K. and the higher yielding markets (e.g., Spain and Italy)
significantly outperformed the "core" and "near core" markets (e.g., Germany,
France and the Netherlands). The U.K. was the strongest European performer
during the fiscal year under review, which was particularly notable because it
trailed most other markets early in the period. Within continental Europe,
Spain and Italy achieved the best returns as their markets were buoyed by weak
economic growth and low inflation. In addition, these markets benefited from
convergence trades triggered by rising optimism regarding their inclusion in
the European Monetary Union (EMU). However, "core" European markets lagged, as
a rebound in German manufacturing and production toward the end of the period
led the Bundesbank to increase interest rates in a preemptive strike against
inflation.
The dollar bloc achieved positive returns, but performance varied widely.
Australia posted the strongest performance of the major global bond markets, as
lower-than-expected wage and inflation data prompted the Reserve Bank to
continue to cut interest rates. In contrast, the U.S. trailed all other bond
markets. Though Treasuries performed well during the latter half of the period,
their 12-month return suffered because of their weak performance during the
first quarter of 1997, when accelerating growth pushed yields higher. In Japan,
Japanese Governments Bonds (JGBs) rallied as poor economic conditions--
including weak production, a buildup in inventories and anemic domestic
demand--made interest rate hikes increasingly unlikely. As a result, JGBs fared
better than Treasuries and several European bonds.
PERFORMANCE REVIEW: COUNTRY ALLOCATIONS CONTRIBUTED TO PERFORMANCE
During the period under review, the fund underperformed its 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 largest contributors to the fund's performance included its
overweighted positions in the U.K. and Italy, two of the strongest markets
during the period. However, the fund's underweightings in Canada and Japan
proved to be a drag on its performance relative to the benchmark when those
markets performed well.
However, we are pleased to report that the fund fared well relative to its
peers. For the three-year period ended October 31, 1997, Morningstar, Inc., an
independent
11
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
rating agency, rated the fund's Class A shares five stars (in a universe of
1,338 taxable bond funds), its highest rating./1/
The fund also performed well compared with its peers in Lipper Analytical
Services, Inc.'s global income category. For the 12-month period ended October
31, the Institutional, Class A and Class B shares ranked 6th, 10th and 14th,
respectively, out of 137 global income funds based on total return. For the
five-year period ended October 31, 1997, the fund's Class A shares ranked
within the top quartile (10th out of 48 funds) of its category. (Please note
that Lipper rankings do not take sales charges into account and that past
performance is not a guarantee of future results. Class C and Service shares
were not ranked for these periods because they were in existence less than 12
months.)
Though the portfolio is typically fully hedged into U.S. dollars, we
successfully employed several currency strategies during the period. For
example, the fund held long U.S. dollar positions against the yen and several
European currencies, which benefited performance when continued weakness in
Japanese and European economies was reflected in their exchange rates.
- ------------------------
/1/ Source: (C)1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of
10/31/97. 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 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 fund's Class A shares received four stars for the
five-year period and were rated among 732 taxable bond funds. The Morningstar
ratings apply only to the fund's Class A shares; the fund's Class B, Class C,
Institutional and Service shares have not been rated. Class B, Class C,
Institutional 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.
PERFORMANCE SUMMARY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C* INSTITUTIONAL SERVICE*
(10/31/96 - (10/31/96 - (8/15/97 - (10/31/96 - (3/12/97 -
10/31/97) 10/31/97) 10/31/97) 10/31/97) 10/31/97)
----------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Total Return (based on
net asset value [NAV]) 9.66% 9.04% 3.03% 10.26% 6.42%
Return From Monthly
Distributions 5.62% 5.15% 1.27% 6.21% 0.22%
Return From Price
Appreciation 4.04% 3.89% 1.76% 4.05% 6.20%
Total Return of J.P.
Morgan Global
Government Bond Index 10.58% 10.58% 3.01% 10.58% 7.41%
NAV (as of 10/31/97) $15.10 $15.08 $15.06 $15.09 $15.09
NAV Change +$0.57 +$0.55 +$0.26 +$0.57 +$0.40
Total Distributions Paid
Per Share+ $0.79 $0.73 $0.19 $0.87 $0.52
</TABLE>
* New share class opened during the period. Performance and NAV change are
cumulative from inception date.
+ 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.
The fund's foreign investments and active management techniques entail risks in
addition to those customarily associated with investing in dollar-denominated
securities of U.S. issuers. Compared with U.S. securities markets, foreign
markets may be less liquid, more volatile and less subject to governmental
regulation, and may make available less public information about issuers. The
fund may incur losses because of changes in securities prices expressed in
local currencies, movements in exchange rates or both. All performance figures
represent past performance and in no way guarantee future results, which will
fluctuate as market conditions change. The investment return and principal
value of an investment in the fund will fluctuate, and therefore an investor's
shares when redeemed may be worth more or less than their original cost.
Goldman, Sachs & Co., the distributor of the fund, is not a bank, and fund
shares distributed by Goldman, Sachs & Co. are not deposits or obligations of,
or endorsed or guaranteed by, any bank or depository institution, nor are they
insured by the Federal Deposit Insurance Corporation (FDIC), the Federal
Reserve Board or any other government agency.
---------------------------------------
- ---------------------------------------
12
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS GLOBAL INCOME FUND (continued)
- --------------------------------------- ---------------------------------------
PORTFOLIO COMPOSITION AND INVESTMENT STRATEGIES
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 1997*
[PIE CHART]
U.S. 31.5%
U.K. 14.1%
Japan 12.1%
Italy 11.1%
Germany 11.0%
New Zealand 7.4%
Spain 4.0%
Cash 3.5%
France 3.0%
Sweden 1.3%
Australia 1.0%
* 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, 1997, 39.9% of the fund was invested in the
dollar bloc countries (e.g., the U.S., Australia and New Zealand) compared with
43.8% for the Index. Though the fund was underweighted in the dollar bloc in
terms of market positions, the sector represented a neutral allocation relative
to the benchmark on a duration-weighted basis.
U.S. As noted, the U.S. lagged other major bond markets. The fund was
underweighted in U.S. Treasuries relative to the Index (31.5% versus 39.6% as
of October 31), which worked in its favor when Treasuries came under pressure
during the first quarter of 1997 amid accelerating growth and a Federal Reserve
rate hike. When Treasuries later rallied, however, the underweighting detracted
from the fund's performance relative to the benchmark.
Other Dollar Bloc Countries. In June, we initiated a position in New Zealand
(7.4% of the portfolio as of October 31), in the expectation that economic
weakness would push interest rates lower (and bond prices higher). When yield
spreads between the U.S. and New Zealand narrowed, the allocation contributed
to performance. The portfolio also held an overweighted position in Australian
bonds during the first half of the period, which we then sold at a profit after
that market rallied. Toward the end of the period, we reestablished a neutral
weighting in Australia (1.0% as of October 31). The fund briefly held a
position in Canada, but was not invested in that market during most of the
period because Canada's strengthening economy indicated an unattractive
risk/return trade-off.
. Europe. The fund was overweighted in Europe compared with the Index, 44.5%
versus 41.7%. This strategy worked to the fund's advantage because most
European bonds performed well due to favorable bond market conditions
throughout the region.
U.K. During the first half of the period, the U.K. gilt sold off when a surge
in consumer spending contributed to a sharp acceleration in growth and fueled
fears of inflation. However, later in the year, gilts rebounded dramatically.
Fixed income investors were encouraged when the newly independent Bank of
England demonstrated its determination to fight inflation by initiating a
series of rate hikes. In January, we increased the fund's U.K. allocation to an
overweighting when our analysis indicated that the gilt market had become
oversold. When the U.K. market recovered, this strategy significantly
contributed to the fund's performance. The fund continued to overweight the
U.K. at the end of the period, 14.1% compared with 6.9% for the benchmark.
Germany and France. Within the "core" European markets, weak economic
activity in Germany and France helped support their bond markets during the
first half of the period. During the summer, however, the performance of these
markets began to deteriorate when accelerating growth in Germany rekindled
inflationary fears. In early October, these concerns prompted the Bundesbank to
raise its repo rate, and other "core" markets, such as France, quickly followed
with their own rate hikes. As of the end of the period, the fund was
overweighted in Germany (11.0% versus 8.6% for the Index) and underweighted in
France (3.0% versus 8.0%).
- --------------------------------------- ---------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
Italy, Spain and Sweden. In the higher yielding markets, the portfolio
benefited from a significant overweighting in Italy (11.1% versus 5.6% for the
Index as of October 31) and a slight overweighting in Spain (4.0% versus 3.2%).
Both of these markets performed extremely well as yield spreads relative to
other European markets narrowed significantly in anticipation of their
participation in EMU. The fund held a neutral weighting in Sweden during most
of the period, which we then reduced to an under-weighting (1.3% versus 1.8%)
because its accelerating economy is likely to trigger rising bond yields.
. Japan. During the first half of the period, the fund significantly
underweighted Japan. This strategy detracted from performance, since JGBs
performed well as investors focused on the fragility of Japan's banking system.
When Japan's economy deteriorated during the latter half of the period, we
increased the portfolio's duration-weighted exposure in the expectation that
interest rates would need to remain at historically low levels in the absence
of fiscal stimulus. As of October 31, the fund held a 12.1% allocation in
Japan.
. Cash Equivalents. As of October 31, 3.5% of the fund was in cash equivalents.
We reduced this position from 15.4% a year ago as we identified attractive
investment opportunities.
. Duration. The fund's duration was slightly longer than that of the Index as
of October 31, 5.6 years versus 5.3 years, primarily due to overweightings in
U.K. and Italy. (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.)
FUND OUTLOOK
In the near term, the outlook for global bond markets will be heavily
dependent on the fortunes of global equity markets. If uncertainty related to
the Asian financial crisis continues to impact equities, we expect bonds will
continue to benefit from investor demand for lower risk assets.
In the U.S., inflationary pressures remain in place with tight labor market
conditions, strong consumer confidence, robust growth and solid corporate
earnings. Though the deflationary impact of the Asian situation will help
offset these domestic influences, we expect Treasury prices to decline if
investors regain confidence in global equity markets and begin to reduce their
Treasury holdings. In other dollar bloc countries, we are neutral on Australia,
which has experienced significant spread contraction in recent months; positive
on New Zealand, which is attractively valued following a recent sell-off; and
remain negative on Canada, which is vulnerable to the rising risks of an
overheating economy.
Within Europe, we believe yields in several countries reflect an overly
pessimistic view of future interest rate increases. As a result, we expect
these markets to offer attractive returns as current steep yield curves
flatten. We are particularly positive on the U.K., which we expect to continue
to benefit from the Bank of England's proactive stance toward monetary policy,
and Italy, which we believe will experience further spread contraction as the
likelihood of its participation in EMU increases. In Japan, we expect that bond
yields will remain near their current levels with the economy remaining very
weak and concerns rising over the extent of Japanese banks' exposure to other
Asian markets.
/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 28, 1997
- --------------------------------------- ---------------------------------------
14
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
GOLDMAN SACHS GLOBAL INCOME FUND
October 31, 1997
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1997. The
performance for each class of the Goldman Sachs Global Income Fund (assuming
both the maximum sales charge of 4.5% and no sales charge for the Class A
shares and the appropriate redemption fee and no redemption fee for the Class B
and Class C 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.
Class A Shares (a) Class A Shares (a) JP Morgan GGB Index - $
(No Sales Charge) (W/Sales Charge) Hedged
9/1/91 10000 9550 10000
10/31/91 10145 9688 10263
10/31/92 11034 10538 11156
10/31/93 12220 11670 12509
10/31/94 11672 11146 12051
10/31/95 13432 12827 13903
10/31/96 14921 14250 15306
10/31/97 16362 15627 16925
Class B Shares Class B Shares JP Morgan GGB Index
(w/out redempt. charge) (w/redempt. charge) $ Hedged
5/1/96 10000 10000 10000
10/31/96 10624 10624 10653
10/31/97 11584 11184 11780
Class C Shares Class C Shares JP Morgan GGB Index
(w/out redempt. charge) (w/redempt. charge) $ Hedged
8/15/97 10000 10000 10000
10/31/97 10303 10203 10301
- --------------------------------------- ---------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Institutional Shares JP Morgan GGB Index - $ Hedged
8/1/95 10000 10000
10/31/95 10442 10351
10/31/96 11651 11395
10/31/97 l2846 12601
Service Shares JP Morgan GGB Index - $ Hedged
3/12/97 10000 10000
10/31/97 10642 10741
------------------------------------
<TABLE>
<CAPTION>
Average Annual Total Return
--------------------------------------------
Since
One Year Five Year Inception(b)
<S> <C> <C> <C>
Class A Shares, excluding sales charge 9.66% 8.19% 8.28%
-------------------------------------------------------------------------
Class A Shares, including sales charge 3.26% 7.36% 7.48%
-------------------------------------------------------------------------
Class B Shares, excluding redemption
charge 9.04% N/A 10.27%
-------------------------------------------------------------------------
Class B Shares, including redemption
charge 4.33% N/A 6.27%
-------------------------------------------------------------------------
Class C Shares, excluding redemption
charge N/A N/A 3.03%(c)
-------------------------------------------------------------------------
Class C Shares, including redemption
charge N/A N/A 2.03%(c)
-------------------------------------------------------------------------
Institutional Shares 10.26% N/A 11.75%
-------------------------------------------------------------------------
Service Shares N/A N/A 6.42%(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 of
Class A, Class C and Service shares.
(b) The Class A, Class B, Institutional, Service and Class C shares commenced
operations August 2, 1991, May 1, 1996, August 1, 1995, March 12, 1997 and
August 15, 1997, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since Class C and Service had not completed a full
twelve months of operations.
- --------------------------------------- ---------------------------------------
16
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS GLOBAL INCOME FUND
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount(a) Rate Date Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS--79.4%
AUSTRALIAN DOLLAR--1.0%
Commonwealth of Australia
AUD 2,500,000 10.00% 02/15/06 $ 2,223,818
- -----------------------------------------------------------------------------------------------
BRITISH POUND STERLING--13.9%
United Kingdom Treasury
BPS 17,000,000 8.50% 07/16/07 $ 32,283,075
- -----------------------------------------------------------------------------------------------
DEUTSCHEMARK--10.8%
Federal Republic of Germany
DEM 13,500,000 8.00% 07/22/02 $ 8,783,066
2,000,000 6.50 10/14/05 1,233,670
7,000,000 6.25 04/26/06 4,251,247
13,000,000 6.00 01/04/07 7,752,640
Treuhandanstalt
5,000,000 6.38 07/01/99 2,996,287
- -----------------------------------------------------------------------------------------------
$ 25,016,910
- -----------------------------------------------------------------------------------------------
FRENCH FRANC--3.0%
Government of France
FRF 40,000,000 4.75% 03/12/02 $ 6,862,393
- -----------------------------------------------------------------------------------------------
ITALIAN LIRA--10.8%
Republic of Italy
ITL 26,000,000,000 9.50% 05/01/01 $ 17,180,272
13,000,000,000 6.75 07/01/07 8,000,413
- -----------------------------------------------------------------------------------------------
$ 25,180,685
- -----------------------------------------------------------------------------------------------
JAPANESE YEN--12.1%
Asian Development Bank
JPY 350,000,000 5.63% 02/18/02 $ 3,449,834
Federal National Mortgage Association
740,000,000 2.22 10/09/07 6,256,950
Government of Japan
850,000,000 2.50 06/20/07 7,477,245
Kingdom of Spain
600,000,000 3.10 09/20/06 5,490,237
Republic of Italy
550,000,000 5.13 07/29/03 5,472,580
- -----------------------------------------------------------------------------------------------
$ 28,146,846
- -----------------------------------------------------------------------------------------------
NEW ZEALAND DOLLAR--7.4%
Federal National Mortgage Association
NZD 8,500,000 7.00% 09/26/00 $ 5,257,964
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount(a) Rate Date Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS (CONTINUED)
NEW ZEALAND DOLLAR (CONTINUED)
Government of New Zealand
NZD 9,700,000 8.00% 02/15/01 $ 6,245,054
International Bank for Reconstruction & Development
9,000,000 7.00 09/18/00 5,575,830
- ----------------------------------------------------------------------------------------------
$ 17,078,848
- ----------------------------------------------------------------------------------------------
SPANISH PESETA--3.9%
Kingdom of Spain
ESP 1,100,000,000 10.30% 06/15/02 $ 9,026,397
- ----------------------------------------------------------------------------------------------
SWEDISH KRONA--1.2%
Kingdom of Sweden
SEK 22,000,000 6.00% 02/09/05 $ 2,899,398
- ----------------------------------------------------------------------------------------------
UNITED STATES DOLLAR--15.3%
International Bank for Reconstruction & Development
USD 8,000,000 6.63% 08/21/06 $ 8,217,600
United States Treasury Bonds
5,100,000 7.50 11/15/16 5,835,522
3,250,000 7.63 02/15/25 3,848,195
6,000,000 6.75 08/15/26 6,448,140
United States Treasury Notes
2,050,000 7.00 07/15/06 2,199,589
8,600,000 6.50 10/15/06 8,945,376
- ----------------------------------------------------------------------------------------------
$ 35,494,422
- ----------------------------------------------------------------------------------------------
TOTAL DEBT OBLIGATIONS
(COST $180,581,438) $184,212,792
- ----------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES--3.9%
AESOP Funding Series 1997-1, Class A2(c)
USD 1,250,000 6.40% 10/20/03 $ 1,263,494
AFC Series 1997-1, Class A(b)
1,307,028 5.85 07/25/27 1,302,532
ALAC Automobile Receivable Series 1997-1, Class A
431,466 6.29 12/15/02 431,970
Cit RV Trust Series 1995-B, Class A
252,266 6.50 04/15/11 254,142
EQCC Home Equity Loan Trust Series 1997-3, Class A
890,097 5.80 11/15/28 890,097
First Chicago Mortgage Trust Series 1992-E, Class A
750,000 6.25 08/15/99 748,823
</TABLE>
---------------------------------------
- ---------------------------------------
The accompanying notes are an integral
part of these financial statements.
17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount(a) Rate Date Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSET-BACKED SECURITIES (CONTINUED)
First USA Credit Card Master Trust Series 1997-6, Class A
USD 900,000 6.42% 03/17/05 $ 909,558
Ford Motor Credit Trust Series 1993-B, Class A
51,114 4.30 07/15/98 51,066
MBNA Master Card Series 1992-1, Class A
666,667 7.25 06/15/99 665,833
Navistar Financial Corp. Series 1994-A, Class A
634,284 5.93 10/15/99 634,372
Nissan Auto Receivables Series 1995-A, Class A
986,455 6.10 08/15/01 986,760
Premier Auto Trust Series 1994-3, Class A
811,060 6.85 03/02/99 813,087
- ------------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(COST $8,924,066) $ 8,951,734
- ------------------------------------------------------------------------------------------------
CORPORATE BONDS--5.7%
BankAmerica Corp.
USD 900,000 7.75% 07/15/02 $ 953,586
Bayerische Landesbank Girozent
10,000,000 6.63 06/25/07 10,388,200
Beneficial Corp.
500,000 6.43 04/10/02 500,325
Capital One Bank
1,000,000 7.35 06/20/00 996,800
Countrywide Funding Corp.
450,000 6.38 10/08/02 453,830
- ------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $12,884,606) $ 13,292,741
- ------------------------------------------------------------------------------------------------
MORTGAGE BACKED OBLIGATIONS--7.1%
Asset Securitization Corp. Series 1997-D5, Class A1
USD 450,000 6.73% 02/14/41 $ 452,385
CMC Series 1997-2, Class A
2,000,000 6.60 11/25/27 2,010,488
Countrywide Funding Corp. Series 1994-2, Class A
1,000,000 6.50 02/25/09 988,120
Countrywide Funding Corp. Series 1994-I, Class A
2,000,000 6.25 07/25/09 1,998,120
FHLMC Series 1985, Class PC
2,000,000 6.35 05/17/18 2,010,620
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount(a) Rate Date Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MORTGAGE BACKED OBLIGATIONS (CONTINUED)
General Electric Capital Mortgage Services Series 1994-2,
Class A
USD 564,879 4.82% 01/25/09 $ 491,772
968,367 6.69 01/25/09 997,737
General Motors Acceptance Corp. Series 1997-C1, Class A
450,000 6.85 09/15/06 464,702
Government National Mortgage Association (GNMA)
270,468 9.00 03/15/05 287,540
217,927 9.00 02/15/06 231,833
737,597 9.00 02/15/10 795,245
710,845 7.50 01/15/23 729,057
153,476 7.50 04/15/23 157,408
134,544 7.50 05/15/23 137,991
685,072 7.00 07/15/23 690,848
103,932 7.00 07/15/23 104,808
254,393 7.00 08/15/23 256,537
532,123 7.00 08/15/23 536,609
255,536 7.50 08/15/23 262,083
213,908 7.00 09/15/23 215,711
325,641 7.00 09/15/23 328,387
358,388 7.00 10/15/23 361,409
211,500 7.00 10/15/23 213,283
316,425 7.00 11/15/23 319,093
481,311 7.50 12/15/23 493,642
257,886 7.50 12/15/23 264,733
Morgan Stanley Capital Commercial Mortgage, Inc.
Series 1997-C1
650,000 7.46 05/15/06 681,280
- -------------------------------------------------------------------------------------------------
TOTAL MORTGAGE BACKED OBLIGATIONS
(COST $16,322,630) $ 16,481,441
- -------------------------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS--9.4%
State Street Bank & Trust Euro-Time Deposit
USD 21,901,526 5.66% 11/03/97 $ 21,901,526
- -------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS
(COST $21,901,526) $ 21,901,526
- -------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $240,614,266(B)) $244,840,234
- -------------------------------------------------------------------------------------------------
</TABLE>
---------------------------------------
- ---------------------------------------
The accompanying notes are an integral
part of these financial statements.
18
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS GLOBAL INCOME FUND (continued)
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in which
value exceeds cost $ 5,500,234
Gross unrealized loss for investments in which
cost exceeds value (1,274,266)
- --------------------------------------------------------------------------------------------------
Net unrealized gain $ 4,225,968
- --------------------------------------------------------------------------------------------------
</TABLE>
(a) The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
AUD = Australian JPY = Japanese Yen
Dollar NZD = New Zealand Dollar
BPS = British ESP = Spanish Peseta
Pound Sterling SEK = Swedish Krona
DEM = Deutschemark USD = United States Dollar
FRF = French Franc
ITL = Italian Lira
(b) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. Such securities may be resold, normally to qualified institutional
buyers in transactions exempt from registration. Total market value of the
Rule 144A securities amounted to $2,566,026.
(c) The amount stated also represents aggregate cost for Federal income tax
purposes.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------
</TABLE>
---------------------------------------
- ---------------------------------------
The accompanying notes are an integral
part of these financial statements.
19
<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.
NEW SHARE CLASSES ADDED
On August 15, 1997, the fund added Class C, Institutional Class and Service
Class shares.
MUNICIPAL BOND MARKET SHOWS SIGNS OF STRENGTH AND STABILITY
The municipal market remained at relatively strong levels compared with the
taxable market for much of the year, including four consecutive months of
rallying from April through July. A typical August slowdown, some rallying in
September, and mixed performance for municipals during October, capped off a
year that saw overall municipal prices rise. The average price of a 15-year
municipal bond (as calculated from data provided by Municipal Market Data, an
independent municipal market information provider) increased, while yields fell
from 5.30% on October 31, 1996 to 4.98% on October 31, 1997.
New issue supply increased during 1997 vs. 1996, up a solid 5% through
October, versus the first ten months of 1996. 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). Spikes in new issue
supply to $21.9 billion in June and $20.6 billion in September were
approximately 50% greater than the monthly average for the rest of 1997, and
contributed significantly to the year's overall supply increase. Heavy June and
July coupon and principal payments flooded the market with enough reinvestment
cash to absorb most of the new issue supply during the summer, but heavy fall
supply has weakened the municipal market relative to treasuries.
Demand from individual investors, who control approximately two-thirds of
municipal bond ownership either through mutual funds or direct investment,
continued to dominate the market, though municipal rates below the
psychologically key 6% level may have discouraged some investors. The budget
bill, passed in August, was favorable to municipals both on the demand side--an
exemption allowing corporations with outstanding debt to invest in the
municipal market was left intact--as well as on the supply side, where
restrictions on the amount that private universities can issue were loosened.
MUNICIPAL BOND YIELD CURVE
[GRAPH]
10/31/97 10/31/96
1998 3.70% 3.90%
1999 3.85 4.15
2000 3.95 4.30
2001 4.05 4.40
2002 4.15 4.50
2003 4.25 4.60
2004 4.35 4.70
2005 4.45 4.80
2006 4.50 4.90
2007 4.55 5.00
2008 4.65 5.10
2009 4.75 5.20
2010 4.85 5.25
2011 4.93 5.30
2012 4.98 5.35
2013 5.03 5.40
2014 5.08 5.40
2015 5.13 5.45
2016 5.15 5.45
2017 5.15 5.45
2018 5.18 5.50
2019 5.18 5.50
2020 5.20 5.50
2021 5.20 5.50
2022 5.20 5.50
2023 5.20 5.50
2024 5.20 5.50
2025 5.23 5.50
2026 5.23 5.50
2027 5.23 5.50
The yield curve experienced a downward parallel shift in contrast to one year
ago.
Source: Municipal Market Data
PERFORMANCE REVIEW: POSITIVE PERFORMANCE RELATIVE TO PEERS
We are pleased to report that the fund's Class A and B shares outperformed
most of their peers, for the one-year period ended October 31, 1997. Class A
shares ranked in the top 10% of general municipal debt funds (22 out of 231)
based on total return, according to Lipper
- --------------------------------------- ---------------------------------------
20
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MUNICIPAL INCOME FUND (continued)
- --------------------------------------- ---------------------------------------
Analytical Services, Inc. The fund's Class B shares ranked in the top one-third
of all general municipal debt funds for the period (73 out of 231). Class C,
Institutional and Service shares did not exist for the entire period and were
not ranked by Lipper. (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 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 ratio of credit upgrades to credit downgrades in the municipal market
increased during the year, reflected in a tightening of spreads between higher-
and lower-rated securities. We have maintained a "credit-barbell" in the
portfolio, emphasizing high-quality bonds with maturities of 20 to 30 years on
the long end of the yield curve, as we do not feel there is adequate
compensation in more volatile, lower-quality, long-term bonds. The portfolio's
concentration of lower quality--though still investment-grade--bonds is on the
less volatile, short end of the yield curve in the four- to 10-year maturity
range. This strategy is intended to allow 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. We regularly adjusted the
credit and term structure in seeking 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 at the end of the reporting period, indicating attractive
opportunities across the entire length of the municipal yield curve. Also, we
were able to take advantage of the municipal market's tendency to overvalue
callable discount bonds
PERFORMANCE SUMMARY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C* INSTITUTIONAL* SERVICE*
(10/31/96 - (10/31/96 - (8/15/97 - (8/15/97 - (8/15/97 -
10/31/97) 10/31/97) 10/31/97) 10/31/97) 10/31/97)
----------- ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Total Return (based on
net asset value) 9.23% 8.48% 1.75% 2.10% 1.93%
Return From Monthly
Distributions 4.81% 4.16% 0.81% 1.02% 0.91%
Return From Price
Appreciation 4.42% 4.32% 0.94% 1.08% 1.02%
Lehman Brothers 15-Year
Municipal Bond Index 9.62% 9.62% 1.94% 1.94% 1.94%
NAV (as of 10/31/97) $14.99 $15.00 $14.99 $15.00 $14.99
NAV Change +$0.62 +$0.63 +$0.14 +$0.16 +$0.15
Total Distributions Paid
Per Share+ $0.68 $0.56 $0.12 $0.15 $0.14
</TABLE>
* New share class opened during the period. Performance and NAV change are
cumulative from inception date.
+ 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.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by a bank or other insured depository institution, and are not insured
by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board,
or any other government agency, and an investment in a Fund involves risk,
including possible loss of principal. All performance figures represent past
performance and in no way guarantee future results, which will fluctuate as
market conditions change. The investment return and principal value of an
investment in a Fund will fluctuate and, therefore, an investor's shares when
redeemed, may be worth more or less than their original cost. The Fund may
invest up to 20% in private activity bonds the interest from which is subject
to the alternative minimum tax (AMT).
---------------------------------------
- ---------------------------------------
21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
and undervalue callable par or premium bonds by strategically trading between
the two.
The fund's performance also benefited from our extensive credit analysis. Our
research helped 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. One "story"
bond in the portfolio is the Cleveland-Cuyahoga County Port Authority bonds for
the Rock 'n Roll Hall of Fame. Rated BBB by Fitch Investors Service, L.P., our
research analysis conservatively indicated that the anticipated combination of
admission receipts, sponsorship fees, and a county-wide hotel tax (benefiting
from the overall emergence of downtown Cleveland as a tourist destination), as
well as an additional debt service reserve, would make this an attractive
addition to the portfolio. As of October 31, 1997, the Fund owned approximately
0.9% of the outstanding issue.
PORTFOLIO COMPOSITION AND INVESTMENT STRATEGIES:EMPHASIS ON REVENUE BONDS
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 1997*
[PIE CHART]
Insured Revenue Bonds 45.3%
Revenue Bonds 28.6%
Insured General Obligations 15.7%
General Obligations 6.6%
Variable Rate Demand Notes 3.8%
* 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 October 31, the fund held a 73.9% position in a combination of
insured and uninsured revenue bonds, overweight compared with the Index
(55.8%). (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 reduced to
22.3% of the portfolio from 29.8% one year ago, and is underweighted relative
to the Index (43.4%).
. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. VRDNs fell
to 3.8% from 7.6% of the portfolio one year ago. The Index has no VRDNs.
. Credit Quality. As of October 31, 69.6% of the fund was invested in triple-A-
rated securities, down slightly from 70.5% one year ago. Double-A-securities
were basically unchanged, to 9.0% from 9.3%, while single-A-rated securities
were increased to 9.9% from 1.8%. We continued to maintain a position in
triple-B-rated securities (the lowest credit category for investment-grade
securities), which accounted for 11.5% of the portfolio, down from 18.4%. We
used extensive credit research to identify specific securities that offered
unique value within the universe of triple-B-rated securities, but still were
believed to be 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 provide 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.
22
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MUNICIPAL INCOME FUND (continued)
- --------------------------------------- ---------------------------------------
MARKET OUTLOOK
Our long-term outlook for municipal bonds is essentially bullish. With
municipals escaping unscathed from the federal budget accord, we do not see any
near-term fundamental problems for tax-exempts, and are left with technical
forces as the key driver in relative market performance. The recent cheapening
of the market was more related to the heavy seasonal new issue supply and
weaker demand than from the global volatility that affected the taxable
sectors; we do not feel that municipals are at risk to cheapen much more. In
anticipation of near-term outperformance, we feel that municipals are
attractive enough to warrant an allocation from investors who do not currently
benefit from tax-exempt income.
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 28, 1997
- --------------------------------------- ---------------------------------------
23
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
GOLDMAN SACHS MUNICIPAL INCOME FUND
October 31, 1997
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1997. The
performance for each class of 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 appropriate redemption fee and no redemption fee for the Class B and
Class C 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.
Class A Shares (a) Class A Shares (a) Lehman 15 - Year Muni
(No Sales Charge) (W/Sales Charge) Index
8/1/93 10000 9550 10000
10/31/93 10455 9984 10385
10/31/94 9878 9434 9860
10/31/95 11241 10735 11414
10/31/96 11933 11395 12100
10/31/97 13034 12447 13264
Class B Shares Class B Shares Lehman 15 - Year Muni
(w/out redempt charge) (w/redempt. charge) Index
5/1/96 10000 10000 10000
10/31/96 10440 10440 10480
10/31/97 11325 10925 11489
Class C Shares Class C Shares Lehman 15 - Year Muni
(w/out redempt. charge) (w/redempt. charge) Index
8/15/97 10000 10000 10000
10/31/97 10175 10075 10194
- --------------------------------------- ---------------------------------------
24
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
GOLDMAN SACHS MUNICIPAL INCOME FUND
October 31, 1997
- --------------------------------------------------------------------------------
Institutional Shares Lehman 15 - Year Muni Index
8/15/97 10000 10000
10/31/97 10210 10194
Service Shares Lehman 15 - Year Muni Index
8/15/97 10000 10000
10/31/97 10193 10194
------------------------
<TABLE>
<CAPTION>
Average Annual Total
Return
------------------------
Since
One Year Inception(b)
<S> <C> <C>
Class A Shares, excluding sales
charge 9.23% 6.18%
--------------------------------------------------
Class A Shares, including sales
charge 2.98% 5.12%
--------------------------------------------------
Class B Shares, excluding
redemption charge 8.48% 8.63%
--------------------------------------------------
Class B Shares, including
redemption charge 3.69% 4.63%
--------------------------------------------------
Class C Shares, excluding
redemption charge N/A 1.75%(c)
--------------------------------------------------
Class C Shares, including
redemption charge N/A 0.75%(c)
--------------------------------------------------
Institutional Shares N/A 2.10%(c)
--------------------------------------------------
Service Shares N/A 1.93%(c)
</TABLE>
(a) For comparative purposes, Class A, Class C, Institutional and Service
shares initial investment is assumed to be made on the first day of the
month following the Fund's commencement of operations.
(b) Class A, Class B, Class C, Institutional and Service commenced operations
July 20, 1993, May 1, 1996, August 15, 1997, August 15, 1997 and August 15,
1997, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since Class C, Institutional and Service had not
completed a full twelve months of operations.
- --------------------------------------- ---------------------------------------
25
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS MUNICIPAL INCOME FUND
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS--97.4%
ARIZONA--6.9%
Maricopa County MFH IDA (A)
$1,795,000 5.85% 01/01/08 $ 1,898,966
Maricopa County Unifed School District No. 41 GO (FSA) (AAA)
2,500,000 6.25 07/01/15 2,711,475
- -------------------------------------------------------------------------------------------------
$ 4,610,441
- -------------------------------------------------------------------------------------------------
CONNECTICUT--3.3%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $ 2,205,900
- -------------------------------------------------------------------------------------------------
FLORIDA--6.2%
Escambia County Housing Authority, Single Family Multi-County Progress
(FNMA/GNMA) (Aaa)
$1,390,000 6.80% 10/01/15 $ 1,509,290
Santa Rosa Bay Bridge Authority RB (BBB-)
2,500,000 6.25 07/01/28 2,611,425
- -------------------------------------------------------------------------------------------------
$ 4,120,715
- -------------------------------------------------------------------------------------------------
HAWAII--3.3%
Hawaii GO Bond Series CA (FGIC) (AAA)
$2,000,000 6.00% 01/01/09 $ 2,193,700
- -------------------------------------------------------------------------------------------------
ILLINOIS--9.6%
Chicago Midway Airport RB (MBIA) (AAA/Aaa)
$2,500,000 5.50% 01/01/10 $ 2,598,225
Lake County Unified School District No. 116 GO (FSA)(AAA)
1,000,000 7.60 02/01/13 1,264,960
2,000,000 7.60 02/01/14 2,552,660
- -------------------------------------------------------------------------------------------------
$ 6,415,845
- -------------------------------------------------------------------------------------------------
INDIANA--6.4%
Indiana Bond Bank for Hendricks County RB (AA-)
$1,420,000 6.00% 02/01/12 $ 1,505,399
Indiana Transportation Airport Series A RB (AAA/Aaa)
2,500,000 6.00 11/01/11 2,743,625
- -------------------------------------------------------------------------------------------------
$ 4,249,024
- -------------------------------------------------------------------------------------------------
KENTUCKY--1.6%
Nelson County Industrial Building Mabex Universal Corp. Project (AMT)
(A3)
$1,000,000 6.50% 04/01/05 $ 1,088,640
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS (CONTINUED)
LOUISIANA--3.2%
Orleans Levee District Improvement Bonds (AAA/Aaa)
$2,000,000 5.95% 11/01/15 $ 2,125,940
- -------------------------------------------------------------------------------------------------
MAINE--1.1%
Maine Educational Loan Authority RB Series A-1 (AMT) (Aaa)(a)
$ 675,000 6.80% 12/01/07 $ 734,029
- -------------------------------------------------------------------------------------------------
MASSACHUSETTS--1.5%
Massachusetts Bay Transportation Authority General Transportation System
Bonds Series A (A+/A1)
$1,000,000 5.63% 03/01/26 $ 1,019,460
- -------------------------------------------------------------------------------------------------
MICHIGAN--1.5%
Detroit Self Insurance Series A (BBB-)
$1,000,000 5.60% 05/01/01 $ 1,027,990
- -------------------------------------------------------------------------------------------------
MISSOURI--3.2%
St. Louis Municipal Finance Leasehold RB Series A (A/Aa3)
$2,100,000 5.30% 07/15/02 $ 2,170,287
- -------------------------------------------------------------------------------------------------
NEVADA--2.9%
Washoe County GO (MBIA) (AAA/Aaa)
$2,000,000 5.00% 06/01/17 $ 1,939,100
- -------------------------------------------------------------------------------------------------
NEW MEXICO--5.0%
Santa Fe County Correctional System RB (AAA/Aaa)
$3,000,000 6.00% 02/01/27 $ 3,311,100
- -------------------------------------------------------------------------------------------------
NEW YORK--4.5%
New York City Municipal Water Finance Authority Series B (MBIA) (AAA/Aaa)
$3,000,000 5.50% 06/15/27 $ 3,015,210
- -------------------------------------------------------------------------------------------------
NORTH DAKOTA--3.2%
Mercer County PCRB for Basin Electric & Power 2nd Series (AMBAC) (AAA/Aaa)
$2,000,000 6.05% 01/01/19 $ 2,125,920
- -------------------------------------------------------------------------------------------------
OHIO--2.4%
Butler County Transportation Improvement District Series 1997-A (FSA)
(AAA/Aaa)(b)
$1,000,000 5.13% 04/01/17 $ 972,900
Cleveland-Cuyahoga County Port Authority Bonds for Rock & Roll Hall of
Fame RB
600,000 5.45 12/01/05 610,236
- -------------------------------------------------------------------------------------------------
$ 1,583,136
- -------------------------------------------------------------------------------------------------
</TABLE>
---------------------------------------
- ---------------------------------------
The accompanying notes are an integral
part of these financial statements.
26
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS MUNICIPAL INCOME FUND (continued)
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS (CONTINUED)
OKLAHOMA--3.6%
Holdenville IDA RB (BBB/Baa)
$1,245,000 5.95% 07/01/02 $ 1,305,619
Tulsa County Public Facilities RB (A-)
1,000,000 6.60 11/01/08 1,100,580
- -------------------------------------------------------------------------------------------------
$ 2,406,199
- -------------------------------------------------------------------------------------------------
RHODE ISLAND--4.6%
Rhode Island Clean Water Finance Authority Waste Water Treatment System
Bonds (MBIA) (AAA/Aaa)
$3,000,000 5.80% 09/01/22 $ 3,055,140
- -------------------------------------------------------------------------------------------------
TENNESSEE--6.0%
McMinnville Housing Authority RB (A2)
$1,510,000 6.00% 10/01/09 $ 1,578,599
Metropolitian Government of Nashville and Davidson County GO Refunding
Bonds (AA/Aa2)
2,500,000 5.13 05/15/25 2,430,300
- -------------------------------------------------------------------------------------------------
$ 4,008,899
- -------------------------------------------------------------------------------------------------
TEXAS--9.4%
East Texas Criminal Justice Facilities Financing Corp. RB (AMBAC)
(AAA/Aaa)
$2,000,000 5.75% 11/01/09 $ 2,112,820
Lago Vista Independent School District Refunding Bonds Series 1997 (Aaa)
1,000,000 5.50 08/15/27 1,003,910
Tarrant County Health Facilities Development Corp. RB (MBIA) (AAA/Aaa)
3,000,000 5.75 02/15/15 3,193,200
- -------------------------------------------------------------------------------------------------
$ 6,309,930
- -------------------------------------------------------------------------------------------------
WASHINGTON--8.0%
Chelan County Public Utility RB (MBIA) (AAA/Aaa)
$2,500,000 6.35% 07/01/28 $ 2,713,650
Washington State Public Power Supply System RB Series A (AMBAC) (AAA/Aaa)
2,500,000 5.70 07/01/11 2,604,175
- -------------------------------------------------------------------------------------------------
$ 5,317,825
- -------------------------------------------------------------------------------------------------
TOTAL DEBT OBLIGATIONS
(COST $62,618,455) $65,034,430
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM OBLIGATIONS--4.5%
CALIFORNIA--3.3%
California GO Bond Series 23 (VMIG1)(c)
$2,200,000 5.25% 11/01/97 $ 2,200,000
- -------------------------------------------------------------------------------------------------
GEORGIA--0.2%
Monroe County Development Authority PCRB (A2)(c)
$ 100,000 3.20% 11/01/97 $ 100,000
- -------------------------------------------------------------------------------------------------
NEVADA--0.4%
Clark County Industrial Development Revenue, Cogeneration Associates
Project I (VMIG1)(c)
$ 300,000 3.70% 11/01/97 $ 300,000
- -------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS (COST $2,600,000) $ 2,600,000
- -------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $65,218,455)(D) $67,634,430
- -------------------------------------------------------------------------------------------------
</TABLE>
Futures contract open at October 31, 1997:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type (Short)(e) Month Gain
- --------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
U.S. 20 Year Long Term Bond (27) March 1998 $23,625
- --------------------------------------------------------------------------------------
</TABLE>
FEDERAL INCOME TAX INFORMATION:
<TABLE>
<S> <C> <C> <C>
Gross unrealized
gain for
investments in
which value
exceeds cost $2,417,645
Gross unrealized
loss for
investments in
which cost
exceeds value (1,670)
- -----------------------------
Net unrealized
gain $2,415,975
- -----------------------------
</TABLE>
(a) Portion of this security is segregated for a when-issued security and an
open futures contract.
(b) When-issued security.
(c) Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
(d) The amount stated also represents aggregate cost for federal income tax
purposes.
(e) Each U.S. 20 Year Long Term Bond contract represents $100,000 in notional
par value. The total notional amount and market value at risk are
$2,700,000 and $3,191,063, respectively. The determination of notional
amounts 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.
27
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
INVESTMENT ABBREVIATIONS:
AMBAC--Insured by American Municipal Bond Assurance Corp.
AMT--Alternative Minimum Tax
FGIC--Insured by Financial Guaranty Insurance Co.
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
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.
28
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS HIGH YIELD FUND
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
On behalf of Goldman Sachs, it is a pleasure to welcome you as a shareholder
in the Goldman Sachs High Yield Fund. In the future, we will be sending you
annual and semiannual reports that describe the fund's performance, as well as
information regarding specific holdings. This annual report covers the
abbreviated period from August 1, 1997, when the fund's Class A, B,
Institutional and Service shares began operations, through October 31, 1997.
(The fund's Class C shares were added on August 15, 1997.)
INVESTMENT OBJECTIVE
The Goldman Sachs High Yield Fund seeks to provide shareholders with a high
level of current income and secondarily, capital appreciation. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
high-yield, fixed income securities rated, at the time of investment, below
investment grade. The fund may invest in all types of fixed income securities,
including senior and subordinated debt obligations, convertible and
nonconvertible corporate debt obligations, and preferred stock. Under normal
interest rate conditions, the fund's duration is expected to be equal to that
of the fund's benchmark, the Lehman Brothers High Yield Bond Index, plus or
minus 2.5 years.
INVESTMENT STRATEGY AND APPROACH
Our investment process employs a combination of bottom-up company research
and fundamental economic analysis. Bottom-up research is critical to identify
attractive investments in the high-yield market, since market values of
individual securities tend to reflect developments within a company to a
greater extent than higher rated corporate debt. To determine a company's
creditworthiness, we conduct an in-depth analysis of each issue considered for
the fund. Among the factors we evaluate are a company's competitive position,
the strength of its balance sheet and its ability to generate ample cash flow
to service its debt. We then diversify the portfolio among different sectors
and industries on a global basis in an effort to reduce overall portfolio risk.
THE HIGH YIELD MARKET FARED WELL RELATIVE TO OTHER ASSET CLASSES
During the period under review, the high-yield market benefited from
favorable economic conditions. Buoyant economic activity enabled many companies
to achieve strong growth in cash flows and earnings, which in turn kept default
rates extremely low relative to historical averages. As a result, the spread,
or difference in yield, between high-yield bonds and similar-duration
Treasuries was very tight during most of the period. During October, however,
the high-yield market came under pressure when the financial crisis in
Southeast Asia impacted U.S. markets. Though the yield spread widened sharply
as a result, the high-yield sector proved to be resilient--high-yield bonds
weathered the market turbulence very well relative to other asset classes. For
the period under review, the Lehman Brothers High Yield Bond Index returned
1.84%, outperforming the U.S. equity market's -3.76% return (as measured by the
S&P 500 stock index) and modestly trailing the 2.07% return of the broad Lehman
Brothers Aggregate Bond Index.
PERFORMANCE REVIEW
From its inception on August 1, 1997 through October 31, 1997, the fund
underperformed its benchmark due to the weak performance of its investments in
emerging market debt. Though this sector represented only a small portion of
the portfolio (7.0% as of October 31) and the majority of the allocation was to
Latin American securities, it nonetheless proved to be a drag on performance
when the turmoil in Southeast Asian markets spread across all regions. However,
investors should remember that a period of only three months is obviously too
short a time frame to measure performance meaningfully.
29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
PORTFOLIO COMPOSITION
As of October 31, the portfolio was well diversified with 129 issues. We
maintained this relatively broad allocation because of low credit differentials
among sectors and individual issues. In addition, demand has outstripped the
supply of bonds issued by industrial companies, which has made it difficult to
build up sizable positions in individual issues at attractive levels.
The fund's largest holding as of the end of the period was PRINTPACK, INC., a
packaging manufacturer with strong market positions in nearly all of the niches
it serves. Printpack has had difficulties integrating its acquisition of James
River's flexible packaging operations, but once completed, the merger is
expected to provide substantial opportunities for cost savings and help to
deleverage the company. Other significant positions were INTERTEK, a global
testing company, and ALLIED WASTE INDUSTRIES, INC., a solid waste management
company.
We also invested in bonds issued by several non-U.S. companies that offered
attractive risk-adjusted returns relative to U.S. debt. For example, as of the
end of the period, our fourth-largest holding was Germany-based GEBERIT
INTERNATIONAL, one of the largest suppliers of plumbing-based sanitary systems.
Geberit has
operations throughout Europe, and is well positioned to benefit from the
ongoing home improvement trend.
CREDIT QUALITY
As of October 31, the portfolio primarily consisted of single-B-rated and
double-B-rated securities (82.7% and 13.1%, respectively). The remainder of the
fund was invested in triple-C-rated securities (2.6%), triple-B-rated
securities (0.4%) and repurchase agreements/cash equivalents (1.2%).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 1997*
[PIE CHART]
U.S. High-Yield Corporates 84.2%
Foreign Debt 7.6%
Other Foreign Debt (Emerging Markets) 7.0%
Repos/Cash Equivalents 1.2%
* 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.
PERFORMANCE SUMMARY**
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C INSTITUTIONAL SERVICE
(8/1/97 - (8/1/97 - (8/15/97 - (8/1/97 - (8/1/97 -
10/31/97) 10/31/97) 10/31/97) 10/31/97) 10/31/97)
--------- --------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Total Return (based on
net asset value [NAV]) 1.50% 1.31% 1.46% 1.58% 1.46%
Return From Monthly
Distributions 1.80% 1.61% 1.46% 1.88% 1.76%
Return From Price
Depreciation -0.30% -0.30% 0.00% -0.30% -0.30%
Total Return of Lehman
Brothers High Yield
Bond Index 1.84% 1.84% 2.07% 1.84% 1.84%
NAV (as of 10/31/97) $9.97 $9.97 $9.97 $9.97 $9.97
NAV Change -$0.03 -$0.03 $0.00 -$0.03 -$0.03
Total Distributions Paid
Per Share+ $0.18 $0.16 $0.15 $0.19 $0.18
</TABLE>
**
Performance and NAV change are cumulative from each class's inception date.
+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.
The fund invests primarily in high-yield, fixed income securities rated below
investment grade that are considered speculative and generally involve greater
price volatility and greater risk of loss of principal and interest than
investments in higher rated fixed income securities. All performance figures
represent past performance and in no way guarantee future results, which will
fluctuate as market conditions change. The investment return and principal
value of an investment in the fund will fluctuate, and therefore an investor's
shares when redeemed may be worth more or less than their original cost.
Goldman, Sachs & Co., the distributor of the fund, is not a bank, and fund
shares distributed by Goldman, Sachs & Co. are not deposits or obligations of,
or endorsed or guaranteed by, any bank or depository institution, nor are they
insured by the Federal Deposit Insurance Corporation (FDIC), the Federal
Reserve Board or any other government agency.
---------------------------------------
- ---------------------------------------
30
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS HIGH YIELD FUND (continued)
- --------------------------------------- ---------------------------------------
TOP 10 HOLDINGS AS OF OCTOBER 31, 1997
<TABLE>
<CAPTION>
CORPORATE PERCENTAGE OF
COMPANY (LINE OF BUSINESS) RATING TOTAL NET ASSETS
- ---------------- --------- ----------------
<S> <C> <C>
Printpack, Inc. BB 2.4%
Packaging
Intertek Finance BB- 2.3
PIC
Financial
Services
Geberit BB 2.1
International
Building
Products
Tekni-Plex Inc. B+ 1.6
Packaging
Jitney-Jungle B+ 1.6
Stores of
America, Inc.
Grocery
International B+ 1.6
Wire Group
Manufacturing
ITC Deltacom, B+ 1.6
Inc.
Telecommunications
Newport News BB 1.5
Shipbuilding
Inc.
Defense
Viasystems, Inc. B- 1.5
Fresenius BB 1.5
Medical Care
Healthcare
</TABLE>
MARKET OUTLOOK
We continue to have a positive view of the high-yield market, which we expect
to benefit from continued strength in mergers and acquisition activity as well
as other favorable fundamental factors. In addition, in the wake of the October
market turmoil, there is greater credit differential within the high-yield
market than in previous months. As bonds with attractive upside potential
become more readily available, we intend to trim the number of portfolio
holdings to concentrate on fewer issues. Finally, we believe that fundamentals
remain sound in most of the emerging markets in which the fund has invested.
Given a period of recovery and stability in global equity markets, we expect
yield spreads in the sector to recover from their recent slide.
Sincerely,
/s/ Andrew R. Jessop
Andrew R. Jessop
/s/ Michael L. Pasternak
Michael L. Pasternak
/s/ Richard H. Buckholz
Richard H. Buckholz
Portfolio Managers
Goldman Sachs High Yield Fund
November 28, 1997
- --------------------------------------- ---------------------------------------
31
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
GOLDMAN SACHS HIGH YIELD FUND
October 31, 1997
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1997. The
performance for each class of the Goldman Sachs High Yield Fund (assuming both
the maximum sales charge of 4.5% and no sales charge for the Class A shares and
the appropriate redemption fee and no redemption fee for the Class B and Class
C shares) is compared with its benchmark--the Lehman High Yield Bond Index. All
performance data shown represents past performance and should not be considered
indicative 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.
Class A Shares Class A Shares Lehman High Yield Bond
(No Sales Charge) (W/Sales Charge) Index
8/1/97 10000 9550 10000
10/31/97 10150 9693 10184
Class B Shares Class B Shares Lehman High Yield Bond
(w/out redempt. charge) (w/redempt. charge) Index
8/1/97 10000 10000 10000
10/31/97 10131 9631 10184
Class C Shares Class C Shares Lehman High Yield Bond
(w/out redempt. charge) (w/redempt. charge) Index
8/15/97 10000 10000 10000
10/31/97 10146 10046 10207
- --------------------------------------- ---------------------------------------
32
<PAGE>
Goldman Sachs Trust--Fixed Income Trust
- --------------------------------------------------------------------------------
GOLDMAN SACHS HIGH YIELD FUND (continued)
October 31, 1997
- --------------------------------------------------------------------------------
Institutional Shares Lehman High Yield Bond Index
8/1/97 10000 10000
10/31/97 10158 10184
Service Shares Lehman Gov't/MBS Index
8/1/97 10000 10000
10/31/97 10146 10184
-----------------------
<TABLE>
<CAPTION>
Average Annual Total
Return
-------------------------
Since
One Year Inception(a)
<S> <C> <C>
Class A Shares, excluding sales
charge N/A 1.50% (b)
---------------------------------------------------
Class A Shares, including sales
charge N/A (2.32%)(b)
---------------------------------------------------
Class B Shares, excluding
redemption charge N/A 1.31% (b)
---------------------------------------------------
Class B Shares, including
redemption charge N/A (3.64%)(b)
---------------------------------------------------
Class C Shares, excluding
redemption charge N/A 1.46% (b)
---------------------------------------------------
Class C Shares, including
redemption charge N/A 0.46% (b)
---------------------------------------------------
Institutional Shares N/A 1.58% (b)
---------------------------------------------------
Service Shares N/A 1.46% (b)
</TABLE>
(a) The Fund commenced operations on August 1, 1997 except for Class C which
commenced on August 15, 1997.
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Fund has not completed a full twelve months
of operations.
- -------------------------------------- ---------------------------------------
33
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS HIGH YIELD FUND
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS--80.8%
Adelphia Communications Co.(d)
$ 3,000,000 9.25% 10/01/02 $ 2,985,000
Advanced Accessory Systems(d)
2,000,000 9.75 10/01/07 1,965,000
Allied Waste Industries, Inc.(d)
7,000,000 0.00/11.30(a) 06/01/07 4,760,000
Allied Waste North America
2,000,000 10.25 12/01/06 2,170,020
Ameriserv Food Distributors
3,000,000 8.88 10/15/06 3,000,000
Amtrol, Inc.
3,000,000 10.63 12/31/06 3,060,000
Anker Coal Group, Inc.(d)
2,000,000 9.75 10/01/07 2,015,000
Argo-tech Corp.(d)
5,000,000 8.62 10/01/07 4,975,000
Aurora Foods, Inc.
3,750,000 9.88 02/15/07 3,862,500
Axiohm Transaction Solutions(d)
3,000,000 9.75 10/01/07 3,045,000
B&G Foods, Inc.(d)
4,000,000 9.63 08/01/07 4,020,000
Benton Oil & Gas Co.(b)
4,000,000 9.38 11/01/07 3,990,000
Brooks Fiber Properties, Inc.
$3,000,000 0.00/11.87(a) 11/01/06 2,340,000
Burke Industries, Inc.(d)
2,000,000 10.00 08/15/07 2,070,000
Cabot Safety Acquisition Corp.
2,000,000 12.50 07/15/05 2,260,000
Cellnet Data Systems, Inc.(d)
3,000,000 0.00/14.00(a) 10/01/07 1,500,000
Central European Media Enterprises
2,000,000 9.38 08/15/04 1,960,000
Colt Telecom
5,500,000 0.00/12.00(a) 12/15/06 4,097,500
Communications Instruments, Inc.(d)
3,500,000 10.00 09/15/04 3,517,500
Cross Timbers Oil Co.
2,750,000 8.75 11/01/09 2,746,563
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS (CONTINUED)
Decisionone Holdings Corp.
$ 2,000,000 9.75% 08/01/07 $ 2,060,000
4,500,000 0.00/11.50(a) 08/01/08 2,902,500
Delta Mills, Inc.(d)
3,000,000 9.63 09/01/07 3,030,000
Doskocil Manufacturing(d)
2,000,000 10.13 09/15/07 2,060,000
Econophone, Inc.(d)
2,000,000 13.50 07/15/07 2,190,000
Falcon Building Products, Inc.
2,000,000 0.00/10.50(a) 06/15/07 1,280,000
Fleming Companies, Inc.(d)
3,000,000 10.50 12/01/04 3,120,000
Fresenius Medical Care
5,000,000 9.00 12/01/06 5,100,000
Frontiervision Holdings LP(d)
2,500,000 0.00/11.87(a) 09/15/07 1,700,000
GCI, Inc.
2,000,000 9.75 08/01/07 2,050,000
Gensis Eldercare
2,000,000 9.00 08/01/07 1,960,000
General Chemical Corp.
2,000,000 9.25 08/15/03 2,050,000
Globalstar LP
2,000,000 10.75 11/01/04 1,905,000
Graphic Controls Corp.
2,805,000 12.00 09/15/05 3,120,563
Greyhound Lines, Inc.
2,000,000 11.50 04/15/07 2,165,000
GST Equipment Funding, Inc.
2,000,000 13.25 05/01/07 2,250,000
Hawk Corp.
3,000,000 10.25 12/01/03 3,135,000
Hayes Wheels International Inc.(d)
3,000,000 9.13 07/15/07 3,090,000
Hermes Europe Railtel B.V.
2,000,000 11.50 08/15/07 2,180,000
Hyperion Telecommunications
2,000,000 12.25 09/01/04 2,130,000
</TABLE>
---------------------------------------
- ---------------------------------------
The accompanying notes are an integral
part of these financial statements.
34
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS HIGH YIELD FUND (continued)
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS (CONTINUED)
ICN Pharmaceutical, Inc.(d)
$ 2,000,000 9.25% 08/15/05 $ 2,100,000
Integrated Health Services, Inc.
5,000,000 9.25 01/15/08 5,075,000
Intermedia Communications Inc(d)
2,000,000 0.00/11.25(a) 07/15/07 1,315,000
2,250,000 8.88 11/01/07 2,199,375
International Wire Group
5,000,000 11.75 06/01/05 5,440,625
Intertek Finance PLC
7,500,000 10.25 11/01/06 7,800,000
Iridium LLC
3,000,000 11.25 07/15/05 2,835,000
ISP Holdings, Inc.
4,000,000 9.75 02/15/02 4,230,000
ITC Deltacom, Inc.(d)
5,000,000 11.00 06/01/07 5,300,000
James Cable Partners(d)
2,000,000 10.75 08/15/04 2,090,000
Jitney-Jungle Stores America(d)
3,000,000 12.00 03/01/06 3,367,500
2,000,000 10.38 09/15/07 2,080,000
Johnstown American Industries, Inc.(d)
2,000,000 11.75 08/15/05 2,140,000
K&F Industries, Inc.
3,000,000 9.25 10/15/07 3,015,000
Kabelmedia Holdings
5,500,000 0.00/13.63(a) 08/01/06 3,987,500
Kinetic Concepts, Inc.(b)
1,750,000 9.63 11/01/07 1,750,000
Knology Holdings, Inc.
1,750,000 0.00/11.88(a) 10/15/07 892,500
Microcell Telecommunications
3,000,000 0.00/14.00(a) 06/01/06 1,980,000
Millicom International Cellular
4,000,000 0.00/13.50(a) 06/01/06 3,000,000
Mettler Toledo, Inc.
2,125,000 9.75 10/01/06 2,385,313
Newport News Shipbuilding
5,000,000 9.25 12/01/06 5,200,000
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS (CONTINUED)
Nextel Communications, Inc.(d)
$ 3,750,000 0.00/9.75%(a) 08/15/04 $ 3,206,250
1,000,000 0.00/10.65(a) 09/15/07 567,500
Nextlink Communications, Inc.
2,000,000 9.63 10/01/07 2,005,000
Nortek, Inc.(d)
2,000,000 9.88 03/01/04 2,030,000
2,000,000 9.13 09/01/07 2,010,000
NTL, Inc.
1,000,000 10.00 02/15/07 1,042,500
Omnipoint Corp.
1,500,000 11.63 08/15/06 1,560,000
Oxford Automotive, Inc.(d)
3,000,000 10.13 06/15/07 3,120,000
Packard Bioscience, Inc.
5,000,000 9.38 03/01/07 5,025,000
Pathmark Stores, Inc.
3,000,000 9.63 05/01/03 2,835,000
PCI Chemicals Canada, Inc.
4,000,000 9.25 10/15/07 3,920,000
Physician Sales And Services, Inc.
2,500,000 8.50 10/01/07 2,450,000
Prime Succession, Inc.
420,000 10.75 08/15/04 464,100
Printpack, Inc.
7,500,000 10.63 08/15/06 7,950,000
Randalls Food Markets, Inc.(d)
2,000,000 9.38 07/01/07 2,010,000
Red Roof Inns, Inc.
2,000,000 9.63 12/15/03 2,030,000
Revlon Consumer Products Corp.
1,500,000 10.50 02/15/03 1,582,500
Rogers Cantel, Inc.
3,500,000 8.80 10/01/07 3,465,000
RSL Communications Ltd.
3,225,000 12.25 11/15/06 3,483,000
Rutherford Moran Oil Corp.(d)
2,000,000 10.75 10/01/04 1,980,000
SD Warren Co.
3,000,000 12.00 12/15/04 3,375,000
</TABLE>
---------------------------------------
- ---------------------------------------
The accompanying notes are an integral
part of these financial statements.
35
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS (CONTINUED)
Southern Foods Group LP
$ 5,000,000 9.88% 09/01/07 $ 5,150,000
Southwest Royalties, Inc.
1,000,000 10.50 10/15/04 992,500
Sovereign Specialty Chemicals(d)
4,000,000 9.50 08/01/07 4,070,000
Sun World International, Inc.(d)
1,000,000 11.25 04/15/04 1,072,500
Tekni-Plex, Inc.(d)
5,000,000 11.25 04/01/07 5,462,500
Telesystem International Wireless(d)
2,000,000 0.00/13.25(a) 06/30/07 1,200,000
Telewest PLC
4,000,000 0.00/11.00(a) 10/01/07 3,000,000
United Defense Industries, Inc.(d)
1,250,000 8.75 11/15/07 1,250,000
Venture Holdings Trust(d)
3,750,000 9.50 07/01/05 3,684,375
Viasystems, Inc.(d)
5,000,000 9.75 06/01/07 5,125,000
Williams Scotsman, Inc.(d)
3,000,000 9.88 06/01/07 3,090,000
Young Broadcasting, Inc.
5,000,000 8.75 06/15/07 4,850,000
- --------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (COST $273,633,612) $ 273,057,684
- --------------------------------------------------------------------------------------------
EMERGING MARKET DEBT--6.6%
Abril SA
$ 1,500,000 12.00% 10/25/03 $ 1,662,315
Acindar Industries
670,000 11.75 11/12/98 694,757
Argentina Bontes
950,000 8.75 05/09/02 869,250
Asia Pulp and Paper International Finance Co.
900,000 8.53(c) 06/28/99 887,013
390,000 10.25 10/01/00 401,111
Axa S.A de C.V.
1,000,000 9.00 08/04/04 940,000
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EMERGING MARKET DEBT (CONTINUED)
Banco Nacional de Obras
$ 860,000 9.63% 11/15/03 $ 866,450
Bridas Corp.
750,000 12.50 06/10/03 922,440
Groupo Iusacell S.A. de C.V.
1,000,000 10.00 07/15/04 1,048,980
Grupo Industrial Durango
2,030,000 12.63 08/01/03 2,355,957
Grupo Televisa
4,250,000 0.00/13.25(a) 05/15/08 3,022,813
Impsa Industrias Metal
2,000,000 9.50 05/31/02 2,029,080
Indah Kiat Paper & Pulp(b)
40,000 8.88 11/01/00 38,900
Ministry of Finance Russia
2,180,000 10.00 06/26/07 2,350,934
MRS Logistica S.A.(d)
120,000 10.63 08/15/05 111,600
Polysindo Eka Perkasa
1,000,000 15.45 07/15/98 910,200
Poland Communications, Inc.
700,000 9.88 11/01/03 705,250
Providence of Tucuman
1,000,000 9.45 08/01/04 1,007,250
Republic of Argentina
1,000,000 9.75 09/19/27 797,500
Trikem S.A.
500,000 10.00 05/08/98 476,100
United Mexican States Global Bond
300,000 11.50 05/15/26 373,584
- -----------------------------------------------------------------------------------------------
TOTAL EMERGING MARKET DEBT (COST $22,805,541) $ 22,471,484
- -----------------------------------------------------------------------------------------------
FOREIGN BONDS(E)--6.7%
DEUTSCHEMARK--5.4%
Central European Media Enterprises
DEM 3,000,000 8.13% 08/15/04 $ 1,653,324
Exide Holdings(d)
8,000,000 9.13 04/15/04 4,640,910
</TABLE>
---------------------------------------
- ---------------------------------------
The accompanying notes are an integral
part of these financial statements.
36
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS HIGH YIELD FUND (continued)
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOREIGN BONDS (CONTINUED)
DEUTSCHEMARK (CONTINUED)
Geberit International S.A.
DEM 11,600,000 10.13% 04/16/07 $ 7,183,548
ITT Promedia CVA
8,000,000 9.13 09/15/07 4,687,319
- ------------------------------------------------------------------------------------------------
$ 18,165,101
- ------------------------------------------------------------------------------------------------
FRENCH FRANC--1.3%
Financiere Neopost(d)
FRF 25,000,000 5.88 09/30/07 4,334,070
- ------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST 21,956,882) $ 22,499,171
- ------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS--2.1%
Joint Repurchase Agreement Account(f)
$ 7,200,000 5.76% 11/3/97 $ 7,200,000
- ------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT (COST $7,200,000) $ 7,200,000
- ------------------------------------------------------------------------------------------------
<CAPTION>
Maturity
Shares Date Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK--1.9%
Cablevision Systems Corp. Series H, 11.75%(g)
45,975 10/01/02 $ 5,218,163
Intermedia Communications, Inc. Series B, 13.50%(g)
1,000 03/31/09 1,150,000
- ------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(COST $6,399,047) $ 6,368,163
- ------------------------------------------------------------------------------------------------
WARRANTS--0.0%
RSL Communications Ltd., expiring July 7, 2077*
725 $ 68,875
- ------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(COST $36,250) $ 68,875
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $332,031,332(H)) $331,665,377
- ------------------------------------------------------------------------------------------------
</TABLE>
FEDERAL INCOME TAX INFORMATION:
<TABLE>
<S> <C>
Gross unrealized
gain for
investments in
which value
exceeds cost $ 2,965,536
Gross unrealized
loss for
investments in
which cost
exceeds value (3,303,595)
- ------------------------------
Net unrealized
gain $ (338,059)
- ------------------------------
</TABLE>
* Non-income producing security.
(a) These securities are issued with a zero coupon which increases to the
stated rate at a set date in the future.
(b) When-issued security.
(c) Variable rate security. Coupon rate declared is that which is in effect at
October 31, 1997.
(d) Securities are exempt from registration under rule 144A of the Securities
Act of 1933. Such securities may be resold, normally to qualified
institutional buyers in transactions exempt from registration. Total market
value of Rule 144A securities amounted to $115,599,080 as of October 31,
1997.
(e) The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
DEM=Deutsche Mark
FRF=French Franc
(f) Portions of this security is being segregated for when-issued securities
and forwards.
(g) Pay-in-kind security.
(h) 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.
37
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT GLOBAL MUNICIPAL HIGH
INCOME INCOME INCOME YIELD
FUND FUND FUND FUND
---------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in
securities, at value
(cost $96,668,634,
$240,614,266,
$65,218,455 and
$332,031,332) $ 98,123,674 $244,840,234 $67,634,430 $331,665,377
Cash, at value 36,283 -- 94,347 94,291
Receivables:
Investment securities
sold 8,052,214 11,752,792 -- 12,169,433
Interest 665,287 4,225,594 1,095,616 6,052,483
Forward foreign currency
exchange contracts -- 1,997,772 -- 3,864
Fund shares sold 1,068,545 2,954,399 172,672 5,758,585
Variation margin 5,624 -- -- --
Foreign tax withheld -- 206,286 -- --
Deferred organization
expenses, net 5,201 -- 12,545 33,236
Other assets 188,250 67,675 152,755 146,170
- -------------------------------------------------------------------------------
Total assets 108,145,078 266,044,752 69,162,365 355,923,439
- -------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment securities
purchased 27,847,701 20,519,286 1,972,669 15,735,687
Income distribution 106,752 15,591 97,593 599,767
Forward foreign currency
exchange contracts -- 7,755,584 -- 1,049,541
Fund shares repurchased 44,691 5,256,750 171,019 18,476
Management fees 16,011 116,948 30,844 183,745
Authorized dealer
service fees 43,807 113,348 38,493 156,715
Distribution fees 15,662 96,969 455 11,312
Accrued expenses and
other liabilities 78,620 33,276 64,941 153,940
- -------------------------------------------------------------------------------
Total Liabilities 28,153,244 33,907,752 2,376,014 17,909,183
- -------------------------------------------------------------------------------
NET ASSETS:
Paid in capital 78,059,005 217,234,970 64,172,166 338,613,072
Accumulated undistributed
(distributions in excess
of) net investment
income 134,310 16,021,332 69,879 (131,443)
Accumulated net realized
gain on investment
transactions 284,661 3,266,230 104,706 931,960
Accumulated net realized
foreign currency gain
(loss) -- (4,042,742) -- 3,863
Net unrealized gain
(loss) on investments
and futures 1,513,858 3,116,981 2,439,600 (1,424,443)
Net unrealized gain
(loss) on translation of
assets and liabilities
denominated in foreign
currencies -- (3,459,771) -- 21,247
- -------------------------------------------------------------------------------
Net assets $ 79,991,834 $232,137,000 $66,786,351 $338,014,256
- -------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING
AND REDEMPTION PRICE PER
SHARE:(A)
Class A $14.59 $15.10 $14.99 $9.97
Class B $14.61 $15.08 $15.00 $9.97
Class C $14.60 $15.06 $14.99 $9.97
Institutional $14.59 $15.09 $15.00 $9.97
Service $14.59 $15.09 $14.99 $9.97
- -------------------------------------------------------------------------------
SHARES OUTSTANDING:
Class A 4,717,984 11,066,854 4,305,257 32,686,166
Class B 550,353 229,899 116,684 1,033,828
Class C 81,888 32,914 8,681 179,625
Institutional 129,772 4,038,267 23,435 153
Service 105 9,985 102 153
- -------------------------------------------------------------------------------
Total shares outstanding,
$.001 par value
(unlimited number of
shares authorized) 5,480,102 15,377,919 4,454,159 33,899,925
- -------------------------------------------------------------------------------
</TABLE>
(a) Maximum public offering price per share (NAV per share X 1.0471) for Class
A shares is $15.27, $15.81, $15.70 and $10.44 for Government Income, Global
Income, Municipal Income, and High Yield, respectively. At redemption,
Class B and Class C shares may be 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.
38
<PAGE>
Goldman Sachs Trust -- Fixed Income Funds
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Year Ended October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT GLOBAL MUNICIPAL HIGH
INCOME INCOME INCOME YIELD
FUND FUND FUND FUND(B)
-----------------------------------------
<S> <C> <C> <C> <C>
Interest(a) $3,706,833 $15,271,687 $3,181,789 $5,023,956
- --------------------------------------------------------------------------------
TOTAL INCOME 3,706,833 15,271,687 3,181,789 5,023,956
- --------------------------------------------------------------------------------
EXPENSES:
Management fees 350,034 2,158,925 320,868 438,819
Authorized dealer service fees 134,563 458,477 145,949 156,715
Distribution fees 152,194 465,887 150,412 164,257
Custodian fees 74,488 169,209 48,385 36,261
Transfer agent fees 163,181 106,886 152,152 27,280
Professional fees 61,189 82,286 59,477 28,781
Registration fees 26,633 56,758 29,284 130,000
Amortization of deferred
organization expenses 18,797 -- 17,545 1,764
Trustee fees 669 4,686 1,116 982
Other 21,348 64,044 22,916 8,580
- --------------------------------------------------------------------------------
TOTAL EXPENSES 1,003,096 3,567,158 948,104 993,439
LESS--EXPENSES REIMBURSABLE
AND FEES WAIVED BY GOLDMAN
SACHS (706,060) (1,040,703) (443,596) (384,387)
- --------------------------------------------------------------------------------
NET EXPENSES 297,036 2,526,455 504,508 609,052
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,409,797 12,745,232 2,677,281 4,414,904
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENT, FUTURES
AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gain from:
Investment transactions 445,057 7,902,917 985,727 931,960
Futures transactions 44,614 -- 143,869 --
Foreign currency related
transactions -- 5,653,361 -- 62,153
Net change in unrealized gain
(loss) on:
Investments 1,378,438 (1,747,881) 1,424,846 (1,424,443)
Futures (15,782) -- 23,625 --
Translation of assets and
liabilities denominated in
foreign currencies -- (2,249,013) -- 21,247
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENT,
FUTURES AND FOREIGN
CURRENCY TRANSACTIONS 1,852,327 9,559,384 2,578,067 (409,083)
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $5,262,124 $22,304,616 $5,255,348 $4,005,821
- --------------------------------------------------------------------------------
</TABLE>
(a) Net of $104,329 and $2,652 in foreign withholding tax for the Global Income
and High Yield Funds, respectively.
(b) Commencement of operations was August 1, 1997 for all classes except Class
C which commenced operations on August 15, 1997.
---------------------------------------
- ---------------------------------------
The accompanying notes are an integral
part of these financial statements.
39
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT GLOBAL MUNICIPAL HIGH
INCOME INCOME INCOME YIELD
FUND FUND FUND FUND(A)
------------------------------------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 3,409,797 $ 12,745,232 $ 2,677,281 $ 4,414,904
Net realized gain from
investment transactions 489,671 7,902,917 1,129,596 931,960
Net realized gain from
foreign currency
related transactions -- 5,653,361 -- 62,153
Net change in unrealized
gain on investments and
futures 1,362,656 (1,747,881) 1,448,471 (1,424,443)
Net change in unrealized
loss on translation of
assets and liabilities
denominated in foreign
currencies -- (2,249,013) -- 21,247
- ---------------------------------------------------------------------------------
Net increase in net
assets resulting from
operations 5,262,124 22,304,616 5,255,348 4,005,821
- ---------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class A (3,152,235) (9,752,023) (2,651,661) (4,377,263)
Class B (186,284) (74,972) (33,375) (85,036)
Class C (5,823) (2,823) (172) (10,842)
Institutional Class (2,853) (3,332,259) (56) (27)
Service Class (20) (5,785) (14) (26)
In excess of net
investment income
Class A -- -- -- (126,302)
Class B -- -- -- (4,386)
Class C -- -- -- (755)
Institutional Class -- -- -- (1)
Service Class -- -- -- (1)
Net realized gain on
investment
transactions -- -- -- --
Class A (157,471) -- -- --
Class B (1,780) -- -- --
Class C -- -- -- --
Institutional -- -- -- --
Service -- -- -- --
- ---------------------------------------------------------------------------------
Total distributions to
shareholders (3,506,466) (13,167,862) (2,685,278) (4,604,637)
- ---------------------------------------------------------------------------------
FROM SHARE TRANSACTIONS:
Net proceeds from sales
of shares 69,513,073 56,787,564 21,242,873 344,880,814
Reinvestment of
dividends and
distributions 2,614,489 9,138,023 1,598,487 3,439,274
Cost of shares
repurchased (24,728,808) (96,100,786) (11,147,479) (9,707,016)
- ---------------------------------------------------------------------------------
Net increase
(decrease) in net
assets resulting from
share transactions 47,398,754 (30,175,199) 11,693,881 338,613,072
- ---------------------------------------------------------------------------------
Total increase
(decrease) 49,154,412 (21,038,445) 14,263,951 338,014,256
NET ASSETS:
Beginning of period 30,837,422 253,175,445 52,522,400 --
- ---------------------------------------------------------------------------------
End of period $ 79,991,834 $232,137,000 $ 66,786,351 $338,014,256
- ---------------------------------------------------------------------------------
Accumulated
undistributed
(distributions in
excess of) net
investment income $ 134,310 $ 16,036,268 $ 69,879 $ (131,443)
- ---------------------------------------------------------------------------------
SUMMARY OF SHARE
TRANSACTIONS:
Shares sold 4,877,554 3,836,511 1,451,690 34,524,040
Reinvestment of
dividends and
distributions 182,774 620,219 109,016 343,632
Shares repurchased (1,728,010) (6,501,935) (761,762) (967,747)
- ---------------------------------------------------------------------------------
Net increase (decrease)
in shares outstanding 3,332,318 (2,045,205) 798,944 33,899,925
- ---------------------------------------------------------------------------------
</TABLE>
(a) Commencement of operations was August 1, 1997 for all classes except Class
C which commenced operations August 15, 1997.
---------------------------------------
- ---------------------------------------
The accompanying notes are an integral
part of these financial statements.
40
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
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> <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.
41
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
October 31, 1997
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
1. ORGANIZATION
Goldman Sachs Trust (the "Trust") is a Delaware 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), the Goldman Sachs Municipal Income Fund
(Municipal Income) and the Goldman Sachs High Yield Fund (High Yield),
collectively, "the Funds" or individually a "Fund." Government Income,
Municipal Income and High Yield are diversified portfolios whereas Global
Income is a non-diversified portfolio. The Funds currently offer Class A
shares, Class B shares, Class C shares, Institutional shares 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 Fund's 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
Portfolio securities 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.
42
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1997
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
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
The Global Income and High Yield Funds 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 and High Yield 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
43
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
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, currency exchange rates (in the case of
Global Income and High Yield) 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 Municipal Income Fund, at its most recent tax year-end of December 31,
had approximately the following amount of capital loss carryforward for U.S.
federal tax purposes:
<TABLE>
- --------------------------------------
<CAPTION>
YEAR OF
FUND AMOUNT EXPIRATION
- --------------------------------------
<S> <C> <C>
Municipal Income $641,973 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, Class B and Class C 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
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, an affiliate of GSAM.
44
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1997
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
Under the Agreement, GSAM and GSAM International (GSAM), 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 Agreement and the
assumption of the expenses related thereto and administering the Fund's
business affairs, including providing facilities, GSAM is entitled to a fee,
computed daily and payable monthly at an annual rate equal to .65%, .90%, .55%
and .70% of average daily net assets of Government Income, Global Income,
Municipal Income and High Yield Funds, respectively.
Goldman Sachs has voluntarily agreed to limit certain of the Funds' expenses
(excluding management, service, distribution and authorized dealer service
fees, taxes, interest, brokerage, litigation, indemnification and other
extraordinary expenses and with respect to the Global Income and High Yield
Funds, transfer agent fees) to the extent such expenses exceed .00%, .06%, .05%
and .01% per annum of Government Income, Global Income, Municipal Income and
High Yield Funds, 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 October 31, 1997,
Goldman Sachs retained approximately $193,000, $176,000, $57,000 and $3,194,000
of sales loads related to sales of Government Income, Global Income, Municipal
Income and High Yield Funds, 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%, .75% and .75% of each Fund's
average daily net assets attributable to Class A, Class B and Class C 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, Class B and Class C shares. Goldman Sachs also serves as the Transfer
Agent of the Funds for a fee.
For the year ended October 31, 1997, the Managers and Distributor have
voluntarily agreed to waive certain fees and reimburse other expenses as
follows (in thousands):
Waivers
<TABLE>
<CAPTION>
------------------------------ ---
Reimburse-
Class A Reimburse- ment
Fund Management 12b-1 ment Outstanding
- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government
Income $215 $126 $365 $ 139
Global
Income 744 73 224 56
Municipal Income -- 144 300 113
High Yield 31 153 200 146
</TABLE>
The Manager and Distributor may discontinue or modify such waivers and
limitations in the future at their discretion.
For the year ended October 31, 1997, Government Income and Municipal Income
Funds incurred commissions expense of approximately $2,400 and $1,800
respectively, in connection with futures contracts entered into with Goldman
Sachs. At October 31, 1997, Goldman Sachs owes approximately $5,600 to
Government Income related to variation margin on futures contracts.
4. LINE OF CREDIT FACILITY
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line
of credit facility. In addition, Global Income and High Yield Funds participate
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
45
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
requires a fee to be paid based on the amount of the commitment which has not
been utilized. For the year ended October 31, 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
year ended October 31, 1997, were as follows:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
GOVERNMENT GLOBAL MUNICIPAL HIGH
FUND INCOME INCOME INCOME YIELD
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases of U.S.
Government and agency
obligations $233,289,609 $141,309,917 -- --
- -------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and agency
obligations) 17,622,785 678,102,464 $97,409,474 $439,712,607
- -------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and agency
obligations 199,313,496 183,217,390 -- --
- -------------------------------------------------------------------------------
Sales or maturities
(excluding U.S. Government
and agency obligations) 5,883,622 619,012,989 88,394,031 117,559,082
- -------------------------------------------------------------------------------
</TABLE>
At October 31, 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 GAIN
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
DEUTSCHE MARK
Expiring 01/09/98 $ 5,646,960 $ 5,761,656 $114,696
SWEDISH KRONA
Expiring 12/12/97 8,268,563 8,399,403 130,840
- -----------------------------------------------------------------------------
Total Foreign Currency Purchase Contracts $13,915,523 $14,161,059 $245,536
- -----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE ON
FOREIGN CURRENCY SETTLEMENT CURRENT UNREALIZED
SALE CONTRACTS DATE VALUE GAIN/(LOSS)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
AUSTRALIAN DOLLAR Expiring 12/18/97 $ 2,382,288 $ 2,259,392 $ 122,896
BRITISH POUND STERLING Expiring
11/17/97 30,871,825 32,890,869 (2,019,044)
Expiring 01/26/98 7,043,389 7,087,943 (44,554)
DEUTSCHE MARK Expiring 11/21/97 12,767,425 13,026,336 (258,911)
Expiring 12/12/97 11,185,084 11,537,531 (352,447)
FRENCH FRANC Expiring 01/23/98 18,369,370 19,024,538 (655,168)
ITALIAN LIRA Expiring 11/13/97 17,068,610 18,122,461 (1,053,851)
JAPANESE YEN Expiring 11/21/97 6,820,529 6,869,362 (48,833)
Expiring 01/22/98 27,706,724 27,929,410 (222,686)
NEW ZEALAND DOLLAR Expiring 12/19/97 22,897,566 22,466,145 431,421
SPANISH PESETA Expiring 12/11/97 8,628,088 9,059,096 (431,008)
- -----------------------------------------------------------------------------
Total Foreign Currency Sale Contracts $165,740,898 $170,273,083 ($4,532,185)
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
- --------------------------------------------------------------
<CAPTION>
FOREIGN CURRENCY PURCHASE SALE
CROSS CONTRACTS CURRENT CURRENT UNREALIZED
(PURCHASE/SALE) VALUE VALUE LOSS
- --------------------------------------------------------------
<S> <C> <C> <C>
DEUTSCHE MARK/SWISS FRANC
Expiring 11/28/97 $11,863,004 $12,029,122 $(166,118)
DEUTSCHE MARK/IRISH PUNT
Expiring 01/08/98 11,823,233 11,972,652 (149,419)
- --------------------------------------------------------------
Total Foreign Currency
Cross Contracts $23,686,237 $24,001,774 $ (315,537)
- --------------------------------------------------------------
</TABLE>
46
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1997
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
At October 31, 1997, High Yield 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 LOSS
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
DEUTSCHE MARK
Expiring 02/17/98 $ 65,605 $ 69,174 ($3,569)
Expiring 03/16/98 212,345 220,490 (8,145)
Expiring 04/15/98 726,400 761,732 (35,332)
Expiring 08/17/98 1,604,606 1,688,221 (83,615)
Expiring 09/15/98 4,756,625 4,931,914 (175,289)
Expiring 10/15/98 11,692,647 12,250,676 (558,029)
FRENCH FRANC
Expiring 05/04/98 4,362,210 4,547,772 (185,562)
- ---------------------------------------------------------------------------
Total Foreign Currency Sale Contracts $23,420,438 $24,469,979 $(1,049,541)
- ---------------------------------------------------------------------------
</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, 1997, Global Income and High Yield Funds 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 $1,997,772 and $7,755,584 respectively, in the
accompanying Statement of Assets and Liabilities. High Yield has recorded
$3,864 and $1,049,541 respectively. Included in the Global Income "Receivable
and Payable for forward foreign currency exchange contracts" are $718,874 and
$1,874,502 respectively, related to forward contracts closed but not settled as
of October 31, 1997. High Yield has recorded a "Receivable for forward currency
exchange contracts" of $3,864, related to forward contracts closed but not
settled as of October 31, 1997.
6. REPURCHASE AGREEMENTS
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the
value of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Funds' custodian.
7. SERVICE PLAN
The Funds have adopted a Service Plan. This plan allows for Service shares 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 Service Plan provides for compensation to
the service organizations in an amount up to .50% (on an annualized basis), of
the average daily net asset value of the Service shares.
47
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
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 October 31, 1997, Government Income and
High Yield Funds had an undivided interest in the repurchase agreement in the
following joint account which equaled $20,200,000 and $7,200,000, respectively
in principal amount. At October 31, 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 October 31, 1997, repurchase price $300,144,250
(total collateral value $309,849,518 consisting of FHLMC: 6.50%, 12/01/23;
FNMA: 6.00%, 6/01/11; GNMA: 7.00%-8.00%, 2/15/25-10/15/27)
$300,000,000 5.77% 11/03/97 $ 300,000,000
Lehman Brothers, Inc., dated October 31, 1997, repurchase price $241,215,728
(total collateral value $245,922,019 consisting of FHLMC: 6.50%-10.25%,
3/01/01-10/01/27; FNMA: 6.00%-11.25%, 11/01/01-10/01/27)
241,100,000 5.76 11/03/97 241,100,000
Nomura Securities International, Inc., dated October 31, 1997, repurchase
price $200,096,167 (total collateral value $204,000,900 consisting of
FHLMC: 6.02%-7.53%, 9/25/00-8/21/07; FNMA: 6.11%-7.73%, 6/22/99-2/07/07;
U.S. Treasury Note: 5.75%-9.00%, 5/15/98-2/15/07; U.S. Treasury Principal
Only Stripped Security: 5/15/00)
200,000,000 5.77 11/03/97 200,000,000
Nomura Securities International, Inc., dated October 31, 1997, repurchase
price $100,047,500 (total collateral value $102,000,449 consisting of
FHLMC: 6.02%-7.53%, 9/25/00-8/21/07; FNMA: 6.11%-7.73%, 6/22/99-2/07/07;
U.S. Treasury Note: 5.75%-9.00%, 5/15/98-2/15/07; U.S. Treasury Principal
Only Stripped Security: 5/15/00)
$100,000,000 5.70% 11/03/97 $ 100,000,000
- -------------------------------------------------------------------------------------------------
TOTAL JOINT REPURCHASE AGREEMENT ACCOUNT $ 841,100,000
- -------------------------------------------------------------------------------------------------
</TABLE>
9. CERTAIN RECLASSIFICATIONS
In accordance with Statement of Position 93-2, the Government Income and
Municipal Income Funds have reclassified $18,397 and $17,545, respectively,
from paid-in capital to accumulated undistributed net investment income.
Additionally, the Global Income Fund and the High Yield Fund have reclassified
$9,739,737 and $58,290, respectively from accumulated net realized gain 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, 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.
48
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1997
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
11. SUMMARY OF SHARE TRANSACTIONS
Share activity for the year ended October 31, 1997 is as follows:
<TABLE>
<CAPTION>
Government Income Global Income Municipal Income High Yield(a)
- ---------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Shares sold 4,037,141 $57,488,835 3,015,583 $ 44,585,997 1,303,279 $19,055,213 33,312,862 $332,722,875
Reinvestment of
dividends and
distributions 171,093 2,446,417 467,859 6,894,169 107,716 1,579,312 337,850 3,381,418
Shares repurchased (1,621,717) (23,201,046) (6,086,858) (89,969,794) (743,175) (10,871,802) (964,546) (9,674,791)
---------------------------------------------------------------------------------------------------
2,586,517 36,734,206 (2,603,416) (38,489,628) 667,820 9,762,723 32,686,166 326,429,502
---------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 616,145 8,785,642 234,541 3,469,609 116,039 1,702,581 1,031,591 10,350,661
Reinvestment of
dividends and
distributions 11,108 159,730 3,715 55,069 1,286 18,970 4,944 49,476
Shares repurchased (93,217) (1,338,822) (25,960) (383,982) (18,419) (273,177) (2,707) (27,285)
---------------------------------------------------------------------------------------------------
534,036 7,606,550 212,296 3,140,696 98,906 1,448,374 1,033,828 10,372,852
---------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 94,585 1,365,823 39,328 589,195 8,837 132,078 179,285 1,804,260
Reinvestment of
dividends and
distributions 379 5,517 183 2,750 12 176 834 8,342
Shares repurchased (13,076) (188,940) (6,597) (98,680) (168) (2,500) (494) (4,940)
---------------------------------------------------------------------------------------------------
81,888 1,182,400 32,914 493,265 8,681 129,754 179,625 1,807,662
---------------------------------------------------------------------------------------------------
INSTITUTIONAL SHARES
Shares sold 129,579 1,871,267 520,054 7,743,275 23,434 351,500 150 1,501
Reinvestment of
dividends and
distributions 193 2,806 148,072 2,180,251 1 15 3 28
Shares repurchased -- -- (365,110) (5,385,751) -- -- -- --
---------------------------------------------------------------------------------------------------
129,772 1,874,073 303,016 4,537,775 23,435 351,515 153 1,529
---------------------------------------------------------------------------------------------------
SERVICE SHARES
Shares sold 104 1,506 27,005 399,488 101 1,501 152 1,517
Reinvestment of
dividends and
distributions 1 19 390 5,784 1 14 1 10
Shares repurchased -- -- (17,410) (262,579) -- -- -- --
---------------------------------------------------------------------------------------------------
105 1,525 9,985 142,693 102 1,515 153 1,527
---------------------------------------------------------------------------------------------------
Net increase
(decrease) 3,332,318 $47,398,754 (2,045,205) $(30,175,199) 798,944 $11,693,881 33,899,925 $338,613,072
===================================================================================================
</TABLE>
(a) Commencement of operations was August 1, 1997 for all classes except Class
C which commenced operations August 15, 1997.
49
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
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>
50
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations
----------------------------------------------------
Net realized Net realized
and unrealized and unrealized Total
gain (loss) on gain (loss) income
Net asset investment, on foreign (loss)
value, Net option and currency from
beginning investment futures related investment
of period income transactions(a) transactions operations
-----------------------------------------------------------------
GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- ---------------------------------------
1997-Class A Shares $14.36 $0.91 $0.29 -- $1.20
1997-Class B Shares 14.37 0.80 0.30 -- 1.10
1997-Class C Shares(j) 14.38 0.17 0.22 -- 0.39
1997-Institutional
Shares(j) 14.37 0.20 0.22 -- 0.42
1997-Service Shares(j) 14.37 0.20 0.21 -- 0.41
1996-Class A shares 14.47 0.92 (0.11) -- 0.81
1996-Class B shares(c) 14.11 0.41 0.26 -- 0.67
1995-Class A shares 13.47 0.94 1.00 -- 1.94
1994-Class A shares 14.90 0.85 (1.28) -- (0.43)
FOR THE PERIOD FEBRUARY 10, 1993(D) THROUGH OCTOBER 31,
- ---------------------------------------
1993-Class A shares 14.32 0.56 0.58 -- 1.14
GLOBAL INCOME FUND
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------------
1997-Class A shares $14.53 $0.59 $0.50 $0.27 $1.36
1997-Class B shares 14.53 0.72 0.36 0.20 1.28
1997-Class C shares(j) 14.80 0.16 0.19 0.10 0.45
1997-Institutional
Shares 14.52 0.88 0.37 0.19 1.44
1997-Service Shares(i) 14.69 0.53 0.25 0.14 0.92
1996-Class A shares 14.45 0.71 0.62 0.18 1.51
1996-Class B shares(c) 14.03 0.34 0.41 0.11 0.86
1996-Institutional
shares 14.45 1.15 0.32 0.10 1.57
1995-Class A shares 13.43 0.89 0.92 0.15 1.96
1995-Institutional
shares(f) 14.09 0.22 0.34 0.06 0.62
1994-Class A shares 15.07 0.84 (1.37) (0.12) (0.65)
1993-Class A shares 14.69 0.85 1.07 (0.42) 1.50
1992-Class A shares 14.60 1.14 0.45 (0.36) 1.23
FOR THE PERIOD AUGUST 2, 1991(D) THROUGH OCTOBER 31,
- -------------------------------------
1991-Class A shares 14.55 0.25 0.23 (0.19) 0.29
- --------------------------------------------------------------------------------
<CAPTION>
Distributions to shareholders
---------------------------------------------------------------------
From In excess of
net realized net realized
gain on gain on
From investment, In excess investment, Total
net option and of net option and From distributions
investment futures investment futures paid in to
income transactions income transactions capital shareholders
-----------------------------------------------------------------
GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- ---------------------------------------
1997-Class A Shares $(0.90) $(0.07) -- -- -- $(0.97)
1997-Class B Shares (0.79) (0.07) -- -- -- (0.86)
1997-Class C Shares(j) (0.17) -- -- -- -- (0.17)
1997-Institutional
Shares(j) (0.20) -- -- -- -- (0.20)
1997-Service Shares(j) (0.19) -- -- -- -- (0.19)
1996-Class A shares (0.92) -- -- -- -- (0.92)
1996-Class B shares(c) (0.41) -- -- -- -- (0.41)
1995-Class A shares (0.94) -- -- -- -- (0.94)
1994-Class A shares (0.85) (0.12) (0.02) (0.01) -- (1.00)
FOR THE PERIOD FEBRUARY 10, 1993(D) THROUGH OCTOBER 31,
- ---------------------------------------
1993-Class A shares (0.56) -- -- -- -- (0.56)
GLOBAL INCOME FUND
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------------
1997-Class A shares $(0.79) -- -- -- -- $(0.79)
1997-Class B shares (0.73) -- -- -- -- (0.73)
1997-Class C shares(j) (0.19) -- -- -- -- (0.19)
1997-Institutional
Shares (0.87) -- -- -- -- (0.87)
1997-Service Shares(i) (0.52) -- -- -- -- (0.52)
1996-Class A shares (1.43) -- -- -- -- (1.43)
1996-Class B shares(c) (0.36) -- -- -- -- (0.36)
1996-Institutional
shares (1.50) -- -- -- -- (1.50)
1995-Class A shares (0.94) -- -- -- -- (0.94)
1995-Institutional
shares(f) (0.26) -- -- -- -- (0.26)
1994-Class A shares (0.22) (0.16) -- -- (0.61) (0.99)
1993-Class A shares (0.85) (0.27) -- -- -- (1.12)
1992-Class A shares (1.14) -- -- -- -- (1.14)
FOR THE PERIOD AUGUST 2, 1991(D) THROUGH OCTOBER 31,
- -------------------------------------
1991-Class A shares (0.24) -- -- -- -- (0.24)
- --------------------------------------------------------------------------------
<CAPTION>
Net Ratio of
increase net
(decrease) Net asset Ratio of investment Net assets
in net value at net expenses income Portfolio at end of
asset end of Total to average to average turnover period
value period return(b) net assets net assets rate(h) (in 000s)
-----------------------------------------------------------------
GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- ---------------------------------------
1997-Class A Shares $0.23 $14.59 8.72% 0.50% 6.38% 395.75% $ 68,859
1997-Class B Shares 0.24 14.61 7.96 1.25 5.59 395.75 8,041
1997-Class C Shares(j) 0.22 14.60 2.72(g) 1.25(e) 5.45(e) 395.75(g) 1,196
1997-Institutional
Shares(j) 0.22 14.59 2.94(g) 0.25(e) 7.03(e) 395.75(g) 1,894
1997-Service Shares(j) 0.22 14.59 2.85(g) 0.50(e) 6.49(e) 395.75(g) 2
1996-Class A shares (0.11) 14.36 5.80 0.50 6.42 485.09 30,603
1996-Class B shares(c) 0.26 14.37 4.85(g) 1.25(e) 5.65(e) 485.09 234
1995-Class A shares 1.00 14.47 14.90 0.47 6.67 449.53 29,503
1994-Class A shares (1.43) 13.47 (2.98) 0.11 6.06 654.90 14,452
FOR THE PERIOD FEBRUARY 10, 1993(D) THROUGH OCTOBER 31,
- ---------------------------------------
1993-Class A shares 0.58 14.90 8.03(g) 0.00(e) 4.87(e) 725.41(g) 12,860
GLOBAL INCOME FUND
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------------
1997-Class A shares $0.57 $15.10 9.66% 1.17% 5.19% 383.72% $167,096
1997-Class B shares 0.55 15.08 9.04 1.71 4.76 383.72 3,465
1997-Class C shares(j) 0.26 15.06 3.03(g) 1.71(e) 4.98(e) 383.72(g) 496
1997-Institutional
Shares 0.57 15.09 10.26 0.65 5.72 383.72 60,929
1997-Service Shares(i) 0.40 15.09 6.42(g) 1.15(e) 5.33(e) 383.72(g) 151
1996-Class A shares 0.08 14.53 11.05 1.16 5.81 232.15 198,665
1996-Class B shares(c) 0.50 14.53 6.24(g) 1.70(e) 5.16(e) 232.15(g) 256
1996-Institutional
shares 0.07 14.52 11.55 0.65 6.35 232.15 54,254
1995-Class A shares 1.02 14.45 15.08 1.29 6.23 265.86 245,835
1995-Institutional
shares(f) 0.36 14.45 4.42(g) 0.65(e) 6.01(e) 265.86(g) 31,619
1994-Class A shares (1.64) 13.43 (4.49) 1.28 5.73 343.74 396,584
1993-Class A shares 0.38 15.07 10.75 1.30 5.78 313.88 675,662
1992-Class A shares 0.09 14.69 8.77 1.37 7.85 270.75 588,893
FOR THE PERIOD AUGUST 2, 1991(D) THROUGH OCTOBER 31,
- -------------------------------------
1991-Class A shares 0.05 14.60 2.00(g) 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
--------------------------------------------------------------
GOVERNMENT INCOME FUND
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- ---------------------------------------
1997-Class A Shares 1.82% 5.06%
1997-Class B Shares 2.32 4.52
1997-Class C Shares(j) 2.32(e) 4.38(e)
1997-Institutional
Shares(j) 1.57(e) 5.42(e)
1997-Service Shares(j) 1.82(e) 5.17(e)
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)
GLOBAL INCOME FUND
- ----------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------------
1997-Class A shares 1.60% 4.76%
1997-Class B shares 2.10 4.37
1997-Class C shares(j) 2.10(e) 4.59(e)
1997-Institutional Shares 1.04 5.33
1997-Service Shares(i) 1.54(e) 4.94(e)
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.
51
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations
----------------------------------------------------
Net realized Net realized
and unrealized and unrealized Total
gain (loss) on gain (loss) income
Net asset investment, on foreign (loss)
value, Net option and currency from
beginning investment futures related investment
of period income transactions(a) transactions operations
---------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- ------------------------------------
1997-Class A Shares $14.37 $0.67 $0.62 -- $1.29
1997-Class B Shares 14.37 0.56 0.63 -- 1.19
1997-Class C Shares(j) 14.85 0.12 0.14 -- 0.26
1997-Institutional
Shares(j) 14.84 0.15 0.16 -- 0.31
1997-Service Shares(j) 14.84 0.14 0.15 -- 0.29
1996-Class A shares 14.17 0.65 0.20 -- 0.85
1996-Class B shares(c) 14.03 0.27 0.34 -- 0.61
1995-Class A shares 13.08 0.67 1.09 -- 1.76
1994-Class A shares 14.64 0.73 (1.51) -- (0.78)
FOR THE PERIOD JULY 20, 1993(D) THROUGH OCTOBER 31,
- ------------------------------------
1993-Class A shares 14.32 0.22 0.32 -- 0.54
HIGH YIELD FUND
- --------------------------------------------------------------------------------
FOR THE PERIOD AUGUST 1, 1997(D) THROUGH OCTOBER 31,
- ------------------------------------
1997-Class A Shares $10.00 $0.17 $(0.03) 0.01 $0.15
1997-Class B Shares 10.00 0.15 (0.03) 0.01 0.13
1997-Class C Shares(j) 9.97 0.14 -- 0.01 0.12
1997-Institutional
Shares 10.00 0.18 (0.03) 0.01 0.16
1997-Service Shares 10.00 0.17 (0.03) 0.01 0.15
<CAPTION>
Distributions to shareholders
---------------------------------------------------------------------
From In excess of
net realized net realized
gain on gain on
From investment, In excess investment, Total
net option and of net option and From distributions
investment futures investment futures paid in to
income transactions income transactions capital shareholders
------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- --------------------------
1997-Class A Shares $(0.67) -- -- -- -- $(0.67)
1997-Class B Shares (0.56) -- -- -- -- (0.56)
1997-Class C Shares(j) (0.12) -- -- -- -- (0.12)
1997-Institutional
Shares(j) (0.15) -- -- -- -- (0.15)
1997-Service Shares(j) (0.14) -- -- -- -- (0.14)
1996-Class A shares (0.65) -- -- -- -- (0.65)
1996-Class B shares(c) (0.27) -- -- -- -- (0.27)
1995-Class A shares (0.67) -- -- -- -- (0.67)
1994-Class A shares (0.73) (0.05) -- -- -- (0.78)
FOR THE PERIOD JULY 20, 1993(D) THROUGH OCTOBER 31,
- --------------------------
1993-Class A shares (0.22) -- -- -- -- (0.22)
HIGH YIELD FUND
- --------------------------------------------------------------------------------
FOR THE PERIOD AUGUST 1, 1997(D) THROUGH OCTOBER 31,
- --------------------------
1997-Class A Shares $(0.17) -- $(0.01) -- -- $(0.18)
1997-Class B Shares (0.15) -- (0.01) -- -- (0.16)
1997-Class C Shares(j) (0.14) -- (0.01) -- -- (0.15)
1997-Institutional
Shares (0.18) -- (0.01) -- -- (0.19)
1997-Service Shares (0.17) -- (0.01) -- -- (0.18)
<CAPTION>
Net Ratio of
increase net
(decrease) Net asset Ratio of investment Net assets
in net value at net expenses income Portfolio at end of
asset end of Total to average to average turnover period
value period return(b) net assets net assets rate(h) (in 000s)
------------------------------------------------------------------------
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- --------------------------
1997-Class A Shares $0.62 $14.99 9.23% 0.85% 4.60% 153.12% $64,553
1997-Class B Shares 0.63 15.00 8.48 1.60 3.74 153.12 1,750
1997-Class C Shares(j) 0.14 14.99 1.75(g) 1.60(e) 3.24(e) 153.12(g) 130
1997-Institutional
Shares(j) 0.16 15.00 2.10(g) 0.60(e) 4.41(e) 153.12(g) 351
1997-Service Shares(j) 0.15 14.99 1.93(g) 1.10(e) 4.24(e) 153.12(g) 2
1996-Class A shares 0.20 14.37 6.13 0.85 4.58 344.13 52,267
1996-Class B shares(c) 0.34 14.37 4.40(g) 1.60(e) 3.55(e) 344.13(g) 255
1995-Class A shares 1.09 14.17 13.79 0.76 4.93 335.55 53,797
1994-Class A shares (1.56) 13.08 (5.51) 0.45 5.28 357.54 47,373
FOR THE PERIOD JULY 20, 1993(D) THROUGH OCTOBER 31,
- --------------------------
1993-Class A shares 0.32 14.64 3.73(g) 0.00(e) 5.15(e) 99.99(g) 30,166
HIGH YIELD FUND
- --------------------------------------------------------------------------------
FOR THE PERIOD AUGUST 1, 1997(D) THROUGH OCTOBER 31,
- --------------------------
1997-Class A Shares $(0.03) $9.97 1.50%(g) 0.95%(e) 7.06%(e) 44.80%(g) $325,911
1997-Class B Shares (0.03) 9.97 1.31(g) 1.70(e) 6.28(e) 44.80(g) 10.308
1997-Class C Shares(j) (0.03) 9.97 1.46(g) 1.70(e) 6.17(e) 44.80(g) 1,791
1997-Institutional
Shares (0.03) 9.97 1.58(g) 0.70(e) 7.16(e) 44.80(g) 2
1997-Service Shares (0.03) 9.97 1.46(g) 1.20(e) 6.69(e) 44.80(g) 2
<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
-------------------------------------------------------------------
MUNICIPAL INCOME FUND
- -------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- ------------------------------------
1997-Class A Shares 1.62% 3.83%
1997-Class B Shares 2.12 3.22
1997-Class C Shares(j) 2.12(e) 2.72(e)
1997-Institutional Shares(j) 1.12(e) 3.89(e)
1997-Service Shares(j) 1.62(e) 3.72(e)
1996-Class A shares 1.55 3.88
1996-Class B shares(c) 2.05(e) 3.10(e)
1995-Class A shares 1.49 4.20
1994-Class A shares 1.55 4.18
FOR THE PERIOD JULY 20, 1993(D) THROUGH OCTOBER 31,
- ------------------------------------
1993-Class A shares 2.42(e) 2.73(e)
HIGH YIELD FUND
- -------------------------------------------------------------------------
FOR THE PERIOD AUGUST 1, 1997(D) THROUGH OCTOBER 31,
- ------------------------------------
1997-Class A Shares 1.57%(e) 6.44%(e)
1997-Class B Shares 2.07(e) 5.91(e)
1997-Class C Shares(j) 2.07(e) 5.80(e)
1997-Institutional Shares 1.07(e) 6.79(e)
1997-Service Shares 1.57(e) 6.32(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 and Class C 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.
(j) Commenced operations on August 15, 1997.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
52
<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, Goldman Sachs Municipal Income
Fund and Goldman Sachs High Yield Fund:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund, Goldman
Sachs Municipal Income Fund and Goldman Sachs High Yield Fund: (portfolios of
Goldman Sachs Trust, a Delaware Business Trust), including the statements of
investments, as of October 31, 1997, 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, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of
the Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund,
Goldman Sachs Municipal Income Fund and Goldman Sachs High Yield Fund as of
October 31, 1997, 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, 1997
53
<PAGE>
VOTING RESULTS OF SPECIAL MEETING OF SHAREHOLDERS
The proposals described below were submitted to a vote of shareholders of
Goldman Sachs Trust (the "Company") at a Special Meeting of Shareholders held
on April 1, 1997 (the "Meeting"):
- --------------------------------------------------------------------------------
PROPOSAL NO. 1--ELECTION OF NINE TRUSTEES:
- --------------------------------------------------------------------------------
At the Meeting, Ashok Bakhru, David B. Ford, Douglas Grip, John McNulty, Mary
McPherson, Richard Strubel, Alan Shuch, Jackson Smart and William Springer were
elected to the Company's Board of Trustees. In electing the Trustees, the
Company's shareholders voted as follows:
<TABLE>
<CAPTION>
TRUSTEE FOR AGAINST ABSTAIN BROKER NON-VOTES
------- --------------- ------- -------------- ----------------
<S> <C> <C> <C> <C>
Ashok Bakhru............ 59,699,988.0890 0 993,484.8850 0
David B. Ford........... 59,362,764.7000 0 1,330,708.2740 0
Douglas Grip............ 59,477,956.3930 0 1,215,516.5810 0
John McNulty............ 59,362,764.7000 0 1,330,708.2740 0
Mary McPherson.......... 59,705,150.0290 0 988,322.9450 0
Richard Strubel......... 59,727,715.4610 0 965,757.5130 0
Alan Shuch.............. 59,362,764.7000 0 1,330,708.2740 0
Jackson Smart........... 59,706,199.9810 0 987,272.9930 0
William Springer........ 59,729,198.2540 0 964,274.7200 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 2--RATIFICATION OF THE SELECTION OF ARTHUR ANDERSEN LLP AS THE
INDEPENDENT ACCOUNTANTS OF THE TRUST OR THE CORPORATION FOR THE
FISCAL YEARS ENDING OCTOBER 31, 1997 AND JANUARY 31, 1998,
RESPECTIVELY:
- --------------------------------------------------------------------------------
At the Meeting, the Company's shareholders approved Proposal No. 2 as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
- --------------- -------------- -------------- ----------------
<S> <C> <C> <C>
55,747,113.1630 37,028.3220 4,909,331.4890 0
- --------------------------------------------------------------------------------
PROPOSAL NO. 4(B)--APPROVAL OF AN AMENDMENT TO THE TRUST'S DECLARATION OF TRUST
TO PERMIT INVESTMENT OF EACH FUND'S ASSETS IN ANOTHER OPEN-END
INVESTMENT COMPANY:
- --------------------------------------------------------------------------------
At the Meeting, the Company's shareholders approved Proposal No. 4(B) as
follows:
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
- --------------- -------------- -------------- ----------------
<S> <C> <C> <C>
52,375,742.4380 1,978,971.9450 6,267,663.5910 71,095.0000
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 3--APPROVAL OF AN AGREEMENT AND PLAN OF REORGANIZATION:
- --------------------------------------------------------------------------------
At the Meeting, the shareholders of each of the Company's portfolios (each, a
"Fund" and collectively, the "Funds") approved Proposal No. 3 as follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,256,266.2380 249,187.0120 0 0
G.S. Adjustable Rate
Government............. 30,840,046.7270 205,007.3510 4,029,816.1740 64,115.0000
G.S. Short Duration Tax
Free................... 2,017,550.0780 16,321.0250 527.7150 0
G.S. Core Fixed Income.. 4,761,964.9270 1,055.6280 0 0
G.S. Global Income...... 7,475,140.0900 216,569.4820 1,108,286.2630 0
G.S. Government Income.. 1,419,426.1060 19,927.7870 2,736.8010 6,980.0000
G.S. Municipal Income... 1,871,247.5330 13,820.1290 117,480.9080 0
</TABLE>
54
<PAGE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 4(A)--APPROVAL OF AN AMENDMENT TO THE FUND'S INVESTMENT
RESTRICTIONS TO PERMIT EACH FUND TO INVEST ALL ITS ASSETS IN
ANOTHER OPEN-END INVESTMENT COMPANY:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 4(A) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1230 255,529.1270 0 0
G.S. Adjustable Rate
Government............. 29,300,183.4090 738,971.8930 5,035,714.9500 64,115.0000
G.S. Short Duration Tax
Free................... 1,707,256.5030 326,614.6000 527.7150 0
G.S. Core Fixed Income.. 4,761,964.9270 1,055.6280 0 0
G.S. Global Income...... 7,338,642.1730 350,819.2200 1,110,534.4420 0
G.S. Government Income.. 1,409,107.5260 30,246.3670 2,736.8010 6,980.0000
G.S. Municipal Income... 1,850,690.6070 29,828.2390 122,029.7240 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(A)--INVESTMENT POLICY ON ISSUER DIVERSIFICATION:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(A) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1230 249,187.0120 6,342.1150 0
G.S. Adjustable Rate
Government............. 29,997,087.3250 43,548.7280 5,034,234.1990 64,115.0000
G.S. Short Duration Tax
Free................... 2,023,592.0760 1,190.2710 9,616.4710 0
G.S. Core Fixed Income.. 4,763,020.5550 0 0 0
G.S. Global Income...... 7,302,111.2200 337,094.6510 1,160,789.9640 0
G.S. Government Income.. 1,432,220.1140 3,231.1630 6,639.4170 6,980.0000
G.S. Municipal Income... 1,872,473.5900 16,237.5860 113,837.3940 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(B)--INVESTMENT POLICY ON INDUSTRY CONCENTRATION:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(B) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1230 249,187.0120 6,342.1150 0
G.S. Adjustable Rate
Government............. 29,717,448.6200 48,100.0560 5,309,321.5760 64,115.0000
G.S. Short Duration Tax
Free................... 2,023,592.0760 1,190.2710 9,616.4710 0
G.S. Core Fixed Income.. 4,763,020.5550 0 0 0
G.S. Global Income...... 7,308,203.5950 364,153.7540 1,127,638.4860 0
G.S. Government Income.. 1,435,859.2330 3,462.0620 2,769.3990 6,980.0000
G.S. Municipal Income... 1,869,373.6660 12,600.7210 120,574.1830 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(C)--INVESTMENT POLICIES ON BORROWING, MARGIN PURCHASES AND
PLEDGING ASSETS:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(C) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1230 249,187.0120 6,342.1150 0
G.S. Adjustable Rate
Government............. 29,536,226.5180 496,829.5350 5,041,814.1990 64,115.0000
G.S. Short Duration Tax
Free................... 2,024,782.3470 0 9,616.4710 0
G.S. Core Fixed Income.. 4,761,964.9270 1,055.6280 0 0
G.S. Global Income...... 7,216,046.8580 429,048.0000 1,154,900.9770 0
G.S. Government Income.. 1,382,429.7560 55,980.6910 3,680.2470 6,980.0000
G.S. Municipal Income... 1,852,339.5570 25,565.3640 124,643.6490 0
</TABLE>
55
<PAGE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(D)--INVESTMENT POLICY ON LOANS:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(D) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1230 249,187.0120 6,342.1150 0
G.S. Adjustable Rate
Government............. 29,791,225.9940 241,830.0590 5,041,814.1990 64,115.0000
G.S. Short Duration Tax
Free................... 2,024,782.3470 0 9,616.4710 0
G.S. Core Fixed Income.. 4,761,964.9270 1,055.6280 0 0
G.S. Global Income...... 7,246,088.4970 387,925.7060 1,165,981.6320 0
G.S. Government Income.. 1,418,199.0540 16,793.6490 7,097.9910 6,980.0000
G.S. Municipal Income... 1,855,997.7160 18,603.7770 127,947.0770 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(E)--INVESTMENT POLICY ON UNDERWRITING:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(E) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,499,008.6670 102.4680 6,342.1150 0
G.S. Adjustable Rate
Government............. 24,563,621.2260 203,940.9210 10,307,308.1050 64,115.0000
G.S. Short Duration Tax
Free................... 2,024,782.3470 0 9,616.4710 0
G.S. Core Fixed Income.. 4,763,020.5550 0 0 0
G.S. Global Income...... 7,277,794.5270 358,843.4350 1,163,357.8730 0
G.S. Government Income.. 1,430,965.7480 7,444.6990 3,680.2470 6,980.0000
G.S. Municipal Income... 1,848,511.9770 12,976.0140 141,060.5790 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(F)--INVESTMENT POLICY ON REAL ESTATE AND OIL AND GAS:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(F) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1230 249,187.0120 6,342.1150 0
G.S. Adjustable Rate
Government............. 24,526,695.5880 240,866.5590 10,307,308.1050 64,115.0000
G.S. Short Duration Tax
Free................... 1,990,762.3590 34,019.9880 9,616.4710 0
G.S. Core Fixed Income.. 1,125,872.4290 0 3,637,148.1260 0
G.S. Global Income...... 7,327,402.6000 291,544.8020 1,181,048.4330 0
G.S. Government Income.. 1,432,561.1600 5,849.2870 3,680.2470 6,980.0000
G.S. Municipal Income... 1,867,044.1890 15,154.4890 120,349.8920 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(G)--INVESTMENT POLICY ON COMMODITIES:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(G) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,256,266.2380 102.4680 249,084.5440 0
G.S. Adjustable Rate
Government............. 24,259,310.5330 258,550.2170 10,557,009.5020 64,115.0000
G.S. Short Duration Tax
Free................... 1,999,851.1150 34,019.9880 527.7150 0
G.S. Core Fixed Income.. 4,761,964.9270 0 1,055.6280 0
G.S. Global Income...... 7,242,067.7760 391,426.1320 1,166,501.9270 0
G.S. Government Income.. 1,402,158.5440 35,125.1420 4,807.0080 6,980.0000
G.S. Municipal Income... 1,864,355.0900 15,677.0190 122,516.4610 0
</TABLE>
56
<PAGE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(H)--INVESTMENT POLICY ON SENIOR SECURITIES:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(H) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,296.2850 7,072.4210 249,084.5440 0
G.S. Adjustable Rate
Government............. 24,588,889.6270 204,058.5000 10,281,922.1250 64,115.0000
G.S. Short Duration Tax
Free................... 2,032,680.8320 1,190.2710 527.7150 0
G.S. Core Fixed Income.. 4,763,020.5550 0 0 0
G.S. Global Income...... 7,317,507.8520 317,794.9290 1,164,693.0540 0
G.S. Government Income.. 1,369,235.2830 67,017.8840 5,837.5270 6,980.0000
G.S. Municipal Income... 1,861,721.6030 14,498.0260 126,328.9410 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(I)--INVESTMENT POLICY CONCERNING SHORT SALES OF SECURITIES:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(I) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,243,445.2950 12,923.4110 249,084.5440 0
G.S. Adjustable Rate
Government............. 29,554,106.4250 236,098.2310 5,284,665.5960 64,115.0000
G.S. Short Duration Tax
Free................... 1,994,403.9380 39,467.1650 527.7150 0
G.S. Core Fixed Income.. 4,761,964.9270 0 1,055.6280 0
G.S. Global Income...... 7,221,712.5330 412,993.5060 1,165,289.7960 0
G.S. Government Income.. 1,365,080.4460 68,785.4960 8,224.7520 6,980.0000
G.S. Municipal Income... 1,839,955.6770 27,482.8450 135,110.0480 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(J)--GS SHORT DURATION GOVERNMENT FUND'S POLICY ON OPTIONS:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of GS Short Duration Government approved
Proposal No. 5(J) as follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- -------------- -------- ------------ ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1230 102.4680 255,426.6590 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(K)--GS SHORT DURATION GOVERNMENT FUND'S POLICY ON INVESTMENTS TO
EXERCISE CONTROL:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of GS Short Duration Fund approved Proposal
No. 5(K) as follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- -------------- ---------- ------------ ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1030 6,444.5830 249,084.5440 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 6--APPROVAL OF AMENDED AND RESTATED MANAGEMENT AGREEMENTS:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 6 as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- -------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C>
G.S. Global Income...... 7,767,511.0190 285,099.7120 747,385.1040 0
G.S. Government Income.. 1,417,140.3790 20,595.5810 4,354.7340 6,980.0000
G.S. Municipal Income... 1,868,303.5900 12,832.0000 121,412.9800 0
</TABLE>
57
<PAGE>
This page is intentionally left blank
- --------------------------------------------------------------------------------
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>
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
James A. Fitzpatrick, Vice President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
GOLDMAN SACHS
Investment Adviser,
Distributor and Transfer Agent
Goldman Sachs Funds
One New York Plaza, 41st Floor Goldman Sachs
New York, NY 10004
FIARRET
<PAGE>
The Goldman Sachs
FIXED INCOME FUNDS
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
ANNUAL REPORT
October 31, 1997
<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- -------------------------------- ---------------------------------------------
DEAR SHAREHOLDERS:
We are pleased to present the annual report for the Goldman Sachs Fixed
Income Funds for the fiscal year ended October 31, 1997. In addition to
reviewing the performance and activity of the Goldman Sachs Fixed Income Funds
during this period, we will also provide a brief overview of the economy and
bond market to help put their performance in perspective. Though the U.S.
economy continued to grow at a healthy pace, inflation remained subdued and the
fixed income markets achieved favorable results.
ECONOMIC REVIEW
The U.S. economy was strong throughout the period under review, but during
the summer and fall, growth cooled slightly from the torrid pace of earlier in
the year. Annualized real Gross Domestic Product (GDP) climbed 3.8% for the
fourth quarter of 1996 and a dramatic 4.9% for the first quarter of 1997,
fueled by a sharp increase in retail sales, rising factory orders and buoyant
const-ruction outlays. To curb potential overheating, the Federal Reserve
raised the Federal funds rate a quarter-percentage point to 5.50% at the end of
March. During the second quarter, real GDP moderated to a 3.3% rate
(annualized) when an unusually cool spring impacted weather-sensitive sectors
such as retail sales and construction. Though consumer consumption picked up
significantly during the summer, overall economic growth was somewhat
restrained because of weaker export growth and a slower rate of inventory
accumulation. As a result, third-quarter GDP expanded at a 3.3% annual rate,
the same pace as the prior quarter. In October, the pattern of economic
activity remained
robust, as retail sales held firm, consumer confidence remained high and the
unemployment rate sank to a 24-year low. Despite continued economic strength,
consumer inflation shrank to 2.1% over the 12-month period, its lowest level
since 1986.
FIXED INCOME MARKET REVIEW
When the Funds' fiscal year began in November 1996, bonds rallied on
expectations of a continuation of the slow-growth, low-inflation environment.
However, this optimistic view quickly soured when a steady flow of stronger-
than-expected economic data revived inflation fears. From December through
March, bond yields climbed as investors feared that the acceleration would
prompt the Fed to raise rates. When the Fed eventually increased the Federal
funds rate, the move was perceived as the first in a series of hikes.
During the second quarter of 1997, prospects for the bond market brightened
due to slowing economic growth. As the threat of inflation receded, the need
for additional rate hikes subsided and bonds began to recoup their earlier
losses. However, fixed income investors remained wary of reports suggesting
that the economy was reaccelerating. In this skittish environment, the bond
market came under renewed pressure when signs of strengthening activity emerged
during the summer. The decline proved to be short-lived: Bonds quickly
recovered on the back of reassuring inflation data and a surge of buying
interest. Treasury prices continued to rise sharply through the end of the
period, when demand soared as investors sought a safe haven in the wake of
steep sell-offs in global equity markets. By the end of October, Treasury
yields fell to 20-month lows.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Goldman Sachs Adjustable Rate Government Fund 3 Financial Statements 37
Goldman Sachs Short Duration Government Fund 11 Notes to Financial Statements 41
Goldman Sachs Short Duration Tax-Free Fund 19 Financial Highlights 49
Goldman Sachs Core Fixed Income Fund 27
</TABLE>
- -------------------------------- ---------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
THE YIELD CURVE SHIFTED LOWER FOR MOST MATURITIES
During the period under review, the yield on six-month Treasury bills rose
from 5.26% on October 31, 1996 to approximately 5.31% on October 31, 1997. For
the same period, the yield on the 30-year U.S. Treasury bond fell from 6.64% to
6.15%.
HISTORICAL TREASURY YIELD CURVE
[GRAPH]
10/31/96 10/31/97
3-Month 0.0514 0.0519
6-Month 0.0526 0.0531
1-Year 0.054 0.0535
2-Year 0.0573 0.0561
3-Year 0.0586 0.0568
5-Year 0.0607 0.0572
10-Year 0.0634 0.0583
30-Year 0.0664 0.0615
Source: Bloomberg, L.P.
The one- to 30-year portion of the yield curve shifted downward while the short
end of the curve rose slightly.
OUTLOOK: FED IS LIKELY TO REMAIN ON HOLD WHILE IT ASSESSES THE IMPACT OF THE
ASIAN FINANCIAL CRISIS
Uncertainty regarding the U.S. economic and financial outlook has climbed
sharply recently, as the tug-of-war between a strong domestic economy and the
expected trade drag from emerging market economies has intensified. Though most
domestic economic indicators continue to point toward considerable forward
momentum, Federal Reserve officials are likely to defer any rate hikes until
they can assess the potential impact of Asia's financial crisis on U.S.
economic activity. If evidence mounts that the repercussions from the recent
turmoil will be insufficient to slow U.S. growth to a sustainable long-term
pace, Goldman Sachs' economists expect the Fed to resume tightening in 1998.
We thank you for your investment in the Goldman Sachs Fixed Income Funds, and
we look forward to continuing to help you achieve your investment goals 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 28, 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.
NEW SHARE CLASS
To accommodate different clients' needs and preferences, the fund added
Service shares on March 27, 1997.
ARM PERFORMANCE BENEFITED FROM A FAVORABLE INTEREST RATE ENVIRONMENT
During the period under review, the ARM market benefited from a favorable
interest rate environment. Though rates fluctuated as perceptions of the
economy's health changed, in general, rates remained within a fairly narrow
range for much of the period. As a result, the
pace of mortgage refinancing remained subdued and there appeared to be little
risk of these securities being constrained by their periodic and lifetime rate
caps. (Periodic rate caps are the maximum that ARM interest rates can change
during an adjustment period. Lifetime caps establish the maximum rate to which
a security can reset during its entire lifetime.) The ARM-friendly conditions
drew a wide range of investors to the sector, who viewed these securities as
yield-enhanced alternatives to Treasuries. The ARM sector performed
particularly well during the first quarter of 1997, when yield spreads relative
to Treasuries narrowed. Although the sector's outperformance slowed during the
balance of the period, spreads remained firm due to low volatility and
continued attractiveness relative to other short-duration, high-quality
alternatives.
PERFORMANCE REVIEW
We are pleased to report that during the 12-month period ended October 31,
the fund's Institutional, PERFORMANCE SUMMARY 10/31/96--10/31/97
<TABLE>
<CAPTION>
SIX-MONTH ONE-YEAR
TREASURY TREASURY
INSTITUTIONAL ADMINISTRATION SERVICE* CLASS A BILL BILL
------------- -------------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Return (based on
net asset value [NAV]) 6.70% 6.43% 3.81% 6.43% 5.62% 6.02%
Return From Monthly
Distributions 6.17% 5.91% 3.66% 5.91% NA NA
Return From Price
Appreciation 0.53% 0.52% 0.15% 0.52% NA NA
NAV (10/31/97) $9.88 $9.88 $9.88 $9.88 NA NA
NAV Change +$0.05 +$0.05 +$0.04 +$0.05 NA NA
Total Distributions Paid
Per Share+ $0.59 $0.57 $0.33 $0.57 NA NA
</TABLE>
* New share class opened during the period. Performance and NAV change are
cumulative from inception date on 3/27/97.
+ 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.
The fund's NAV and yield are not guaranteed by the U.S. government or by its
agencies, instrumentalities or sponsored enterprises. All performance figures
represent past performance and in no way guarantee future results, which will
fluctuate as market conditions change. The investment return and principal
value of an investment in the fund will fluctuate, and therefore an investor's
shares when redeemed may be worth more or less than their original cost.
Goldman, Sachs & Co., the distributor of the fund, is not a bank, and fund
shares distributed by Goldman, Sachs & Co. are not deposits or obligations of,
or endorsed or guaranteed by, any bank or depository institution, nor are they
insured by the Federal Deposit Insurance Corporation (FDIC), the Federal
Reserve Board or any other government agency.
3
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------- --------------------------------------
Administration and Class A shares all outperformed the six-month U.S. Treasury
bill and the one-year U.S. Treasury bill. This favorable performance was
primarily the result of tightening yield spreads between ARMs and Treasuries,
as well as the incremental yield of ARMs over similar-duration Treasuries.
The fund performed well compared with its peers. For the three-year period
ended October 31, 1997, the fund's Administration and Institutional shares
were rated four stars (in a universe of 1,338 taxable bond funds) by
Morningstar, Inc., an independent rating agency. In addition, Morningstar
rated the fund's Institutional shares four stars (in a universe of 732 taxable
bond funds) for the five year-period ended October 31./1/
The fund also fared well in Lipper Analytical Services' adjustable rate
mortgage category. According to Lipper, the fund's Institutional shares ranked
in the top third of its category (12th out of 44 adjustable rate mortgage
funds) based on total return for the 12-month period ended October 31, 1997.
For the five-year period ended October 31, 1997, the fund's Institutional
shares ranked 8th out of 28 funds in its category. (Class A shares ranked 18th
in the Lipper category for the 12-month period; Lipper did not rank the fund's
Administration and Service classes. Please note that Lipper rankings do not
take sales charges into account and that past performance is not a guarantee
of future results.)
- -------
/1/Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of
10/31/97. 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 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 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.
PORTFOLIO COMPOSITION AND INVESTMENT STRATEGIES
As of the end of the period, the portfolio's sector allocation changed only
slightly relative to a year earlier. The primary composition changes included
a reduction in agency debentures (SBA floaters), an increase in collateralized
mortgage obligations (CMOs) and the initiation of a small position in U.S.
Treasuries.
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 1997*
[PIE CHART]
U.S. Treasuries 1.9%
Repos/Cash Equivalents 2.3%
SBA Floaters 5.2%
CMOs 5.4%
ARMs 84.2%
* 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 October 31, 1997, 84.2% of the portfolio was invested in ARMs.
During the period, we adhered to our strategy of emphasizing ARM issues that
we believed would fare well relative to the overall ARM market regardless of
the direction of interest rate movements. As such, we focused on fully indexed
securities that were issued prior to 1993, which are attractive because of
their lower prepayment risk. (ARM securities that have been in existence for
several years are referred to as "seasoned" issues. "Seasoned" ARMs are
typically less impacted by prepayments than recently issued mortgages because
homeowners who did not refinance during earlier periods of lower rates are
less likely to refinance in the future.)
- -------------------------------------- --------------------------------------
4
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND (continued)
- --------------------------------------- ---------------------------------------
. CMOs. The portfolio's allocation to CMOs was 5.4% as of the end of October,
slightly higher than its 3.5% weighting a year earlier. CMOs are multi-class
bonds that are collateralized by a pool of mortgage loans or mortgage pass-
through certificates. As was the case with other mortgage-backed securities,
CMOs performed well during the period due to low volatility and relatively
attractive spreads. Within the sector, sequential-pay/support CMOs and CMO
floaters represented the largest allocations, at 2.0% and 1.4% of the
portfolio, respectively.
. SBA Floaters. The portfolio held a 5.2% position in securities backed by
Small Business Administration (SBA) loans, which offered incremental yield over
similar-duration Treasuries. We trimmed the portfolio's allocation from 7.8% a
year ago when we took profits in the sector.
. Repurchase Agreements/Cash Equivalents and U.S. Treasuries. As of the end of
the period, 2.3% of the portfolio was in repurchase agreements/cash equivalents
and 1.9% was in U.S. Treasuries.
. Duration. We seek excess return over similar-duration U.S. Treasuries through
sector weightings and specific security selection, rather than attempting to
add value through interest rate predictions. Therefore, we manage the fund's
duration to approximate that of the benchmark, partly through the use of
futures. As of October 31, the fund's duration was 0.7 years, unchanged from a
year 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
We believe Federal Reserve officials are likely to keep monetary policy on
hold until the first half of 1998, when tight labor markets may generate
sufficient wage pressures to prompt the Fed to raise rates.
Our outlook for the ARM market remains neutral. Although we do not expect
dramatic movement in short-term interest rates, the rally in the Treasury
market and the flattening of the yield curve have left ARMs vulnerable to
ARM-to-fixed rate refinancing in the near term. Therefore, we expect to
continue to emphasize seasoned ARMs originated prior to 1993, which are
less vulnerable to prepayments than more recent issues.
/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
November 28, 1997
- --------------------------------------- ---------------------------------------
5
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
October 31, 1997
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1997. The
performance for each class of the Goldman Sachs Adjustable Rate Government Fund
(assuming both the maximum sales charge of 1.5% and no sales charge for Class A
shares), 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 ("six-Month T-Bill/one-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.
Institutional Shares(a)
[GRAPH]
Institutional Lehman One-Year Six-Month
Shares 1-2 Index T-Bill T-Bill
------------- --------- -------- ---------
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
10/31/97 69,970 72,473 69,308 67,765
Administration Shares(a)
[GRAPH]
Administration Lehman One-Year Six-Month
Shares 1-2 Index T-Bill T-Bill
-------------- --------- -------- ---------
5/1/93 50,000 50,000 50,000 50,000
10/31/93 51,917 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
10/31/97 62,519 63,242 62,417 62,576
- -------------------------------------- ----------------------------------------
6
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
October 31, 1997
- --------------------------------------------------------------------------------
Service Shares
[GRAPH]
Service Lehman One-Year Six-Month
Shares 1-2 Index T-Bill T-Bill
--------- ----------- ---------- -----------
3/27/97 50,000 50,000 50,000 50,000
10/31/97 51,905 52,295 52,010 51,730
Class A Shares(a)
[GRAPH]
Class A Shares Class A Shares Lehman One-Year Six Month
(No Sales Charge) (W/Sales Charge) 1-2 Index T-Bill T-Bill
----------------- ---------------- --------- -------- ---------
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
10/31/97 11,599 11,425 11,576 11,513 11,416
Average Annual Total
Return
----------------------
Since
One Year Five Year Inception(b)
Institutional Shares 6.70% 5.25% 5.54%
-------------------------------------------------------------------------
Administration Shares 6.43% N/A 5.07%
-------------------------------------------------------------------------
Service Shares N/A N/A 3.81%(c)
-------------------------------------------------------------------------
Class A Shares, excluding sales charge 6.43% N/A 6.41%
-------------------------------------------------------------------------
Class A Shares, including sales charge 4.52% N/A 5.67%
(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, Service and Class A shares commenced
operations July 17, 1991, April 15, 1993, March 27, 1997 and May 15, 1995,
respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since these shares have not completed a full twelve
months of operations.
- --------------------------------------- ---------------------------------------
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
MORTGAGE BACKED OBLIGATIONS--95.4%
ADJUSTABLE RATE FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC)(B)--29.3%
$ 2,223,517 7.48% 07/01/18 $ 2,322,530
1,210,343 7.55 12/01/18 1,259,132
9,013,669 7.51 05/01/19(a) 9,369,979
17,838,225 7.79 11/01/19 18,788,645
10,702,752 7.53 01/01/20 11,107,423
4,400,254 7.83 05/01/20 4,631,267
15,895,232 7.58 06/01/20(a) 16,607,974
33,041,610 7.86 02/01/22(a) 34,745,236
6,124,002 7.49 06/01/22 6,337,056
3,384,390 7.54 08/01/22 3,524,538
5,300,601 7.47 09/01/22 5,478,489
5,864,606 7.70 09/01/22 6,145,931
14,855,692 7.76 11/01/22 15,607,836
8,594,891 7.78 06/01/24 9,026,010
3,048,728 7.35 02/01/28 3,152,567
1,525,453 7.77 07/01/30 1,603,633
- -------------------------------------------------------------------------------------------------
$149,708,246
- -------------------------------------------------------------------------------------------------
ADJUSTABLE RATE FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)(B)--49.2%
$ 1,593,175 7.43% 04/01/03 $ 1,618,379
954,358 7.84 11/01/14 1,001,179
642,600 7.52 12/01/15 667,302
5,375,190 6.87 03/01/17 5,498,658
3,004,775 7.58 03/01/17 3,144,226
10,422,695 7.10 04/01/17 10,771,855
765,651 7.61 11/01/17 797,716
3,529,684 6.61 03/01/18 3,583,194
1,072,159 7.33 03/01/18 1,115,721
659,826 7.76 05/01/18 677,971
1,186,769 7.48 06/01/18 1,229,315
7,289,895 7.60 06/01/18 7,664,668
4,578,620 7.58 07/01/18 4,795,371
5,466,744 7.47 08/01/18 5,699,956
3,579,734 7.80 08/01/18 3,776,619
1,728,032 7.46 10/01/18 1,791,796
2,904,804 7.65 10/01/18 3,034,155
188,921 7.40 11/01/18 195,444
5,664,992 7.53 11/01/18 5,898,673
1,747,028 7.35 12/01/18 1,816,630
11,420,431 7.67 12/01/18 12,048,555
2,985,079 7.42 06/01/19 3,105,885
3,874,553 7.42 07/01/19 4,034,378
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
MORTGAGE BACKED OBLIGATIONS (CONTINUED)
ADJUSTABLE RATE FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) (CONTINUED)
$ 1,490,807 7.43% 07/01/19 $ 1,553,928
1,447,904 7.33 08/01/19 1,498,580
3,789,047 7.63 09/01/19 3,974,369
2,639,072 7.83 03/01/20 2,784,221
7,679,259 7.54 07/01/20 7,985,201
4,167,783 7.68 02/01/21 4,388,550
4,608,066 7.40 04/01/21 4,799,577
63,900,621 7.65 09/01/21(a) 67,015,776
19,370,852 7.68 02/01/22(a) 20,384,723
12,311,450 7.75 06/01/22 12,945,120
1,801,456 7.68 08/01/22 1,894,915
266,672 6.23 12/01/23 266,088
14,049,198 7.04 06/01/24 14,454,939
14,417,119 7.58 04/01/25 15,074,540
742,823 7.73 09/01/25 780,774
3,654,814 7.38 08/01/27 3,811,277
2,211,792 7.35 10/01/27 2,306,147
948,534 7.19 07/01/29 980,395
- -------------------------------------------------------------------------------------------------
$250,866,766
- -------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA)(B)--3.4%
$ 1,313,760 7.00% 03/20/16 $ 1,349,889
885,299 7.00 08/20/18 910,751
5,638,287 7.00 02/20/21 5,816,231
3,228,227 7.00 01/20/22 3,326,075
3,398,816 7.00 03/20/23 3,502,921
2,484,829 5.50 06/20/27 2,512,013
- -------------------------------------------------------------------------------------------------
$ 17,417,880
- -------------------------------------------------------------------------------------------------
ADJUSTABLE RATE SMALL BUSINESS ADMINISTRATION (SBA)(B)--5.2%
$ 996,142 6.63% 09/25/16 $ 1,004,858
3,569,972 6.63 07/25/17 3,601,210
7,525,017 6.63 08/25/17 7,590,860
3,051,680 6.63 09/25/17 3,078,383
3,494,298 6.63 10/25/17 3,524,873
7,467,983 6.63 02/25/18 7,533,328
- -------------------------------------------------------------------------------------------------
$ 26,333,512
- -------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------- ---------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND (continued)
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -----------------------------------------------------------------------------------------------
<C> <S> <C> <C>
MORTGAGE BACKED OBLIGATIONS (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA)--1.0%
$ 548,875 7.00% 05/15/23 $ 553,502
623,288 7.00 06/15/23 628,543
1,457,690 7.00 07/15/23 1,469,977
489,634 7.00 09/15/23 493,761
1,364,142 7.00 10/15/23 1,375,643
517,086 7.00 11/15/23 521,445
- -----------------------------------------------------------------------------------------------
$ 5,042,871
- -----------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--7.3%
ADJUSTABLE RATE CMOS(B)--1.9%
FNMA Remic Trust 1990-145, Class A
$9,391,114 6.72% 12/25/20(a) $ 9,478,639
- -----------------------------------------------------------------------------------------------
$ 9,478,639
- -----------------------------------------------------------------------------------------------
INVERSE FLOATER(B)--0.0%
FNMA Remic Trust 1991-91, Class S
$ 111,049 16.81% 07/25/98 $ 117,008
- -----------------------------------------------------------------------------------------------
$ 117,008
- -----------------------------------------------------------------------------------------------
INVERSE FLOATING RATE-INTEREST ONLY(B)--0.0%
FNMA Remic Trust 1992-157, Class SA
$ 674,929(c) 12.74% 03/25/04 $ 21,112
- -----------------------------------------------------------------------------------------------
$ 21,112
- -----------------------------------------------------------------------------------------------
IOETTE--0.2%
FNMA Remic Trust 1990-145, Class B
$ 23,077(c) 10.00% 12/25/20 $ 774,099
- -----------------------------------------------------------------------------------------------
$ 774,099
- -----------------------------------------------------------------------------------------------
PLANNED AMORTIZATION-ACCRUAL BOND--1.2%
FNMA Remic Trust 188B, Class ZA
$6,259,551 5.75% 09/25/10 $ 6,198,457
- -----------------------------------------------------------------------------------------------
$ 6,198,457
- -----------------------------------------------------------------------------------------------
REGULAR FLOATER CMOS(B)--1.4%
FNMA Remic Trust 169B, Class FA
$2,536,413 6.06% 09/25/00 $ 2,550,668
FNMA Remic Trust X-225C, Class FG
4,500,000 6.81 12/25/23 4,644,810
- -----------------------------------------------------------------------------------------------
$ 7,195,478
- -----------------------------------------------------------------------------------------------
</TABLE>
<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--0.0%
FNMA Remic Trust 1991-37, Class E
$ 119,493 8.50% 04/25/05 $ 119,268
- ----------------------------------------------------------------------------------------------
$ 119,268
- ----------------------------------------------------------------------------------------------
SUPER FLOATER CMOS(B)--0.6%
FNMA Remic Trust 1992-157, Class FA
$3,323,177(c) 1.97% 03/25/04 $ 3,272,265
- ----------------------------------------------------------------------------------------------
$ 3,272,265
- ----------------------------------------------------------------------------------------------
SUPPORT--2.0%
FHLMC Series 1645, Class B
$2,956,606 5.50% 01/15/08 $ 2,853,215
FNMA Remic Trust G94 13, Class ZB
7,354,651 7.00 11/17/24 7,239,698
- ----------------------------------------------------------------------------------------------
$ 10,092,913
- ----------------------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS $ 37,269,239
- ----------------------------------------------------------------------------------------------
TOTAL MORTGAGE BACKED OBLIGATIONS
(COST $483,614,604) $486,638,514
- ----------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS--1.8%
United States Treasury Bonds--1.8%
$6,900,000 15.75% 11/15/01 $ 9,352,743
- ----------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $9,301,523) $ 9,352,743
- ----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT--1.3%
Joint Repurchase Agreement Account
$6,500,000 5.76% 11/03/97(a) $ 6,500,000
- ----------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(COST $6,500,000) $ 6,500,000
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $499,416,127(D)) $502,491,257
- ----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------- ---------------------------------------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
Futures contracts open at October 31, 1997 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type Long (Short)(e) Month Gain (Loss)
- --------------------------- --------------- ------------- -----------
<S> <C> <C> <C>
Euro Dollars 520 December 1997 $ 345,750
Euro Dollars 290 March 1998 95,875
Euro Dollars 180 June 1998 71,250
Euro Dollars (20) December 1998 (54,500)
5 Year U.S. Treasury Notes 15 December 1997 20,391
10 Year U.S. Treasury Notes (295) December 1997 (912,719)
---------
$(433,953)
</TABLE>
<TABLE>
- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FEDERAL INCOME TAX
INFORMATION:
Gross unrealized
gain for
investments in
which value
exceeds cost $3,465,455
Gross unrealized
loss for
investments in
which cost
exceeds value (442,377)
- ---------------------------------------------
Net unrealized
gain $3,023,078
- ---------------------------------------------
</TABLE>
(a) Portions of these securities are being segregated for futures margin
requirements.
(b) Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1997.
(c) Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the coupon rate due to
the amortization of related premiums.
(d) The aggregate cost for federal income tax purposes is $499,468,179.
(e) Each Euro Dollar contract represents $1,000,000 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 at risk are
$1,041,000,000 and $272,543,093, respectively. The determination of
notional amounts 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.
10
<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.
NEW SHARE CLASSES
To accommodate different clients' needs and preferences, the fund added Class
A and B shares on May 1, 1997 and Class C shares on August 15, 1997.
PERFORMANCE REVIEW
During the period under review, the fund's Institutional, Administration and
Service shares outperformed their benchmark. The fund's investments in
collateralized mortgage obligations (CMOs) and adjustable-rate mortgage (ARM)
securities were the largest contributors to performance, particularly during
the first half of the period when these sectors' yield spreads relative to
Treasuries narrowed. However, the performance of Class A, B and C shares lagged
the benchmark, primarily because they began operations during the latter half
of the fiscal year after most of the gains in CMOs and ARMs had already been
achieved. By mid-1997, yield spreads were tight, which left them vulnerable to
pressures related to the Asian financial crisis.
PERFORMANCE SUMMARY
<TABLE>
<CAPTION>
INSTITUTIONAL ADMINISTRATION SERVICE CLASS A* CLASS B* CLASS C*
(10/31/96 - (10/31/96 - (10/31/96 - (5/1/97 - (5/1/97 - (8/15/97 -
10/31/97) 10/31/97) 10/31/97) 10/31/97) 10/31/97) 10/31/97)
------------- -------------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total Return (based on
net asset value [NAV]) 7.07% 6.91% 6.63% 4.14% 3.94% 1.44%
Return From Monthly
Distributions 6.75% 6.49% 6.21% 3.11% 2.80% 1.13%
Return From Price
Appreciation 0.32% 0.42% 0.42% 1.03% 1.14% 0.31%
Two-Year U.S. Treasury
Security Total Return 6.35% 6.35% 6.35% 4.17% 4.17% 1.53%
NAV (10/31/97) $9.86 $9.89 $9.86 $9.88 $9.86 $9.86
NAV Change +$0.03 +$0.04 +$0.04 +$0.10 +$0.11 +$0.03
Total Distributions Paid
Per Share+ $0.64 $0.62 $0.59 $0.30 $0.27 $0.11
</TABLE>
* New share class opened during the period. Performance and NAV change are
cumulative from inception date.
+ The fund distributes substantially all of its investment company taxable
income, as required by tax law.
The fund's NAV and yield are not guaranteed by the U.S. government or by its
agencies, instrumentalities or sponsored enterprises. All performance figures
represent past performance and in no way guarantee future results, which will
fluctuate as market conditions change. The investment return and principal
value of an investment in the fund will fluctuate, and therefore an investor's
shares when redeemed may be worth more or less than their original cost.
Goldman, Sachs & Co., the distributor of the fund, is not a bank, and fund
shares distributed by Goldman, Sachs & Co. are not deposits or obligations of,
or endorsed or guaranteed by, any bank or depository institution, nor are they
insured by the Federal Deposit Insurance Corporation (FDIC), the Federal
Reserve Board or any other government agency.
11
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
We are pleased to report that the fund performed well relative to its peers.
According to Morningstar, Inc., an independent rating agency, the fund's
Institutional shares were rated four stars for the five-year period ended
October 31 (in a universe of 732 taxable bond funds)./1/
The fund also fared well compared with other funds in Lipper Analytical
Services, Inc.'s short-intermediate U.S. government category. For the 12-month
period ended October 31, 1997, the fund's Institutional and Administration
shares ranked in the top quartile (19th and 22nd, respectively) of the 95 funds
in the Lipper group based on total return. For the five-year period ended
October 31, 1997, the fund's Institutional shares ranked 12th out of 40 funds
in its category. (The fund's Service shares ranked 34th in the Lipper category
for the 12-month period; Lipper did not rank the fund's Class A, B and C shares
for this period because they have been 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
During the period, we maintained our strategy of focusing on securities that
we believed would fare well relative to the overall market regardless of the
direction of interest rate movements. Rather than attempting to forecast
interest rates, we matched the fund's duration to
- --------
/1/Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of
10/31/97. 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 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 fund's Institutional shares received four stars for
the three-year period and were rated among 1,338 taxable bond funds. The
Morningstar ratings apply only to the fund's Institutional shares; the fund's
Administration, Service, A, B and C shares have not been rated. The
Administration, Service, A, B and C 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.
that of the benchmark (1.9 years as of October 31) and used extensive research
to identify attractive securities that offered incremental yield relative to
Treasuries. The largest changes in the portfolio's sector composition compared
with a year ago were a new allocation in agency debentures and a reduction in
ARM securities.
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 1997*
[PIE CHART]
Repos/Cash Equivalents 1.4%
Agency Debentures 4.0%
Fixed Rate Mortgage Pass Throughs 5.6%
ARMs 15.5%
U.S. Treasuries 16.3%
CMOs 57.2%
* 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 represented more than half of the portfolio as of October 31
(57.2%), approximately the same allocation as a year ago. CMOs, which are
multi-class bonds collateralized by a pool of mortgage loans or mortgage pass-
through certificates, performed well during the period due to the favorable
interest rate environment. When interest rates remained within a relatively
narrow range, CMO securities experienced strong demand from yield-seeking
investors. Sequential-pay/support CMOs and planned amortization class (PAC)
CMOs constituted the majority of the fund's allocation in the sector, at 24.1%
and 19.9% of the portfolio, respectively. The fund's third largest allocation
within the sector was CMO floaters (7.8%), which are floating rate securities
whose coupons reset as interest rates change.
- --------------------------------------- ---------------------------------------
12
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND (continued)
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
. ARMs. As of the end of the fiscal year, ARMs accounted for 15.5% of the
portfolio. We trimmed the fund's allocation in the sector from 19.0% a year
earlier as ARMs "richened" and we identified securities in other sectors that
offered more compelling risk-adjusted return potential. We focused on fully
indexed ARMs because these securities provide stable current income. We
continued to emphasize "seasoned" ARMs, which have lower prepayment risk than
recently issued ARMs. ("Seasoned" issues are securities that have been in
existence for several years; it is assumed that homeowners who did not
refinance during earlier periods of lower rates are less likely to refinance in
the future.)
. Fixed Rate Mortgage Pass-Throughs. The fund held a 5.6% weighting in fixed
rate mortgage pass-throughs, down slightly from a 7.2% allocation a year ago.
As was the case with other mortgage-backed security sectors, pass-throughs
performed well during the period, primarily due to low volatility and healthy
demand. As pass-throughs' yield spreads narrowed relative to Treasuries, we
trimmed the allocation in favor of other sectors that offered greater yield
enhancement.
. Agency Debentures. Agency debentures, a 4.0% position as of October 31, are
bonds issued by agencies of the U.S. government. This sector was attractive
because it offered incremental yield over Treasuries.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. During the first
half of the period, we significantly cut the fund's allocation to U.S.
Treasuries in favor of other sectors that offered better relative value. After
the yield spreads of Treasury alternatives tightened significantly, however, we
increased Treasuries to 16.3%, approximately the same weighting as the
beginning of the fiscal year. In addition, the fund held 1.4% in repurchase
agreements/cash equivalents as of October 31, nearly unchanged from last year.
. Issuer Composition. The composition of the portfolio's mortgage-backed
security allocation by issuer was 39.8% in Federal Home Loan Mortgage
Corporation (FHLMC) issues and 38.6% in Federal National Mortgage Association
(FNMA) issues.
. Credit Quality. The fund invests exclusively in securities issued by the U.S.
government and its agencies or instrumentalities.
. Use of Derivatives. As noted, the fund held sequential-pay/support CMOs, PAC
CMOs and CMO floaters, securities typically considered to be lower risk
derivatives. The fund's CMO allocation also included small positions in super
floaters (2.3%), whose coupons reset higher than conventional floaters when
rates rise; inverse floaters (2.1%), whose coupons reset in the opposite
direction of interest rates; and PAC interest-only (IO) securities (1.0%),
whose cash flows are made up only of the interest payments of their underlying
mortgages. We invest in these higher risk derivatives only when we believe they
will enhance returns without incurring undue risk. In the favorable rate
environment, the fund's performance benefited from these holdings. In addition,
we used futures as a tool to help manage the portfolio's duration.
MARKET OUTLOOK
During October, all mortgage-backed securities gave up ground amid turmoil in
global financial markets. However, the extent of their underperformance was
significantly less than that of the credit sectors (e.g., corporate and asset-
backed securities). The degree to which yield spreads widened among CMOs is
currently somewhat uncertain--there was very little trading in the sector at
the end of the period because investor attention was directed elsewhere. In the
ARM market, the flattening of the yield curve and the rally in the Treasuries
have left ARMs vulnerable to ARM-to-fixed rate refinancing in the near term. In
general, we currently
13
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
have a cautious view of the mortgage-backed securities sectors, and intend to
remain focused on securities that are less vulnerable to rate swings than the
broader market.
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Short Duration Government Fund
November 28, 1997
- --------------------------------------- ---------------------------------------
14
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
October 31, 1997
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1997. The
performance for each class of the Goldman Sachs Short Duration Government Fund
(assuming both the maximum sales charge of 2.0% and no sales charge for Class A
shares and the appropriate redemption fee and no redemption fee for the Class B
and Class C shares) is compared to its benchmarks, the U.S. 2-Year Treasury
Bill ("Two-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.
Institutional Shares(a)
[GRAPH]
Institutional Two Year Lehman Short 1-3
Shares T-Bill Gov't Index
------ ------ -----------
9/1/88 $50,000 $50,000 $50,000
10/31/88 $51,283 $51,057 $51,091
10/31/89 $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
10/31/97 $94,764 $94,392 $96,200
Administration Shares
[GRAPH]
Administration Lehman Short Two Year
Shares 1-3 Gov't Index T-Bill
2/28/96 50,000 50,000 50,000
10/31/96 52,000 51,760 51,805
10/31/97 55,593 55,115 55,095
Service Shares
[GRAPH]
Service Lehman Short Two Year
Shares 1-3 Gov't Index T-Bill
4/10/96 50,000 50,000 50,000
10/31/96 52,175 52,110 51,855
10/31/97 55,634 55,485 55,150
- --------------------------------------- ---------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class A Shares
[GRAPH]
Class A Shares Class A Shares Two-Year Lehman Short
(No Sales Charge) (W/Sales Charge) T-Bill 1-3 Gov't Index
----------------- ---------------- -------- ---------------
5/1/97 10,000 9,800 10,000 10,000
10/31/97 10,414 10,206 10,417 10,415
Class B Shares
[GRAPH]
Class B Shares Class B Shares Two-Year Lehman Short
(w/out redempt.charge) (w/redempt.charge) T-Bill 1-3 Gov't Index
---------------------- ------------------ -------- ---------------
5/1/97 10,000 10,000 10,000 10,000
10/31/97 10,394 10,194 10,417 10,415
Class C Shares
[GRAPH]
Class C Shares Class C Shares Two-Year Lehman Short
(w/out redempt.charge) (w/redempt.charge) T-Bill 1-3 Gov't Index
---------------------- ------------------ -------- ---------------
8/15/97 10,000 10,000 10,000 10,000
10/31/97 10,144 10,044 10,153 10,151
Average Annual Total
Return
----------------------
Since
One Year Five Year Inception(b)
Institutional Shares 7.07% 5.83% 7.22%
-------------------------------------------------------------------------
Administration Shares 6.91% N/A 6.53%
-------------------------------------------------------------------------
Service Shares 6.63% N/A 7.07%
-------------------------------------------------------------------------
Class A Shares, excluding sales charge N/A N/A 4.14%(c)
-------------------------------------------------------------------------
Class A Shares, including sales charge N/A N/A 2.06%(c)
-------------------------------------------------------------------------
Class B Shares, excluding redemption
charge N/A N/A 3.94%(c)
-------------------------------------------------------------------------
Class B Shares, including redemption
charge N/A N/A 1.94%(c)
-------------------------------------------------------------------------
Class C Shares, excluding redemption
charge N/A N/A 1.44%(c)
-------------------------------------------------------------------------
Class C Shares, including redemption
charge N/A N/A 0.44%(c)
(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
Institutional, Administration and Service shares.
(b) The Institutional, Administration, Service, Class A, Class B and Class C
shares commenced operations August 15, 1988, February 28, 1996, April 10,
1996, May 1, 1997, May 1, 1997 and August 15, 1997, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since these shares have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
16
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C>
MORTGAGE BACKED OBLIGATIONS--77.8%
ADJUSTABLE RATE FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) (A)--10.4%
$ 1,670,748 7.63% 08/01/17(b) $ 1,728,439
1,254,549 7.31 05/01/18 1,271,799
1,628,367 7.55 12/01/18(b) 1,694,007
7,237,238 7.86 02/01/22(b) 7,610,390
- ---------------------------------------------------------------------------------------------
$ 12,304,635
- ---------------------------------------------------------------------------------------------
ADJUSTABLE RATE FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) (A)--5.0%
$ 2,290,460 7.84% 11/01/14 $ 2,402,830
1,801,456 7.68 08/01/22 1,894,915
1,563,791 7.77 01/01/31 1,640,511
- ---------------------------------------------------------------------------------------------
$ 5,938,256
- ---------------------------------------------------------------------------------------------
FIXED RATE FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC)--2.5%
$ 2,943,034 6.50% 12/01/00 $ 2,954,218
- ---------------------------------------------------------------------------------------------
FIXED RATE FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)--3.0%
$ 73,609 9.00% 12/01/97 $ 73,825
769,822 6.00 01/01/14 749,637
2,853,210 6.00 03/01/14 2,798,828
- ---------------------------------------------------------------------------------------------
$ 3,622,290
- ---------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)--56.9%
INVERSE FLOATER(A)--1.8%
FHLMC Series 1296, Class J
$ 890,613(c) 11.75% 07/15/99(b) $ 959,973
FNMA Remic Trust 1992-62, Class S
1,212,115(c) 9.42 05/25/99(b) 1,230,661
- ---------------------------------------------------------------------------------------------
$ 2,190,634
- ---------------------------------------------------------------------------------------------
INVERSE FLOATING RATE-INTEREST ONLY(A)--0.2%
FHLMC Series 1684, Class JD
$ 2,192,026 3.60% 08/15/20(b) $ 172,644
FNMA Remic Trust 1993-110, Class SC
1,548,475(c) 3.40 04/25/19 61,258
- ---------------------------------------------------------------------------------------------
$ 233,902
- ---------------------------------------------------------------------------------------------
PLANNED AMORTIZATION CLASS (PAC) CMOS--19.8%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16(b) $ 2,986,860
FHLMC Series 1645, Class ZA
2,221,401 5.50 04/15/05(b) 2,185,992
FHLMC Series 1985, Class PC
6,000,000 6.35 05/17/18(b) 6,031,860
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -----------------------------------------------------------------------------------------------
<C> <S> <C> <C>
MORTGAGE BACKED OBLIGATIONS (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
PLANNED AMORTIZATION CLASS (PAC) CMOS (CONTINUED)
FHLMC Series 1987, Class L
$ 4,000,000 6.20% 08/25/22(b) $ 3,958,976
FNMA Remic Trust 1991-31, Class PJ
3,000,000 6.55 10/25/20 3,034,680
FNMA Remic Trust 1997-70, Class AB
1,250,000 6.50 09/25/22 1,244,125
FNMA Remic Trust 1997-9, Class B
4,000,000 6.50 10/25/22 4,022,320
- -----------------------------------------------------------------------------------------------
$ 23,464,813
- -----------------------------------------------------------------------------------------------
PLANNED AMORTIZATION CLASS INTEREST-ONLY (PAC IO) CMOS--0.8%
FHLMC Series 1552, Class JE
$ 4,451,833(c) 7.00% 02/15/14(b) $ 129,370
FHLMC Series 1587, Class HA
7,417,830(c) 6.50 10/15/08(b) 831,019
- -----------------------------------------------------------------------------------------------
$ 960,389
- -----------------------------------------------------------------------------------------------
PLANNED AMORTIZATION CLASS IOETTE CMOS--0.2%
FNMA Remic Trust 1992-198, Class K
$ 26,073(c) 9.69% 12/25/15 $ 236,624
- -----------------------------------------------------------------------------------------------
REGULAR FLOATER CMOS(A)--7.8%
FHLMC Series 1296, Class I
$ 2,493,715 5.30% 07/15/99(b) $ 2,469,551
FHLMC Series 1634, Class FH
3,000,000 6.78 12/15/23(b) 3,062,160
FHLMC Series 1684, Class JC
2,192,026 5.40 08/15/20(b) 2,148,865
FNMA Remic Trust 1993-110, Class FC
1,548,474 5.60 04/25/19(b) 1,531,054
- -----------------------------------------------------------------------------------------------
$ 9,211,630
- -----------------------------------------------------------------------------------------------
SEQUENTIAL FIXED RATE CMOS--26.3%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06(b) $ 2,113,740
FHLMC Series 1645, Class B
4,927,677 5.50 01/15/08(b) 4,755,356
FNMA Remic Trust 1988-12, Class A
3,468,817 10.00 02/25/18 3,689,659
FNMA Remic Trust 1988-12, Class B
2,738,540 4.73 02/25/18 2,634,823
FNMA Remic Trust 1989-12, Class X
1,212,342 10.00 12/25/14 1,255,525
</TABLE>
- --------------------------------------- ---------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
MORTGAGE BACKED OBLIGATIONS (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
SEQUENTIAL FIXED RATE CMOS (CONTINUED)
FNMA Remic Trust 1989-18, Class B
$ 787,911 9.50% 01/25/04 $ 813,266
FNMA Remic Trust 1989-59, Class H
2,777,301 7.75 10/25/18 2,812,878
FNMA Remic Trust 1991-133, Class Z
4,872,777 8.00 09/25/06(b) 5,084,888
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20(b) 3,298,560
FNMA Remic Trust 1993-188, Class TC
2,400,000 6.50 10/25/13 2,403,144
FNMA Remic Trust 1989-34, Class E
2,196,095 9.85 08/25/14 2,277,065
- -------------------------------------------------------------------------------------------------
$ 31,138,904
- -------------------------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS $ 67,436,896
- -------------------------------------------------------------------------------------------------
TOTAL MORTGAGE BACKED OBLIGATIONS (COST
$91,144,815) $ 92,256,295
- -------------------------------------------------------------------------------------------------
AGENCY DEBENTURES--4.0%
Sri Lanka Aid(a)
$ 4,750,000 5.84% 02/21/16 $ 4,712,000
- -------------------------------------------------------------------------------------------------
TOTAL AGENCY DEBENTURES
(COST $4,678,750) $ 4,712,000
- -------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS--16.0%
United States Treasury Notes
$13,500,000 6.00% 08/15/99(b) $ 13,578,030
5,400,000 5.63 11/30/00(b) 5,383,961
- -------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $18,920,441) $ 18,961,991
- -------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT--4.0%
Joint Repurchase Agreement Account
$ 4,700,000 5.76% 11/03/97(b) $ 4,700,000
- -------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(COST $4,700,000) $ 4,700,000
- -------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $119,444,006(D)) $120,630,286
- -------------------------------------------------------------------------------------------------
</TABLE>
Futures contracts open at October 31, 1997 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type Long (Short)(e) Month Gain (Loss)
- --------------------------- --------------- -------------- -----------
<S> <C> <C> <C>
Euro Dollars 81 December 1997 $ 120,975
Euro Dollars 64 March 1998 81,775
Euro Dollars 66 June 1998 54,500
Euro Dollars 61 September 1998 76,575
Euro Dollars 56 December 1998 73,750
Euro Dollars 31 March 1999 17,000
Euro Dollars 21 June 1999 4,500
Euro Dollars 6 September 1999 4,650
2 Year U.S. Treasury Notes 71 December 1997 120,921
5 Year U.S. Treasury Notes (93) December1997 (169,906)
10 Year U.S. Treasury Notes (132) December 1997 (387,656)
U.S. 20 Year Long Term Bond (7) December 1997 (38,281)
---------
$ (41,197)
- -----------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION:
</TABLE>
<TABLE>
<S> <C> <C> <C>
Gross unrealized
gain for
investments in
which value
exceeds cost $1,517,519
Gross unrealized
loss for
investments in
which cost
exceeds value (331,239)
- -----------------------------
Net unrealized
gain $1,186,280
- -----------------------------
</TABLE>
(a) Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 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 coupon rate due to
the amortization of related premiums.
(d) The amount stated also represents the aggregate cost for federal income tax
purposes.
(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 and 10-Year U.S. Treasury Note and each U.S. 20-Year
Long Term Bond contract represents $100,000 in notional par value. The
total notional amount and market value at risk are $423,400,000 and
$131,267,113, respectively. The determination of notional amounts 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.
18
<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.
NEW SHARE CLASSES ADDED
Class A and Class B Shares were introduced on May 1, 1997, and Class C Shares
were added on August 15, 1997, to the existing Institutional, Administration
and Service shares.
MUNICIPAL BOND MARKET SHOWS SIGNS OF STRENGTH AND STABILITY
The municipal market remained at relatively strong levels compared with the
taxable market for much of the year, including four consecutive months of
rallying from April through July. A typical August slowdown, some rallying in
September, and mixed performance for municipals during October, capped off a
year that saw overall municipal prices rise. The average price of a three-year
municipal bond (as calculated from data provided by Municipal Market Data, an
independent municipal market information provider) increased, while yields fell
from 4.15% on October 31, 1996 to 3.95% on October 31, 1997.
New issue supply increased during 1997 vs. 1996, up a solid 5% through
October, versus the first ten months of 1996. 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). Spikes in new issue
supply to $21.9 billion in June and $20.6 billion in September were
approximately 50% greater than the monthly average for the rest of 1997, and
contributed significantly to the year's overall supply increase. Heavy June and
July coupon and principal payments flooded the market with enough reinvestment
cash to absorb most of the new issue supply during the summer, but heavy fall
supply has weakened the municipal market relative to treasuries.
Demand from individual investors, who control approximately two-thirds of
municipal bond ownership either through mutual funds or direct investment,
continued to dominate the market, though municipal rates below the
psychologically key 6% level may have discouraged some investors. The budget
bill, passed in August, was favorable to municipals both on the demand side--an
exemption allowing corporations with outstanding debt to invest in the
municipal market was left intact--as well as on the supply side, where
restrictions on the amount that private universities can issue were loosened.
MUNICIPAL BOND YIELD CURVE
[GRAPH]
10/31/97 10/31/96
1998 3.70% 3.90%
1999 3.85 4.15
2000 3.95 4.30
2001 4.05 4.40
2002 4.15 4.50
2003 4.25 4.60
2004 4.35 4.70
2005 4.45 4.80
2006 4.50 4.90
2007 4.55 5.00
2008 4.65 5.10
2009 4.75 5.20
2010 4.85 5.25
2011 4.93 5.30
2012 4.98 5.35
2013 5.03 5.40
2014 5.08 5.40
2015 5.13 5.45
2016 5.15 5.45
2017 5.15 5.45
2018 5.18 5.50
2019 5.18 5.50
2020 5.20 5.50
2021 5.20 5.50
2022 5.20 5.50
2023 5.20 5.50
2024 5.20 5.50
2025 5.23 5.50
2026 5.23 5.50
2027 5.23 5.50
The yield curve experienced a downward parallel shift in contrast to one year
ago.
Source: Municipal Market Data
19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
PERFORMANCE SUMMARY
We are pleased to report that the
fund's Institutional shares ranked
tenth out of 33 funds in Lipper
Analytical Services, Inc.'s short-
intermediate municipal debt category
for the one-year period ended October
31, 1997 based on total return.
(Lipper did not rank the fund's Class
A, Class B, Class C, Administration or
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.)
The fund's positive performance during the period was primarily due to our
emphasis on higher yielding revenue bonds (73% of the portfolio), 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 that may offer high quality and attractive
returns, such as insured hospital bonds and letter-of-credit-backed debt; and
the last area was "story" 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 Maryland
Health & Higher Education Facilities bonds for Pickersgill, a 169-bed nursing
home that has been in operation for 150 years. Demand for the facility is
strong, with a waiting list despite competition in the Baltimore area, and
financial results have been strong with sound debt service coverage and
significant unreserved funds. We continue to hold the security as an attractive
addition to the portfolio. As of October 31, 1997, the Fund owned approximately
4.8% of the outstanding issue.
<TABLE>
<CAPTION>
INSTITUTIONAL* ADMINISTRATION SERVICE* CLASS A CLASS B CLASS C*
(10/31/96- (10/31/96- (10/31/96- (5/01/97- (5/01/97- (8/15/97-
10/31/97) 10/31/97) 10/31/97) 10/31/97) 10/31/97) 10/31/97)
-------------- -------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total Return (based on
net asset value [NAV]) 5.40% 5.14% 4.77% 3.39% 3.07% 0.97%
Return From Monthly
Distributions 4.27% 4.01% 3.75% 1.97% 1.65% 0.67%
Return From Price
Appreciation 1.13% 1.13% 1.02% 1.42% 1.42% 0.30%
Lehman Brothers 3-Year
Municipal Bond Index 5.49% 5.49% 5.49% 3.60% 3.60% 1.16%
NAV (as of 10/31/97) $10.07 $10.07 $10.07 $10.08 $10.08 $10.07
NAV Change +$0.11 +$0.11 +$0.10 +$0.14 +$0.14 +$0.03
Total Distributions Paid
Per Share+ $0.42 $0.39 $0.37 $0.20 $0.16 $0.07
</TABLE>
* New share class opened during the period. Performance and NAV change are
cumulative from inception date.
+ 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.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by a bank or other insured depository institution, and are not insured
by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board,
or any other government agency, and an investment in a Fund involves risk,
including possible loss of principal. All performance figures represent past
performance and in no way guarantee future results, which will fluctuate as
market conditions change. The investment return and principal value of an
investment in a Fund will fluctuate and, therefore, an investor's shares when
redeemed, may be worth more or less than their original cost. The Fund may
invest up to 20% in private activity bonds the interest from which is subject
to the alternative minimum tax (AMT).
20
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND (continued)
- --------------------------------------- ---------------------------------------
PORTFOLIO COMPOSITION AND INVESTMENT STRATEGIES:
EMPHASIS ON REVENUE BONDS
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 1997*
[PIE CHART]
Revenue Bonds 52.5%
Insured Revenue Bonds 23.9%
General Obligation 9.8%
Insured General Obligation 9.0%
Pre-refunded Bonds 4.5%
Variable Rate Demand Notes 0.3%
* 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. As of October 31, the portfolio's combined position in insured
and uninsured revenue bonds was bonds was decreased slightly to 76.4% of the
portfolio, from 79.7% one year ago. The allocation was significantly
overweighted compared with the Index' 26.9%. (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 allocation in
insured and uninsured GO bonds was increased slightly to 18.8% of the
portfolio, from 15.6% one year ago. The allocation was significantly
underweighted versus the Index's 40.6%. GOs are backed by the general taxing
power of a municipality and are typically higher credit quality but lower
yielding than revenue bonds.
. Pre-refunded Bonds. Over the course of the year, we re-established the fund's
holdings in pre-refunded bonds to 4.5% from zero. The Index weighting of pre-
refunded bonds was 32.5%.
. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash equivalents
that we use to manage the portfolio's excess liquidity. VRDNs represented 0.3%
of the fund, down from 4.7% one year ago. The Index contains no VRDNs.
. Duration. As of October 31, the fund's duration was effectively in line with
that of the Index at 2.9 years. 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.
. 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, in favor of double-A-rated
revenue bonds. This is consistent with our goal of maintaining the fund's
targeted double-A-rated average credit quality and liquidity while achieving
high 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 October 31, 40.5% of the portfolio was invested in
triple-A-rated bonds, while double-A-, single-A-, and BBB-rated securities
accounted for 32.3%, 21.5%, and 5.7%, respectively.
MARKET OUTLOOK
Our long-term outlook for municipal bonds is essentially bullish. With
municipals escaping unscathed from the federal budget accord, we do not see any
near-term fundamental problems for tax-exempts, and are left with technical
forces as the key driver in relative market performance. The recent cheapening
of the market was more related to the heavy seasonal new issue supply and
weaker demand than from the global volatility that affected the taxable
sectors; we do not feel that
- --------------------------------------- ---------------------------------------
21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
municipals are at risk to cheapen much more. In anticipation of near-term
outperformance, we feel that municipals are attractive enough to warrant an
allocation from investors who do not currently benefit from tax-exempt income.
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
November 28, 1997
- --------------------------------------- ---------------------------------------
22
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
October 31, 1997
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1997. The
performance for each class of the Goldman Sachs Short Duration Tax-Free Fund
(assuming both the maximum sales charge of 2.0% and no sales charge for Class A
shares and the appropriate redemption fee and no redemption fee for the Class B
and Class C shares) is compared to its benchmark, the Lehman Brothers 3-Year
Municipal Bond Index ("Lehman Three-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.
Institutional Shares
[GRAPH]
Lehman 3 Year
Institutional Shares Muni Bond Index
10/1/92 50,000 50,000
10/31/92 49,830 49,805
10/31/93 53,333 53,102
10/31/94 53,424 53,825
10/31/95 56,618 58,023
10/31/96 59,172 60,646
10/31/97 62,375 63,975
Administration Shares
[GRAPH]
Lehman 3 Year
Administration Shares(a) Muni Bond Index
6/1/93 50,000 50,000
10/31/93 51,088 51,144
10/31/94 51,031 51,840
10/31/95 53,971 55,884
10/31/96 56,265 58,410
10/31/97 59,157 61,617
Service Shares
[GRAPH]
Lehman 3 Year
Service Shares(a) Muni Bond Index
10/1/94 50,000 50,000
10/31/94 49,810 49,880
10/31/95 52,594 53,771
10/31/96 54,693 56,201
10/31/97 57,302 59,286
- --------------------------------------- ---------------------------------------
23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
Class A Shares
[GRAPH]
Class A Shares Class A Shares Lehman 3 Year
(No Sales Charge) (W/Sales Charge) Muni Bond Index
----------------- ---------------- ---------------
5/1/97 10,000 9,800 10,000
10/31/97 10,339 10,132 10,360
Class B Shares
[GRAPH]
Class B Shares Class B Shares Lehman 3 Year
(No Sales Charge) (W/Sales Charge) Muni Bond Index
----------------- ---------------- ---------------
5/1/97 10,000 10,000 10,000
10/31/97 10,307 10,107 10,360
Class C Shares
[GRAPH]
Class C Shares Class C Shares Lehman 3 Year
(No Sales Charge) (W/Sales Charge) Muni Bond Index
----------------- ---------------- ---------------
8/15/97 10,000 10,000 10,000
10/31/97 10,097 9,997 10,116
<TABLE>
---------------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------
ONE YEAR FIVE YEAR SINCE INCEPTION(B)
--------------------------------------------------------------------
<S> <C> <C> <C>
Institutional Shares 5.40% 4.59% 4.44 %
--------------------------------------------------------------------
Administration Shares 5.14% N/A 3.87 %
--------------------------------------------------------------------
Service Shares 4.77% N/A 4.49 %
--------------------------------------------------------------------
Class A Shares, excluding sales
charge N/A N/A 3.39 %(c)
--------------------------------------------------------------------
Class A Shares, including sales
charge N/A N/A 1.68 %(c)
--------------------------------------------------------------------
Class B Shares, excluding
redemption charge N/A N/A 3.07 %(c)
--------------------------------------------------------------------
Class B Shares, including
redemption charge N/A N/A 1.07 %(c)
--------------------------------------------------------------------
Class C Shares, excluding
redemption charge N/A N/A 0.97 %(c)
--------------------------------------------------------------------
Class C Shares, including
redemption charge N/A N/A (0.03)%(c)
--------------------------------------------------------------------
</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, Service, Class A, Class B and Class C
shares commenced operations October 1, 1992, May 20, 1993, September 20,
1994, May 1, 1997, May 1, 1997 and August 15, 1997, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since these shares have not completed a full twelve
months of operations.
24
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -----------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
DEBT OBLIGATIONS--101.1%
ARIZONA--3.0%
Mesa, Arizona IDA Health Care Facilities (BIGI) (AAA/Aaa)
$1,000,000 7.50% 01/01/04 $1,053,830
- -----------------------------------------------------------------------------------------------------
CALIFORNIA--2.9%
Abag Finance Authority for Non-Profit Corporations Refunding Bond (BBB)
$1,000,000 5.25% 10/01/07 $1,001,280
- -----------------------------------------------------------------------------------------------------
CONNECTICUT--7.3%
Connecticut State Housing Mortgage Revenue Town Colony Project (Aa3)
$ 995,000 5.00% 04/01/08 $ 997,129
Connecticut State Residential Recovery Authority, Series A RB (AA-)
1,500,000 5.60 11/15/99 1,549,230
- -----------------------------------------------------------------------------------------------------
$2,546,359
- -----------------------------------------------------------------------------------------------------
FLORIDA--4.3%
Dade County Solid Waste System BANS (MIG2/SP2)
$1,500,000 4.75% 09/01/98 $1,507,740
- -----------------------------------------------------------------------------------------------------
ILLINOIS--5.9%
Illinois Health Facilities Authority Highland Park Hospital, Series A
(AAA/Aaa)
$1,000,000 5.20% 10/01/01 $1,031,270
Illinois Housing Development Authority, Series 1991 A (A+/A1)
1,000,000 7.90 07/01/99 1,054,550
- -----------------------------------------------------------------------------------------------------
$2,085,820
- -----------------------------------------------------------------------------------------------------
LOUISIANA--3.0%
Louisiana Offshore Deepwater Port Authority Term B RB (A/Baa1)
$1,000,000 5.85% 09/01/00 $1,038,010
- -----------------------------------------------------------------------------------------------------
MARYLAND--7.6%
Maryland Health and Higher Educational Facilities Authority RB (A-)
$1,600,000 5.50% 01/01/21 $1,665,920
1,000,000 4.75 07/01/21 1,004,510
- -----------------------------------------------------------------------------------------------------
$2,670,430
- -----------------------------------------------------------------------------------------------------
MICHIGAN--2.9%
Detroit Self Insurance Series A (BBB-)
$1,000,000 5.60% 05/01/01 $1,027,990
- -----------------------------------------------------------------------------------------------------
MISSOURI--4.9%
St. Louis, MO Municipal Finance Corp., Series A (A/Aa3)
$1,655,000 5.30% 07/15/02 $1,710,393
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -----------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
DEBT OBLIGATIONS (CONTINUED)
NEW YORK--8.5%
Syracuse, NY IDA RB (AA)
$1,365,000 4.60% 10/15/98 $1,376,261
Yonkers GO Series C (FGIC) (AAA/Aaa)
1,500,000 6.00 08/01/03 1,618,560
- -----------------------------------------------------------------------------------------------------
$2,994,821
- -----------------------------------------------------------------------------------------------------
PENNSYLVANIA--9.8%
Pennsylvania Intergovernmental Coop Authority Special Tax RB (FGIC) (AAA)
$1,500,000 5.75% 06/15/00 $1,561,740
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,872,108
- -----------------------------------------------------------------------------------------------------
$3,433,848
- -----------------------------------------------------------------------------------------------------
PUERTO RICO--3.3%
Puerto Rico Commonwealth (A/Baa1)
$1,105,000 8.00% 07/01/06 $1,152,438
- -----------------------------------------------------------------------------------------------------
RHODE ISLAND--4.6%
Rhode Island Clean Water Finance Agency (AAA/Aaa)
$1,385,000 9.20% 10/01/01 $1,622,694
- -----------------------------------------------------------------------------------------------------
TENNESSEE--4.3%
Clarksville, TN Public Building Authority (AA)
$1,500,000 4.75% 12/01/00 $1,522,635
- -----------------------------------------------------------------------------------------------------
TEXAS--11.6%
Arlington GO Refunding Bonds (AA/Aa)
$1,270,000 5.20% 08/15/05 $1,331,214
Memorial Villages, TX Water Authority (Aa)
1,110,000 7.00 09/01/00 1,165,211
Tarrant County Health Facilities Development Corp. (AAA/Aaa)
1,500,000 5.50 02/15/03 1,573,530
- -----------------------------------------------------------------------------------------------------
$4,069,955
- -----------------------------------------------------------------------------------------------------
VIRGINIA--5.1%
Petersburg, VA Hospital Authority RB (A)
$1,760,000 5.50% 07/01/99 $1,800,075
- -----------------------------------------------------------------------------------------------------
WASHINGTON--4.6%
Washington State Public Power Supply System RB, Series B (AA-/Aa)
$1,500,000 7.20% 07/01/02 $1,615,245
- -----------------------------------------------------------------------------------------------------
WISCONSIN--2.9%
Oshkosh, WI Water Rev. BANS Series C (MIG1)
$1,000,000 4.88% 01/01/00 $1,005,870
</TABLE>
- --------------------------------------- ---------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
DEBT OBLIGATIONS (CONTINUED)
WYOMING--4.6%
Uinta County, WY School District Series A (FSA) (AAA/Aaa)
$1,500,000 6.88% 06/01/00 $ 1,597,935
- ---------------------------------------------------------------------------------------------------
Total Debt Obligations (Cost $35,077,329) $35,457,368
- ---------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $35,077,329)(A) $35,457,368
- ---------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in which
value exceeds cost $385,094
Gross unrealized loss for investments in which cost
exceeds value (5,055)
- ---------------------------------------------------------------------------------------------------
Net unrealized gain $380,039
- ---------------------------------------------------------------------------------------------------
</TABLE>
(a) 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.
INVESTMENT ABBREVIATIONS:
BANS--Bond Anticipation Notes
BIGI--Bond Investors Guaranty Corporation
COPS--Certificates of Participation
FGIC--Insured by Financial GuarantyInsurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
RB --Revenue Bond
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<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.
NEW SHARE CLASSES
To accommodate different clients' needs and preferences, the fund added three
new share classes during the period under review. Class A and B shares opened
on May 1, 1997 and C shares opened on August 15, 1997.
PERFORMANCE REVIEW
During the period under review, the fund's Institutional and Administration
shares outperformed the Index. The strongest performing sectors were
collateralized mortgage obligations (CMOs) and corporate bonds, which benefited
from an accommodative economic environment and high investor demand. The fund's
newer share classes -- Class A, B and C -- also recorded positive results.
However, the relative returns of these classes lagged because they began
operations during the second half of the fiscal year, after most of the gains
from corporate, mortgage and emerging market debt had been achieved. In
addition, the fund's Service shares recorded a positive return, but trailed the
benchmark.
We are pleased to report that the fund performed well relative to its peers.
For the three-year period ended October 31, 1997, the fund's Institutional
shares were
PERFORMANCE SUMMARY
<TABLE>
<CAPTION>
INSTITUTIONAL ADMINISTRATION SERVICE CLASS A* CLASS B* CLASS C*
(10/31/96- (10/31/96- (10/31/96- (5/1/97- (5/1/97- (8/15/97-
10/31/97) 10/31/97) 10/31/97 10/31/97) 10/31/97) 10/31/97)
------------- -------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total Return (based on
net asset value [NAV]) 9.19% 8.92% 8.65% 6.94% 6.63% 2.74%
Return From Monthly
Distributions 6.76% 6.50% 6.23% 3.18% 2.78% 1.12%
Return From Price
Appreciation 2.43% 2.42% 2.42% 3.76% 3.85% 1.62%
Lehman Brothers
Aggregate Bond Index
Total Return 8.89% 8.89% 8.89% 7.07% 7.07% 2.95%
NAV (as of 10/31/97) $10.08 $10.07 $10.09 $10.06 $10.09 $10.09
NAV Change +$0.23 +$0.23 +$0.23 +$0.36 +$0.37 +$0.16
Total Distributions Paid
Per Share+ $0.64 $0.62 $0.59 $0.30 $0.27 $0.11
</TABLE>
* New share class opened during the period. Performance and NAV change are
cumulative from inception date.
+ 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.
All performance figures represent past performance and in no way guarantee
future results, which will fluctuate as market conditions change. The
investment return and principal value of an investment in the fund will
fluctuate, and therefore an investor's shares when redeemed may be worth more
or less than their original cost. Goldman, Sachs & Co., the distributor of the
fund, is not a bank, and fund shares distributed by Goldman, Sachs & Co. are
not deposits or obligations of, or endorsed or guaranteed by, any bank or
depository institution, nor are they insured by the Federal Deposit Insurance
Corporation (FDIC), the Federal Reserve Board or any other government agency.
27
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
rated four stars (in a universe of 1,338 taxable bond funds) by Morningstar,
Inc., an independent rating agency./1/
The fund also fared well versus its peers in Lipper Analytical Services,
Inc.'s intermediate investment-grade debt fund category. For the 12-month
period ended October 31, the fund's Institutional and Administration shares
both ranked within the top 20% of their peer group (26th and 36th,
respectively, out of 195 funds). The fund's Service shares also did well,
placing within the top quartile of the Lipper category (44th of 195 funds).
(Lipper did not rank the fund's Class A, B and C shares for the 12-month period
because they have been in existence less than 12 months. Please note that
Lipper rankings do not take sales charges into account and that past
performance is no guarantee of future results.)
PORTFOLIO COMPOSITION AND INVESTMENT STRATEGIES
During the period, we continued to emphasize securities that are
fundamentally good credit quality and/or have relatively limited exposure to
interest rate movements, such as seasoned mortgage-backed issues. Within this
overall strategy, we actively used our extensive research resources to identify
attractive sectors and securities that enabled us to add incremental yield
relative to Treasuries.
- --------
/1/Source: (C)1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of
10/31/97. 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 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 Morningstar ratings apply only to the fund's
Institutional shares; the fund's Administration, Service, A, B and C shares
have not been rated. The Administration, Service, A, B and C 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.
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 1997*
[PIE CHART]
Emerging Market Debt 5.0%
CMOs 12.6%
ABSs 13.1%
U.S. Treasury 15.7%
Fixed Rate Mortgage Pass-Throughs 24.8%
Corporate Bonds 28.8%
*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. As of October 31, the portfolio held a 28.8% position in
corporate bonds, compared with the Index's 19.2% allocation. During the last 12
months, corporate spreads widened significantly, almost entirely due to the
sector coming under pressure in October in the wake of the financial turmoil in
Asia. However, the fund's investments in the sector benefited its 12-month
performance. As is our investment philosophy, we focused on shorter duration
bonds than the Index to add incremental yield without significantly increasing
overall volatility, and these securities fared well relative to the overall
sector. The fund's corporate holdings consisted primarily of financial issues,
such as CAPITAL ONE BANK (1.9% of the portfolio as of October 31) and
COUNTRYWIDE FUNDING CORP. (1.1%), and industrial issues, such as TIME WARNER
INC. (3.1%) and TCI COMMUNICATIONS, INC. (1.0%).
. Fixed Rate Mortgage Pass-Throughs. The fund held a 24.8% position in fixed
rate mortgage pass-throughs at the end of the period, approximately the same
weighting as a year earlier. We continued to underweight the sector relative to
the Index (29.8%),
- --------------------------------------- ---------------------------------------
28
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS CORE FIXED INCOME FUND (continued)
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
as yield spreads narrowed from already tight levels and upside potential
appeared limited.
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.
. U.S. Treasuries. U.S. Treasuries represented 15.7% of the portfolio as of the
end of the period. We significantly underweighted Treasuries compared with the
Index (43.5%) in favor of "spread" sectors such as corporate bonds and asset-
backed securities that offered more compelling return potential.
. Asset-Backed Securities (ABS). As of October 31, the portfolio was
significantly overweighted in ABS securities in relation to the Index, 13.1%
versus 1.0%. ABSs continued to perform well during the period, but heavy
issuance during the second half of the period caused yield spreads to widen and
restrained the sector's relative performance. Within the sector, the fund held
primarily credit card receivables (7.5%), with smaller positions in home equity
receivables (3.0%) and other receivables (2.6%).
. CMOs. The fund's CMO weighting was 12.6%, up from 9.8% a year earlier. CMOs
appeared increasingly attractive during the period because of diminishing
yield-enhancement opportunities in other sectors, such as fixed rate mortgage
pass-throughs, where spreads remained tight. Within the sector, 7.9% were
sequential-pay/support CMOs, 3.7% were planned amortization class (PAC) CMOs
and 1.0% were PAC interest-only (IO) securities.
. Emerging Market Debt. As of October 31, emerging market debt represented 5.0%
of the portfolio. During the period, we controlled the fund's exposure in the
sector by stressing high-credit-quality, short-duration bonds. Geographically,
most of the sector's holdings were in Latin America, which was attractive
because structural and economic reforms in this region are helping strengthen
credit fundamentals. Though the fund's investments in emerging market debt
contributed to performance during most of the period, the sector more than gave
up its gains in October, when financial turmoil in Asia spread to other
emerging markets.
. Duration. During the period, we continued to match the fund's duration to
that of the Index, partly through the use of financial futures. Rather than
attempting to predict the direction of interest rates, we seek to add
incremental return over the Index through our sector weightings, as well as
individual security selection. As of October 31, the fund's duration was 4.6
years, in line with the Index (4.4 years).
. Credit Quality. As of October 31, nearly half of the portfolio was invested
in government and agency securities (44.3%), with another 19.1% invested in
triple-A-rated securities. The remainder of the portfolio was made up of
double-A-rated securities (2.5%), single-A-rated securities (12.1%) and triple-
B-rated securities (22.0%).
MARKET OUTLOOK
Although the economy and interest rate movements continue to appear
supportive of the fixed income market, recent volatility emanating from
Southeast Asia has altered the sector-to-sector relationships that have
persisted through most of the past year.
In the corporate market, Asia-related uncertainty has put pressure on yield
spreads, and the sector may continue to experience selling pressure arising
from year-end window dressing. Though we have a somewhat cautious view of
corporates, we view the sector's recent
29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
underperformance as a potential buying opportunity, particularly for securities
with no exposure to Asia. In addition, we expect some spread compression over
the next three to six months based on positive company fundamentals.
The spillover from Asia also caused the spreads of mortgage-backed securities
to widen somewhat relative to Treasuries, but the sector generally held up
better than corporate and emerging market debt. Therefore, these securities may
be less compelling near term than they were previously. In the mortgage pass-
through sector, lower coupon pass-throughs underperformed higher coupon pass-
throughs during this volatile period and, as a result, currently represent a
more attractive risk/return trade-off.
Similarly, the ABS sector was impacted at the end of the period. Although
investors have been buying selectively at these wider yield spread levels, we
believe the sector may remain soft through year-end due to heavy issuance and
the Asian situation. Finally, we believe that fundamentals remain sound in most
of the emerging markets in which the fund has invested. Given a period of
recovery and stability in global equity markets, we expect yield spreads in the
sector to recover from their recent slide.
/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
November 28, 1997
- --------------------------------------- ---------------------------------------
30
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
GOLDMAN SACHS CORE FIXED INCOME FUND
October 31, 1997
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1997. The
performance for each class of the Goldman Sachs Core Fixed Income Fund
(assuming both the maximum sales charge of 4.5% and no sales charge for Class A
shares and the appropriate redemption fee and no redemption fee for the Class B
and Class C shares), 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.
Institutional Shares
[GRAPH]
Institutional Shares Lehman Aggregate
Index
-------------------- ----------------
5/1/94 50,000 50,000
10/31/94 48,500 46,980
10/31/95 56,124 54,332
10/31/96 59,492 57,505
10/31/97 64,955 62,617
Administration Shares
[GRAPH]
Administration Shares Lehman Aggregate
Index
--------------------- ----------------
2/28/96 50,000 50,000
10/31/96 51,780 51,870
10/31/97 56,400 56,480
Service Shares
[GRAPH]
Service Shares Lehman Aggregate
Index
-------------- ----------------
3/13/96 50,000 50,000
10/31/96 52,450 52,470
10/31/97 56,985 57,140
- --------------------------------------- ---------------------------------------
31
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class A Shares
[GRAPH]
Class A Shares Class A Shares Lehman Aggregate
(No Sales Charge) (W/Sales Charge) Index
----------------- ---------------- ---------------
5/1/97 10,000 9,550 10,000
10/31/97 10,694 10,213 10,707
Class B Shares
[GRAPH]
Class B Shares Class B Shares Lehman Aggregate
(No Sales Charge) (W/Sales Charge) Index
----------------- ---------------- ---------------
5/1/97 10,000 10,000 10,000
10/31/97 10,663 10,163 10,707
Class C Shares
[GRAPH]
Class C Shares Class C Shares Lehman Aggregate
(No Sales Charge) (W/Sales Charge) Index
----------------- ---------------- ---------------
8/15/97 10,000 10,000 10,000
10/31/97 10,274 10,174 10,295
<TABLE>
-------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------
ONE YEAR SINCE INCEPTION(A)
--------------------------------------------------
<S> <C> <C>
Institutional Shares 9.19% 7.08%
--------------------------------------------------
Administration Shares 8.92% 7.45%
--------------------------------------------------
Service Shares 8.65% 8.31%
--------------------------------------------------
Class A Shares, excluding
sales charge N/A 6.94%(b)
--------------------------------------------------
Class A Shares, including
sales charge N/A 2.31%(b)
--------------------------------------------------
Class B Shares, excluding
redemption charge N/A 6.63%(b)
--------------------------------------------------
Class B Shares, including
redemption charge N/A 1.63%(b)
--------------------------------------------------
Class C Shares, excluding
redemption charge N/A 2.74%(b)
--------------------------------------------------
Class C Shares, including
redemption charge N/A 1.74%(b)
--------------------------------------------------
</TABLE>
(a) The Institutional, Administration, Service Class A, Class B and Class C
shares commenced operations January 5, 1994, February 28, 1996, March 13,
1996, May 1, 1997, May 1, 1997 and August 15, 1997, respectively.
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since these shares have not completed a full twelve
months of operations.
- --------------------------------------- ---------------------------------------
32
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS CORE FIXED INCOME FUND
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
CORPORATE BONDS--27.3%
FINANCE BONDS--11.2%
Advanta National Bank U.S.A.
$ 345,000 6.43% 04/30/98 $ 345,169
BankAmerica Corp.
300,000 7.75 07/15/02 317,286
Capital One Bank
600,000 6.66 02/03/00 604,032
400,000 6.88 04/24/00 406,476
800,000 6.58 04/17/01 802,552
500,000 6.60 08/20/01 501,645
Capital One Financial Corp.
355,000 7.25 12/01/03 360,236
Conseco, Inc.
340,000 10.50 12/15/04 410,683
170,000 8.70 11/15/26 183,806
Continental Bank N.A.
525,000 11.25 07/01/01 542,173
Countrywide Capital Corp.
325,000 8.05 06/15/27 339,037
Countrywide Funding Corp.
125,000 6.08 07/14/99 125,358
250,000 8.43 11/16/99 261,593
250,000 7.75 08/10/01 263,278
700,000 6.38 10/08/02 705,957
Ford Capital Corp.
300,000 9.50 07/01/01 330,795
General Motors Acceptance Corp.
275,000 7.63 03/09/98 276,653
200,000 7.13 05/10/00 204,470
375,000 9.63 12/15/01 417,956
Meditrust, Inc.
390,000 7.82 09/10/26 420,467
MIC Finance Trust(f)
360,000 8.38 02/01/27 382,338
PXRE Capital Trust I
165,000 8.85 02/01/27 180,205
Sears Roebuck Acceptance Corp.
500,000 6.93 10/03/02 510,400
Security Pacific Corp.(a)
995,000 11.50 11/15/00 1,137,812
Signet Banking Corp.
240,000 9.63 06/01/99 252,698
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
CORPORATE BONDS (CONTINUED)
FINANCE BONDS (CONTINUED)
Taubman Realty Group
$ 480,000 8.00% 07/30/01 $ 501,998
Washington Real Estate Investment Trust
120,000 7.13 08/13/03 123,164
- ---------------------------------------------------------------------------------------------------
$10,908,237
- ---------------------------------------------------------------------------------------------------
INDUSTRIAL BONDS--14.5%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 531,536
Comcast Cable Communications
400,000 8.13 05/01/04 432,112
Continental Airlines, Inc.
339,989 7.75 07/02/14 367,487
553,994 8.56 07/02/14 621,554
Edison Mission Energy Funding Corp.(f)
161,128 6.77 09/15/03 163,191
Global Marine, Inc.
490,000 12.75 12/15/99 505,313
Harrahs Oper, Inc.
300,000 8.75 03/15/00 308,250
Hertz Corp.
200,000 6.00 01/15/03 197,192
500,000 7.00 07/15/03 513,845
Liberty Property LP
340,000 7.10 08/15/04 347,579
Manor Care, Inc.
350,000 9.50 11/15/02 364,000
Northwest Airlines Corp.
158,915 8.26 03/10/06 170,605
564,827 8.97 01/02/15 615,430
RJR Nabisco Inc.
375,000 8.00 07/15/01 387,443
550,000 8.63 12/01/02 585,866
Sci Television, Inc.
700,000 11.00 06/30/05 740,250
TCI Communications, Inc.
560,000 8.00 08/01/05 593,034
275,000 6.82 09/15/10 276,306
290,000 8.75 08/01/15 319,017
</TABLE>
- --------------------------------------- ---------------------------------------
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
CORPORATE BONDS (CONTINUED)
INDUSTRIAL BONDS (CONTINUED)
Tele-Communications, Inc.
$ 100,000 7.13% 02/02/98 $ 100,176
300,000 8.25 01/15/03 318,423
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,704,830
1,350,000 9.63 05/01/02 1,509,773
400,000 7.98 08/15/04 424,560
U.S. Airways Inc.
546,412 6.76 04/15/08 556,099
USI American Holdings
150,000 7.25 12/01/06 154,859
Viacom, Inc.
500,000 6.75 01/15/03 489,500
Worldcom, Inc.
300,000 9.38 01/15/04 319,518
450,000 8.88 01/15/06 490,820
- ---------------------------------------------------------------------------------------------------
$14,108,568
- ---------------------------------------------------------------------------------------------------
UTILITY BONDS--1.6%
California Energy, Inc.
$ 735,000 10.25% 01/15/04 $ 805,237
Central Maine Power Co.
330,000 7.45 08/30/99 333,752
Salton Sea Funding
472,907 7.02 05/30/00 476,705
- ---------------------------------------------------------------------------------------------------
$ 1,615,694
- ---------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (COST $26,055,654) $26,632,499
- ---------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES--13.7%
AFC Series 1997-1, Class A
$ 958,488 5.88% 07/25/27 $ 955,190
Airplanes Pass Through Trust Series 1, Class C
155,000 8.15 03/15/19 164,081
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
129,808 5.80 06/15/02 129,604
Discover Card Master Trust 1996-4, Class A(a)
1,910,000 6.00 10/16/13 1,932,080
Discover Card Master Trust 1996-4, Class B
1,100,000 6.18 10/16/13 1,103,091
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
ASSET-BACKED SECURITIES (CONTINUED)
DVI Equipment Lease Trust Series 1996-1, Class A(f)
$ 882,127 6.55% 07/10/04 $ 889,025
EQCC Home Equity Loan Trust Series 1997-3, Class A
1,829,645 5.80 11/15/28 1,829,645
General Motors Acceptance Corp. Series 1995, Class A
45,590 7.15 03/15/00 45,860
General Motors Acceptance Corp. Series 1997-C1, Class A3
1,000,000 6.87 08/15/07 1,042,460
H + T Master Trust(f)
550,000 8.06 08/15/02 549,483
MBNA Credit Card Master Trust
1,750,000 5.88 04/15/09 1,745,065
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
182,886 6.85 06/15/01 185,774
Premier Auto Trust Series 1995-1, Class A5
15,449 7.90 05/04/99 15,473
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20 02/16/06 679,572
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 569,074
Sears Credit Card Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 305,718
Standard Credit Card Master Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 726,961
World Financial Tower B Series 1996, Class B
495,732 6.91 09/01/13 513,995
- --------------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES (COST $13,331,331) $13,382,151
- --------------------------------------------------------------------------------------------------
EMERGING MARKET DEBT--4.8%
Bancoldex
$ 490,000 8.63% 06/02/00 $ 507,929
Bridas Corp.
110,000 12.50 11/15/99 117,700
120,000 12.50 06/10/03 147,590
Corp. Andina de Fomento
500,000 6.63 10/14/98 502,240
Empresa Columbiana de Petroleos
1,040,000 7.25 07/08/98 1,045,647
Financiera Energy Nacional(f)
400,000 9.38 06/15/06 436,440
</TABLE>
- --------------------------------------- ---------------------------------------
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS CORE FIXED INCOME FUND (continued)
October 31, 1997
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
EMERGING MARKET DEBT (CONTINUED)
Instituto de Fomento Industrial
$ 90,000 8.38% 07/29/01 $ 93,803
Perez Companc
510,000 9.00 01/30/04 543,941
Republic of Colombia
30,000 7.12 05/11/98 30,117
Republic of Croatia(f)
310,000 7.00 02/27/02 308,081
Sampoerna International Finance Co.(f)
200,000 8.38 06/15/06 188,146
YPF Sociedad Anonima
585,602 7.50 10/26/02 598,778
109,536 7.00 10/26/02 111,785
- -------------------------------------------------------------------------------------------------
TOTAL EMERGING MARKET DEBT
(COST $4,600,060) $ 4,632,197
- -------------------------------------------------------------------------------------------------
GOVERNMENT BONDS--0.6%
Province of Quebec
$ 520,000 13.25% 09/15/14 $ 605,956
- -------------------------------------------------------------------------------------------------
TOTAL GOVERNMENT BONDS
(COST $651,597) $ 605,956
- -------------------------------------------------------------------------------------------------
MORTGAGE BACKED OBLIGATIONS--35.7%
Asset Securitization Corp. Series 4, Class A
$ 900,000 7.49% 04/14/27 $ 969,398
Collateralized Mortgage Obligation Trust Series 63, Class Z
943,625 9.00 10/20/20 1,027,957
Federal Home Loan Mortgage Corp. (FHLMC)
1,000,000 6.35 03/25/18 1,004,680
1,000,000 7.00 TBA-15 Yr(b) 1,014,060
1,000,000 6.50 TBA-15 Yr(b) 999,680
2,500,000 7.50 TBA-30 Yr(b) 2,556,250
Federal Home Loan Mortgage Corp. Series 21, Class Z
496,200 5.40 05/25/16 485,964
Federal National Mortgage Association (FNMA)
1,997,933 6.50 11/01/26 1,967,345
2,000,000 6.50 TBA-7 Yr(b) 2,004,360
1,000,000 7.50 TBA-15 Yr(b) 1,025,620
6,000,000 7.00 TBA-30-Yr(b) 6,018,720
First Union-Lehman Brothers Commercial Mortgage Services Series 1997-C1,
Class A2
600,000 7.30 12/18/06 633,703
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- -----------------------------------------------------------------------------------------------
<C> <S> <C> <C>
MORTGAGE BACKED OBLIGATIONS (CONTINUED)
FNMA Remic Trust Series 1997-70, Class AB
$1,250,000 6.50% 09/25/22 $ 1,244,125
FNMA Remic Trust Series 31, Class PJ
750,000 6.55 10/25/20 758,670
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10(a)
2,000,000 7.00 05/25/24 1,926,860
Government National Mortgage Association (GNMA)
309,342 8.00 02/15/17 325,174
27,346 7.00 11/15/22 27,590
350,954 7.00 12/15/22 354,134
592,628 7.00 12/15/22 597,997
172,753 7.00 01/15/23 174,209
747,912 7.50 03/15/23 767,072
737,159 7.00 05/15/23 743,373
113,223 7.50 08/15/23 116,124
36,858 7.00 11/15/23 37,168
2,000,000 7.00 TBA-30 Yr(b) 2,011,240
3,000,000 7.50 TBA-30 Yr(b) 3,067,500
JP Morgan Commercial Mortgage Finance Corp., Series 1997-C4
1,000,000 7.32 12/26/28 1,045,625
Morgan Stanley Capital Commercial Mortgage, Inc. Series 1997-C1
900,000 7.46 05/15/06 943,313
Prudential Home Mortgage Securities Corp. 1992-39 A8
1,000,000 7.23 12/25/07 933,310
- -----------------------------------------------------------------------------------------------
TOTAL MORTGAGE BACKED OBLIGATIONS
(COST $34,183,128) $34,781,221
- -----------------------------------------------------------------------------------------------
SOVEREIGN CREDIT--0.4%
State of Israel
$ 370,000 6.38% 12/15/05 $ 363,177
- -----------------------------------------------------------------------------------------------
TOTAL SOVEREIGN CREDIT
(COST $347,343) $ 363,177
- -----------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS--15.5%
United States Treasury Bonds
$1,800,000 7.50% 11/15/16 $ 2,059,596
1,600,000 8.75 05/15/20 2,086,000
1,400,000 7.88 02/15/21 1,680,224
1,740,000(a) 7.63 02/15/25 2,060,264
United States Treasury Interest-Only Stripped Securities(c)
2,250,000 6.14 08/15/09 1,103,985
350,000 6.20 11/15/10 158,235
</TABLE>
- --------------------------------------- ---------------------------------------
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ----------------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. TREASURY OBLIGATIONS (CONTINUED)
United States Treasury Notes
$ 1,750,000 6.88% 08/31/99 $ 1,786,645
1,530,000(a) 5.63 11/30/00 1,525,456
United States Treasury Principal-Only Stripped Securities(d)
40,000 4.59 11/15/97 39,928
1,900,000 5.86 11/15/04 1,260,137
5,730,000 6.35 05/15/20 1,396,344
- ----------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $14,136,252) $ 15,156,814
- ----------------------------------------------------------------------------------------------
YANKEE BONDS--0.3%
Korea Electric Power
$ 260,512 7.40% 04/01/16 $ 280,113
- ----------------------------------------------------------------------------------------------
TOTAL YANKEE BONDS
(COST $251,907) $ 280,113
- ----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT--23.6%
Joint Repurchase Agreement Account(a)
$ 23,000,000 5.76% 11/03/97 $ 23,000,000
- ----------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT (COST $23,000,000) $ 23,000,000
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $116,557,272(E)) $118,834,128
- ----------------------------------------------------------------------------------------------
</TABLE>
Futures contracts open at October 31, 1997 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type Long(g) Month Gain
- --------------------------- --------- ------------- ----------
<S> <C> <C> <C>
Euro Dollars 8 March 1998 $ 7,100
Euro Dollars 5 June 1998 7,687
Euro Dollars 13 December 1997 10,838
U.S. 20 Year Long Term Bond 12 December 1997 67,243
-------
$92,878
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
FEDERAL INCOME TAX
INFORMATION:
Gross unrealized
gain for
investments in
which value
exceeds cost $2,430,736
Gross unrealized
loss for
investments in
which cost
exceeds value (154,123)
- -----------------------------
Net unrealized
gain $2,276,613
- -----------------------------
</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 coupon rate due to
the amortization of related premiums.
(d) The interest rate disclosed for these securities represents effective
yields to maturity.
(e) The aggregate cost for federal income tax purposes is $116,557,515.
(f) Securities are exempt from registration under Rule 144A of the Securities
Act of 1933. Such securities may be resold, normally to qualified
institutional buyers in transactions exempt from registration. Total market
value of Rule 144A securities amounted to $2,916,704, as of October 31,
1997.
(g) Each Euro Dollar contract represents $1,000,000 in notional par value. Each
U.S. 20 Year Long Term Bond contract represents $100,000 in notional par
value. The total notional amount and market value at risk are $27,200,000
and $7,547,450, respectively. The determination of notional amounts 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.
36
<PAGE>
Goldman Sachs Trust-Fixed Income Funds
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADJUSTABLE SHORT SHORT
RATE DURATION DURATION CORE FIXED
GOVERNMENT GOVERNMENT TAX-FREE INCOME
FUND FUND FUND FUND
-----------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in
securities, at value
(cost $499,416,127,
$119,444,006,
$35,077,329 and
$116,557,272) $502,491,257 $120,630,286 $35,457,368 $118,834,128
Cash, at value 1,002,701 48,600 100,138 101,219
Receivables:
Investment securities
sold 481,728 -- -- 11,510,991
Interest 6,932,682 1,239,579 492,577 1,200,720
Forward foreign
currency exchange
contracts -- -- -- 28,856
Fund shares sold 1,193,824 291,539 63,759 2,590,249
Variation margin -- -- -- 3,750
Foreign tax withheld -- -- -- 11,701
Deferred organization
expenses, net -- -- -- 28,857
Other assets 144,366 168,332 106,594 106,187
- --------------------------------------------------------------------------------
Total assets 512,246,558 122,378,336 36,220,436 134,416,658
- --------------------------------------------------------------------------------
LIABILITIES:
Payables:
Dividends 1,140,745 122,452 20,503 81,756
Investment securities
purchased -- -- 1,029,971 32,185,322
Fund shares repurchased 753,042 3,572,776 3,580 4,539,342
Management fees 175,884 38,181 10,743 34,029
Authorized dealer
service fees 28,171 3,946 1,807 4,380
Transfer agent fees 38,225 35,000 25,000 29,000
Variation margin 23,556 16,631 -- --
Accrued expenses and
other liabilities 44,038 35,415 48,967 39,948
- --------------------------------------------------------------------------------
Total liabilities 2,203,661 3,824,401 1,140,571 36,913,777
- --------------------------------------------------------------------------------
NET ASSETS:
Paid in capital 559,794,391 131,211,275 38,514,053 94,565,068
Accumulated
undistributed
(distributions in
excess of) net
investment income (3,387,447) 693,874 110,881 91,922
Accumulated net realized
gain (loss) on
investment transactions (49,005,224) (14,496,297) (3,925,108) 496,568
Accumulated net realized
foreign currency loss -- -- -- (20,743)
Net unrealized gain on
investments and futures 2,641,177 1,145,083 380,039 2,370,066
- --------------------------------------------------------------------------------
Net assets $510,042,897 $118,553,935 $35,079,865 $ 97,502,881
- --------------------------------------------------------------------------------
NET ASSET VALUE,
OFFERING AND REDEMPTION
PRICE PER SHARE:(A)
Institutional $9.88 $9.86 $10.07 $10.08
Administration $9.88 $9.89 $10.07 $10.07
Service $9.88 $9.86 $10.07 $10.09
Class A $9.88 $9.88 $10.08 $10.06
Class B -- $9.86 $10.08 $10.09
Class C -- $9.86 $10.07 $10.09
- --------------------------------------------------------------------------------
SHARES OUTSTANDING:
Institutional 46,911,214 10,515,184 2,860,956 7,858,088
Administration 282,644 107,210 7,675 612,842
Service 35,020 338,434 203,593 185,166
Class A 4,390,774 960,218 398,986 927,888
Class B -- 75,741 10,529 61,503
Class C -- 19,318 160 27,004
- --------------------------------------------------------------------------------
Total shares
outstanding, $.001 par
value (unlimited number
of shares authorized) 51,619,652 12,016,105 3,481,899 9,672,491
- --------------------------------------------------------------------------------
</TABLE>
(a) Maximum public offering price per share for Class A shares is $10.03
(NAV x 1.0152), $10.08 (NAV x 1.0205), $10.29 (NAV x 1.0205) and $10.53
(NAV x 1.0467) for Adjustable Rate Government Fund, Short Duration
Government Fund, Short Duration Tax-Free Fund and Core Fixed Income Fund,
respectively. At redemption, Class B and Class C shares may be 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.
37
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Year Ended October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADJUSTABLE SHORT SHORT
RATE DURATION DURATION CORE FIXED
GOVERNMENT GOVERNMENT TAX-FREE INCOME
FUND FUND FUND FUND
-----------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest(a) $37,092,868 $7,267,514 $1,667,490 $5,835,747
- --------------------------------------------------------------------------------
TOTAL INCOME 37,092,868 7,267,514 1,667,490 5,835,747
- --------------------------------------------------------------------------------
EXPENSES:
Management fees 2,293,118 528,290 144,157 334,580
Distribution fees 81,928 5,496 2,562 5,597
Authorized dealer service fees 81,928 4,313 2,430 4,832
Administration fees 9,699 3,203 222 14,647
Service share fees 292 12,087 6,435 6,207
Custodian fees 142,225 78,176 61,325 99,826
Transfer agent fees 272,449 77,989 61,185 85,882
Professional fees 61,689 61,175 60,977 59,491
Registration fees 63,360 60,298 59,192 59,746
Amortization of deferred
organization expenses -- -- 20,748 24,495
Trustee fees 11,603 2,008 669 1,562
Other 141,714 59,471 37,171 27,023
- --------------------------------------------------------------------------------
TOTAL EXPENSES 3,160,005 892,506 457,073 723,888
LESS--EXPENSES REIMBURSABLE
AND FEES WAIVED BY GOLDMAN
SACHS (273,667) (395,037) (284,692) (315,780)
- --------------------------------------------------------------------------------
NET EXPENSES 2,886,338 497,469 172,381 408,108
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 34,206,530 6,770,045 1,495,109 5,427,639
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS,
FUTURES AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gain (loss) from:
Investment transactions 992,797 425,241 188,340 757,880
Futures transactions (915,851) (379,727) 26,421 (25,706)
Net change in unrealized gain
(loss) on:
Investments 3,836,966 559,084 177,615 1,445,461
Futures (577,907) (74,078) -- (5,006)
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENT, FUTURES
AND FOREIGN CURRENCY
TRANSACTIONS 3,336,005 530,520 392,376 2,172,629
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $37,542,535 $7,300,565 $1,887,485 $7,600,268
- --------------------------------------------------------------------------------
</TABLE>
(a)Net of $3,396 in foreign withholding tax for the Core Fixed Income Fund.
- --------------------------------------- ---------------------------------------
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADJUSTABLE SHORT SHORT
RATE DURATION DURATION
GOVERNMENT GOVERNMENT TAX-FREE CORE FIXED
FUND FUND FUND INCOME FUND
-------------------------------------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 34,206,530 $ 6,770,045 $ 1,495,109 $ 5,427,639
Net realized gain from
investment and futures
transactions 76,946 45,514 214,761 732,174
Net change in unrealized
gain (loss) on
investments and futures 3,259,059 485,006 177,615 1,440,455
- ----------------------------------------------------------------------------------
Net increase in net
assets resulting from
operations 37,542,535 7,300,565 1,887,485 7,600,268
- ----------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Institutional Shares (32,067,893) (6,559,922) (1,407,585) (4,853,239)
Administration Shares (222,274) (79,521) (3,501) (365,897)
Service Shares (3,287) (145,168) (47,115) (74,035)
Class A (1,858,740) (85,889) (36,026) (107,876)
Class B -- (12,146) (864) (7,255)
Class C -- (632) (18) (778)
- ----------------------------------------------------------------------------------
Total distributions to
shareholders (34,152,194) (6,883,278) (1,495,109) (5,409,080)
- ----------------------------------------------------------------------------------
FROM SHARE TRANSACTIONS:
Net proceeds from sales
of shares 398,400,844 61,888,188 28,091,361 38,830,106
Reinvestment of
dividends and
distributions 20,070,536 4,611,022 1,232,957 4,813,853
Cost of shares
repurchased (539,487,702) (50,380,123) (30,193,481) (21,476,685)
- ----------------------------------------------------------------------------------
Net increase
(decrease) in net
assets resulting from
share transactions (121,016,322) 16,119,087 (869,163) 22,167,274
- ----------------------------------------------------------------------------------
Total increase
(decrease) (117,625,981) 16,536,374 (476,787) 24,358,462
NET ASSETS:
Beginning of year $ 627,668,878 $102,017,561 $ 35,556,652 $ 73,144,419
- ----------------------------------------------------------------------------------
End of year $ 510,042,897 $118,553,935 $ 35,079,865 $ 97,502,881
- ----------------------------------------------------------------------------------
Accumulated
undistributed
(distributions in
excess of) net
investment income $ (3,387,447) $ 693,874 $ 110,811 $ 91,922
- ----------------------------------------------------------------------------------
SUMMARY OF SHARE
TRANSACTIONS:
Shares sold 40,410,416 6,299,174 2,811,858 3,921,467
Reinvestment of
dividends and
distributions 2,035,282 470,422 123,190 488,221
Shares repurchased (54,710,526) (5,133,401) (3,022,098) (2,159,541)
- ----------------------------------------------------------------------------------
Net increase (decrease)
in shares outstanding (12,264,828) 1,636,195 (87,050) 2,250,147
- ----------------------------------------------------------------------------------
</TABLE>
- --------------------------------------- ---------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADJUSTABLE SHORT SHORT
RATE DURATION DURATION
GOVERNMENT GOVERNMENT TAX-FREE CORE FIXED
FUND FUND FUND INCOME 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
share transactions (52,339,892) (1,819,855) (23,268,224) 18,451,740
- -------------------------------------------------------------------------------
Total increase
(decrease) (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
undistributed
(distributions in
excess of) 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.
40
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
October 31, 1997
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
1. ORGANIZATION
Goldman Sachs Trust (the "Trust") is 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". Short
Duration Government, Short Duration Tax-Free and Core Fixed Income are
diversified portfolios of the Trust offering six classes of shares--
Institutional shares, Administration shares, Service shares, Class A shares,
Class B shares and Class C shares. The Adjustable Rate Government Fund is a
diversified portfolio of the Trust offering four classes of shares--
Institutional, Administration, Service and 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 of certain of the funds.
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
Portfolio securities 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.
C. Foreign Currency Translations
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis:
41
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
(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
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
assets 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
42
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1997
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
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.
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. Shareholders of Class A, Class B and
Class C 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, 1997 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 $14,144,000 2002-2004
Short Duration Tax-Free $ 4,058,000 2002-2003
</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 Adjustable Rate
Government and Short Duration Government pursuant to the Agreements. Goldman
Sachs Asset Management ("GSAM"), a separate operating division of Goldman
Sachs, serves as the investment adviser for Short Duration Tax-Free and Core
Fixed Income pursuant to the Agreements. Under the 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 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 fee for Short Duration Government.
The adviser has voluntarily agreed to limit certain of the Funds' expenses,
with the exception of the Adjustable Rate Government Fund, (excluding
management fees, taxes, interest, brokerage, litigation, Administrative and
Service Share fees, indemnification and other
43
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
extraordinary expenses and with respect to Class A, Class B and Class C 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 Class A, Class B and Class C shares. During the year ended October
31, 1997, Goldman Sachs retained approximately $156,000, $63,000, $6,000 and
$14,000 of sales load related to Class A shares of Adjustable Rate Government,
Short Duration Government, Short Duration Tax-Free and Core Fixed Income,
respectively. Goldman Sachs also serves as Transfer Agent of the Funds for a
fee.
The Trust, on behalf of the Funds, has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 for the Class A, Class B and Class C shares.
Class B and Class C shares are not applicable for the Adjustable Rate
Government Fund. 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 and .75% of the average daily net assets of
the Class B and Class C shares. Currently, Goldman Sachs has agreed to
voluntarily waive the distribution fee relating to the Class A shares and .15%
relating to the Class B shares of Short Duration Government and Short Duration
Tax-Free.
The Trust 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. The Funds
pay a fee under the Service Plan equal, on an annual basis, to .25% of its
average daily net assets attributable to Class A, Class B and Class C shares.
Class B and Class C shares are not applicable for the Adjustable Rate
Government Fund.
For the year ended October 31, 1997, the advisers 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 Management 12b-1 ment Outstanding
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustable Rate
Government -- $82 $192 --
Short Duration
Government $106 4 285 99
Short Duration
Tax-Free -- 3 282 85
Core Fixed
Income -- 5 311 94
</TABLE>
For the year ended October 31, 1997, Adjustable Rate Government, Short
Duration Government, and Core Fixed Income incurred commission expenses of
approximately $61,000, $19,000, and $3,000, respectively, in connection with
futures contracts entered into with Goldman Sachs. At October 31, 1997,
Adjustable Rate Government and Short Duration Government had approximately
$24,000 and $17,000, respectively, payable to Goldman Sachs related to
variation margin on futures contracts. Approximately $12,000 relating to
variation margin was due to Core Fixed Income from Goldman Sachs.
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 year ended October
31, 1997, the Funds did not have any borrowings under this facility.
44
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
5. INVESTMENT TRANSACTIONS
Purchases and proceeds of sales or maturities of long-term securities for the
year ended October 31, 1997, were as follows:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
ADJUSTABLE SHORT SHORT
RATE DURATION DURATION CORE FIXED
GOVERNMENT GOVERNMENT TAX-FREE INCOME
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases of U.S. Government
and agency obligations $258,673,340 $119,545,404 $ -- $266,525,624
- -------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and agency
obligations) -- -- 69,946,385 48,122,767
- -------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and agency
obligations 372,612,281 105,651,126 -- 261,448,104
- -------------------------------------------------------------------------------
Sales or maturities
(excluding U.S. Government
and agency obligations) -- -- 69,512,138 30,638,111
- -------------------------------------------------------------------------------
</TABLE>
At October 31, 1997, Core Fixed Income had recorded a receivable for forward
foreign currency exchange contracts which were closed but not settled of
$28,856.
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 October 31, 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 $6,500,000, $4,700,000 and $23,000,000
respectively, in principal amount.
As of October 31, 1997, the repurchase agreement in the joint account along
with the corresponding underlying securities (including the type of security,
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 October 31, 1997, repurchase price $300,144,250
(total collateral value $309,849,518 consisting of FHLMC: 6.50%, 12/01/23;
FNMA: 6.00%, 6/01/11; GNMA: 7.00%-8.00%, 2/15/25-10/15/27)
$300,000,000 5.77% 11/30/97 $300,000,000
Lehman Brothers, Inc., dated October 31, 1997, repurchase price $241,215,728
(total collateral value $245,922,019 consisting of FHLMC: 6.50%-10.25%,
3/01/01-10/01/27; FNMA: 6.00%-11.25%, 11/01/01-10/01/27)
$241,100,000 5.76% 11/03/97 $241,100,000
Nomura Securities International, Inc., dated October 31, 1997, repurchase
price $200,096,167 (total collateral value $204,000,900 consisting of
FHLMC: 6.02%-7.53%, 9/25/00-8/21/07; FNMA: 6.11%-7.73%, 6/22/99-2/07/07;
U.S. Treasury Note: 5.75%-9.00%, 5/15/98-2/15/07; U.S. Treasury Principal
Only Stripped Security: 5/15/00)
$200,000,000 5.77% 11/03/97 $200,000,000
Nomura Securities International, Inc., dated October 31, 1997, repurchase
price $100,047,500 (total collateral value $102,000,449 consisting of
FHLMC: 6.02%-7.53%, 9/25/00-8/21/07; FNMA: 6.11%-7.73%, 6/22/99-2/07/07;
U.S. Treasury Note: 5.75%-9.00%, 5/15/98-2/15/07; U.S. Treasury Principal
Only Stripped Security: 5/15/00)
$100,000,000 5.70% 11/03/97 $100,000,000
- ---------------------------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $841,100,000
- ---------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
9. CERTAIN RECLASSIFICATIONS
In accordance with Statement of Position 93-2, Short Duration Government, Short
Duration Tax-Free, and Core Fixed Income have reclassified $36,483, $20,748,
and $24,095, respectively, from paid-in capital to accumulated undistributed
net investment income. Additionally, Core Fixed Income has reclassified $15,717
from accumulated net realized gain to accumulated undistributed net investment
income. These reclassifications have no impact on the net asset value of the
Funds and are designed to present the Fund's capital accounts on a tax basis.
10. OTHER MATTERS
As of October 31, 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.
46
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
11. SUMMARY OF SHARE TRANSACTIONS
Share activity for the year ended October 31, 1997 is as follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Short Duration Government Short Duration Tax-Free Core Fixed Income
- ------------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INSTITUTIONAL
SHARES
Shares sold 32,562,840 $ 321,007,102 4,524,108 $ 44,408,312 1,897,550 $ 18,922,030 1,146,499 $ 11,325,306
Reinvestment of
dividends and
distributions 1,830,181 18,045,430 440,142 4,313,493 115,179 1,152,524 450,657 4,441,709
Shares
repurchased (49,889,214) (491,883,845) (4,617,947) (45,299,315) (2,646,181) (26,425,414) (1,051,390) (10,391,058)
-----------------------------------------------------------------------------------------------------
(15,496,193) (152,831,313) 346,303 3,422,490 (633,452) (6,350,860) 545,766 5,375,957
-----------------------------------------------------------------------------------------------------
ADMINISTRATION
SHARES
Shares sold 209,261 2,063,528 325,429 3,199,356 33,608 336,065 1,366,455 13,474,489
Reinvestment of
dividends and
distributions 10,639 104,909 6,605 64,920 281 2,813 19,189 189,462
Shares
repurchased (322,994) (3,190,328) (250,361) (2,471,239) (31,059) (312,126) (844,042) (8,441,000)
-----------------------------------------------------------------------------------------------------
(103,094) (1,021,891) 81,673 793,037 2,830 26,752 541,602 5,222,951
-----------------------------------------------------------------------------------------------------
SERVICE SHARES
Shares sold 48,034 474,470 191,963 1,881,964 373,847 3,741,754 204,087 2,016,094
Reinvestment of
dividends and
distributions 199 1,965 14,820 145,231 4,184 41,937 7,480 73,981
Shares
repurchased (13,213) (130,485) (53,841) (527,404) (244,134) (2,443,102) (65,183) (648,610)
-----------------------------------------------------------------------------------------------------
35,020 345,950 152,942 1,499,791 133,897 1,340,589 146,384 1,441,465
-----------------------------------------------------------------------------------------------------
CLASS A SHARES
Shares sold 7,590,281 74,855,744 1,141,319 11,256,436 492,769 4,950,140 1,104,533 11,020,182
Reinvestment of
dividends and
distributions 194,263 1,918,232 8,343 82,332 3,459 34,811 10,252 102,270
Shares
repurchased (4,485,105) (44,283,044) (189,444) (1,867,761) (97,242) (977,758) (186,897) (1,876,109)
-----------------------------------------------------------------------------------------------------
3,299,439 32,490,932 960,218 9,471,007 398,986 4,007,193 927,888 9,246,343
-----------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold -- -- 95,322 934,856 11,933 119,768 71,697 712,089
Reinvestment of
dividends and
distributions -- -- 449 4,421 86 861 635 6,353
Shares
repurchased -- -- (20,030) (196,887) (1,490) (15,000) (10,829) (107,884)
-----------------------------------------------------------------------------------------------------
-- -- 75,741 742,390 10,529 105,629 61,503 610,558
-----------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold -- -- 21,033 207,264 2,151 21,604 28,196 281,946
Reinvestment of
dividends and
distributions -- -- 63 625 1 10 8 78
Shares
repurchased -- -- (1,778) (17,517) (1,992) (20,080) (1,200) (12,024)
-----------------------------------------------------------------------------------------------------
-- -- 19,318 190,372 160 1,534 27,004 270,000
-----------------------------------------------------------------------------------------------------
Net increase
(decrease) (12,264,828) $ (121,016,322) 1,636,195 $ 16,119,087 (87,050) $ (869,163) 2,250,147 $ 22,167,274
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Short Duration Government Short Duration Tax-Free Core Fixed Income
- ----------------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INSTITUTIONAL
SHARES
Shares sold 39,981,299 $ 391,363,204 4,072,082 $ 39,855,638 2,085,253 $ 20,777,050 2,094,833 $20,524,422
Reinvestment of
dividends and
distributions 1,780,288 17,432,484 422,559 4,137,041 139,126 1,383,351 436,903 4,292,533
Shares
repurchased (46,666,343) (456,776,795) (4,893,286) (47,875,174) (4,601,865) (45,664,878) (769,104) (7,431,360)
<CAPTION>
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(4,904,756) (47,981,107) (398,645) (3,882,495) (2,377,486) (23,504,477) 1,762,632 17,385,595
<CAPTION>
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ADMINISTRATION
SHARES
Shares sold 148,981 1,457,872 33,251 326,101 10,672 105,302 106,074 1,029,912
Reinvestment of
dividends and
distributions 9,641 94,420 207 2,032 203 2,017 1,847 17,883
Shares
repurchased (138,609) (1,356,764) (7,921) (77,312) (10,644) (105,478) (36,681) (358,284)
<CAPTION>
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
20,013 195,528 25,537 250,821 231 1,841 71,240 689,511
<CAPTION>
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SERVICE SHARES
Shares sold -- -- 188,134 1,837,702 137,557 1,366,332 43,525 422,233
Reinvestment of
dividends and
distributions -- -- 1,508 14,743 1,621 16,124 549 5,332
Shares
repurchased -- -- (4,150) (40,626) (115,450) (1,148,044) (5,292) (50,931)
<CAPTION>
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-- -- 185,492 1,811,819 23,728 234,412 38,782 376,634
<CAPTION>
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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) -- -- -- -- -- --
<CAPTION>
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(464,966) (4,554,313) -- -- -- -- -- --
<CAPTION>
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net increase
(decrease) (5,349,709) $ (52,339,892) (187,616) $ (1,819,855) (2,353,527) $(23,268,224) 1,872,654 $18,451,740
<CAPTION>
==========================================================================================================
</TABLE>
48
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
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 In excess of
and unrealized and unrealized Total From net net realized
gain (loss) gain (loss) income realized gain gain on
Net asset on investment, on foreign (loss) on investment, In excess investment,
value at Net option and currency from From net option of net option and
beginning investment futures related investment investment and futures investment futures
of period income transactions transactions operations income transactions income transactions
-----------------------------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1997-
Institutional
Shares.......... $ 9.83 $0.5914(a) $ 0.0494(a) -- $0.6408 $(0.5908) -- -- --
1997-
Administration
Shares.......... 9.83 0.5665(a) 0.0497(a) -- 0.6162 (0.5662) -- -- --
1997-Service
Shares(m)....... 9.84 0.3298(a) 0.0400(a) -- 0.3698 (0.3298) -- -- --
1997-Class A
Shares.......... 9.83 0.5662(a) 0.0500(a) -- 0.6162 (0.5662) -- -- --
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) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Distribution to
Shareholders Net Ratio of Net
-------------------- increase Ratio of net assets
From Total (decrease) Net asset net investment at end
paid distributions in net value at expenses income Portfolio of
in to asset end of Total to average to average turnover period
capital shareholders value period return(k) net assets net assets rate(d) (in 000s)
--------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
--------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1997-
Institutional
Shares.......... -- $(0.5908) $ 0.0500 $ 9.88 6.70% 0.49% 5.99% 46.58% $ 463,511
1997-
Administration
Shares.......... -- (0.5662) 0.0500 9.88 6.43 0.74 5.73 46.58 2,793
1997-Service
Shares(m)....... -- (0.3298) 0.0400 9.88 3.81(f) 1.05(b) 5.64(b) 46.58(f) 346
1997-Class A
Shares.......... -- (0.5662) 0.0500 9.88 6.43 0.74 5.60 46.58 43,393
1996-
Institutional
Shares.......... -- (0.5931) 0.0600 9.83 6.86 0.45 5.85 52.36 613,149
1996-
Administration
Shares.......... -- (0.5687) 0.0600 9.83 6.60 0.70 5.59 52.36 3,792
1996-Class A
Shares.......... -- (0.5687) 0.0600 9.83 6.60 0.70 5.59 52.36 10,728
1995-
Institutional
Shares.......... -- (0.6046) 0.0301 9.77 6.75 0.46 5.77 24.12 657,358
1995-
Administration
Shares.......... -- (0.5803) 0.0300 9.77 6.48 0.71 5.50 24.12 3,572
1995-Class A
Shares(c)....... -- (0.2831) (0.0200) 9.77 2.74(f) 0.69(b) 5.87(b) 24.12(f) 15,203
1994-
Institutional
Shares.......... -- (0.4486) (0.2600) 9.74 1.88 0.46 4.38 37.81 942,523
1994-
Administration
Shares.......... -- (0.4239) (0.2600) 9.74 1.63 0.71 4.27 37.81 6,960
1993-
Institutional
Shares.......... -- (0.4421) (0.0400) 10.00 4.13 0.45 4.36 103.74 2,760,871
1993-
Administration
Shares(e)....... -- (0.2173) (0.0200) 10.00 2.01(f) 0.70(b) 3.81(b) 103.74(f) 5,326
1992-
Institutional
Shares.......... -- (0.5470) 0.0100 10.04 6.12 0.42 5.61 286.40 2,145,064
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) 7.31(b) 145.67(f) 239,642
---------------------------------------------------------------------------------------------------------------------------
<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
-------------------------------
ADJUSTABLE RATE GOVERNMENT FUND
-------------------------------
<C> <C>
1997-
Institutional
Shares.......... 0.52% 5.96%
1997-
Administration
Shares.......... 0.77 5.70
1997-Service
Shares(m)....... 1.08(b) 5.61(b)
1997-Class A
Shares.......... 1.02 5.32
1996-
Institutional
Shares.......... 0.51 5.79
1996-
Administration
Shares.......... 0.76 5.53
1996-Class A
Shares.......... 1.01 5.28
1995-
Institutional
Shares.......... 0.53 5.70
1995-
Administration
Shares.......... 0.78 5.43
1995-Class A
Shares(c)....... 1.01(b) 5.55(b)
1994-
Institutional
Shares.......... 0.49 4.35
1994-
Administration
Shares.......... 0.74 4.24
1993-
Institutional
Shares.......... 0.48 4.33
1993-
Administration
Shares(e)....... 0.73(b) 3.78(b)
1992-
Institutional
Shares.......... 0.55 5.48
FOR THE PERIOD JULY 17, 1991(g) THROUGH OCTOBER 31,
- --------------------------------------------------
1991-
Institutional
Shares.......... 1.02(b) 6.49(b)
- --------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
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 In excess of
and unrealized and unrealized Total From net net realized
gain (loss) gain (loss) income realized gain gain on
Net asset on investment, on foreign (loss) on investment, In excess investment,
value at Net option and currency from From net option of net option and
beginning investment futures related investment investment and futures investment futures
of period income transactions transactions operations income transactions income transactions
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1997-
Institutional
Shares.......... $ 9.83 $0.6412(a) $ 0.0300(a) -- $ 0.6712 $(0.6412) -- -- --
1997-
Administration
Shares.......... 9.85 0.6183(a) 0.0400(a) -- 0.6583 (0.6183) -- -- --
1997-Service
Shares.......... 9.82 0.5904(a) 0.0401(a) -- 0.6305 (0.5904) -- -- --
1997-Class A
Shares(o)....... 9.78 0.3121(a) 0.0883(a) -- 0.4004 (0.3004) -- -- --
1997-Class B
Shares(o)....... 9.75 0.2787(a) 0.1011(a) -- 0.3798 (0.2698) -- -- --
1997-Class C
Shares(p)....... 9.83 0.1185(a) 0.0225(a) -- 0.1410 (0.1110) -- -- --
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)(d) -- 0.0790 (0.5352) (0.0438) -- --
1993-
Institutional
Shares.......... 10.16 0.5627 (0.0135)(d) -- 0.5492 (0.5627) -- (0.0065) --
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>
Distribution
to
shareholders Net Ratio of Net
-------------------- increase Ratio of net assets
From Total (decrease) Net asset net investment at end
paid distributions in net value at expenses income Portfolio of
in to asset end of Total to average to average turnover period
capital shareholders value period return(k) net assets net assets rate(d) (in 000s)
--------------------------------------------------------------------------------------------------------
SHORT DURATION GOVERNMENT FUND
--------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1997-
Institutional
Shares.......... -- ($0.6412) $0.0300 $9.86 7.07% 0.45% 6.43% 102.58% $103,729
1997-
Administration
Shares.......... -- (0.6183) 0.0400 9.89 6.91 0.70 6.19 102.58 1,060
1997-Service
Shares.......... -- (0.5904) 0.0401 9.86 6.63 0.95 5.92 102.58 3,337
1997-Class A
Shares(o)....... -- (0.3004) 0.1000 9.88 4.14(f) 0.70(b) 6.05(b) 102.58(f) 9,491
1997-Class B
Shares(o)....... -- (0.2698) 0.1100 9.86 3.94(f) 1.30(b) 5.52(b) 102.58(f) 747
1997-Class C
Shares(p)....... -- (0.1100) 0.0300 9.86 1.44(f) 1.45(b) 5.52(b) 102.58(f) 190
1996-
Institutional
Shares.......... -- (0.6326) 0.0100 9.83 6.75 0.45 6.44 115.45 99,944
1996-
Administration
Shares(h)....... -- (0.3940) (0.0100) 9.85 4.00(f) 0.70(b) 5.97(b) 115.45 252
1996-Service
Shares(i)....... -- (0.3152) 0.1000 9.82 4.35(f) 0.95(b) 6.05(b) 115.45 1,822
1995-
Institutional
Shares.......... -- (0.6518) 0.1800 9.82 8.97 0.45 6.87 292.56 103,760
1995-
Administration
Shares.......... -- (0.2051) (0.0100) 9.63(h) 2.10 0.70(b) 7.91(b) 292.56 --
1994-
Institutional
Shares.......... -- (0.6036) (0.5000) 9.64 0.99 0.45 5.69 289.79 193,095
1994-
Administration
Shares.......... -- (0.5790) (0.5000) 9.64 0.73 0.70 5.38 289.79 730
1993-
Institutional
Shares.......... -- (0.5692) (0.0200) 10.14 5.55 0.45 5.46 411.66 359,708
1993-
Administration
Shares(e)....... -- (0.2725) (0.0900) 10.14 1.74(f) 0.70(b) 4.84(b) 411.66 16,490
1992-
Institutional
Shares......... -- (0.6703) (0.0600) 10.16 6.24 0.45 6.60 216.07 277,927
1991-
Institutional
Shares.......... -- (0.8020) 0.2200 10.22 10.93 0.45 8.25 155.44 158,848
1990-
Institutional
Shares.......... -- (0.8300) (0.0700) 10.00 8.23 0.45 8.62 173.21 68,995
1989-
Institutional
Shares.......... (0.0300) 0.9100 (0.0300) 10.07 9.08 0.46 8.71 137.37 31,015
FOR THE PERIOD AUGUST 15, THROUGH OCTOBER 31,
- ---------------------------------------------
1988-
Institutional
Shares.......... -- (0.1800) 0.1000 10.10 3.30(f) 0.55(b) 8.55(b) 167.00(f) 39,052
<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
-------------------------------
SHORT DURATION GOVERNMENT FUND
-------------------------------
<C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1997-
Institutional
Shares.......... 0.82% 6.06%
1997-
Administration
Shares.......... 1.07 5.82
1997-Service
Shares.......... 1.32 5.55
1997-Class A
Shares(o)....... 1.32(b) 5.43(b)
1997-Class B
Shares(o)....... 1.82(b) 5.00(b)
1997-Class C
Shares(p)....... 1.82(b) 5.15(b)
1996-
Institutional
Shares.......... 0.71 6.18
1996-
Administration
Shares(h)....... 0.96(b) 5.71(b)
1996-Service
Shares(i)....... 1.21(b) 5.79(b)
1995-
Institutional
Shares.......... 0.72 6.60
1995-
Administration
Shares.......... 0.90(b) 7.71(b)
1994-
Institutional
Shares.......... 0.59 5.55
1994-
Administration
Shares.......... 0.84 5.24
1993-
Institutional
Shares.......... 0.64 5.31
1993-
Administration
Shares(e)....... 0.80(b) 4.74(b)
1992-
Institutional
Shares......... 0.69 6.36
1991-
Institutional
Shares.......... 0.79 7.91
1990-
Institutional
Shares.......... 0.95 8.12
1989-
Institutional
Shares.......... 1.39 7.78
FOR THE PERIOD AUGUST 15, 1988(g) THROUGH OCTOBER 31,
- -----------------------------------------------------
1988-
Institutional
Shares.......... 1.42(b) 7.68(b)
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations(n)
------------------------------------------------------
Net realized Net realized
and unrealized and unrealized Total
gain (loss) gain (loss) income
Net asset on investment, on foreign (loss)
value at Net option and currency from From net
beginning investment futures related investment investment
of period income transactions transactions operations income
- --------------------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- --------------------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
<S> <C> <C> <C> <C> <C> <C>
1997-
Institutional
Shares.......... $ 9.96 $0.4181(a) $ 0.1091(a) -- $ 0.5272 $(0.4172)
1997-
Administration
Shares.......... 9.96 0.3924(a) 0.1100(a) -- 0.5024 (0.3924)
1997-Service
Shares.......... 9.97 0.3675(a) 0.1000(a) -- 0.4675 (0.3675)
1997-Class A
Shares(o)....... 9.94 0.1950(a) 0.1400(a) -- 0.3350 (0.1950)
1997-Class B
Shares(o)....... 9.94 0.1663(a) 0.1368(a) -- 0.3031 (0.1631)
1997-Class C
Shares(p)....... 10.04 0.0670(a) 0.0300(a) -- 0.0970 (0.0670)
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)
1994-
Administration
Shares.......... 10.23 0.3537(a) (0.3575)(a) -- (0.0038) (0.3537)
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
From net net realized Net
realized gain gain on increase Ratio of
on investment, In excess investment, From Total (decrease) Net asset net
option of net option and paid distributions in net value at expenses
and futures investment futures in to asset end of Total to average
transactions income transactions capital shareholders value period return(k) net assets
--------------------------------------------------------------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997-
Institutional
Shares.......... -- -- -- -- $(0.4172) $ 0.1100 $10.07 5.40% 0.45%
1997-
Administration
Shares.......... -- -- -- -- (0.3924) 0.1100 10.07 5.14 0.70
1997-Service
Shares.......... -- -- -- -- (0.3675) 0.1000 10.07 4.77 0.95
1997-Class A
Shares(o)....... -- -- -- -- (0.1950) 0.1400 10.08 3.39(f) 0.70(b)
1997-Class B
Shares(o)....... -- -- -- -- (0.1631) 0.1400 10.08 3.07(f) 1.30(b)
1997-Class C
Shares(p)....... -- -- -- -- (0.0670) 0.0300 10.07 0.97(f) 1.45(b)
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.......... (0.0825) -- -- -- (0.4612) (0.4400) 9.79 0.17 0.45
1994-
Administration
Shares.......... (0.0825) -- -- -- (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)
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
---------------------
Ratio of Net Ratio of
net assets net
investment at end Ratio of investment
income Portfolio of expenses income
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
-----------------------------------------------------------------
SHORT DURATION TAX-FREE FUND
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997-
Institutional
Shares.......... 4.18% 194.75% $ 28,821 1.23% 3.40%
1997-
Administration
Shares.......... 3.91 194.75 77 1.48 3.13
1997-Service
Shares.......... 3.66 194.75 2,051 1.73 2.88
1997-Class A
Shares(o)....... 3.81(b) 194.75(f) 4,023 1.73(b) 2.78(b)
1997-Class B
Shares(o)....... 3.31(b) 194.75(f) 106 2.23(b) 2.38(b)
1997-Class C
Shares(p)....... 2.60(b) 194.75(f) 2 2.23(b) 1.82(b)
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.
51
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations(n)
---------------------------------------------------
Net realized Net realized
and unrealized and unrealized Total
gain (loss) gain (loss) income
Net asset on investment, on foreign (loss)
value at Net option and currency from From net
beginning investment futures related investment investment
of period income transactions transactions operations income
- ----------------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- -------------------------------
1997-
Institutional
Shares.......... $ 9.85 $0.6431 $0.2282 $(0.0005) $ 0.8708 $(0.6408)
1997-
Administration
Shares.......... 9.84 0.6182 0.2380 (0.0005) 0.8557 (0.6157)
1997-Service
Shares.......... 9.86 0.5937 0.2287 (0.0005) 0.8219 (0.5919)
1997-Class A
Shares(o)....... 9.70 0.3059 0.3596 (0.0008) 0.6647 (0.3048)
1997-Class B
Shares(o)....... 9.72 0.2686 0.3695 (0.0008) 0.6373 (0.2673)
1997-Class C
Shares(p)....... 9.93 0.1118 0.1591 (0.0003) 0.2706 (0.1107)
1996-
Institutional
Shares.......... 10.00 0.6448 (0.0704) -- 0.5744 (0.6438)
1996-
Administrative
Shares(/1/)..... 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
From net net realized Net
realized gain gain on increase
on investment, In excess investment, From Total (decrease) Net asset
option of net option and paid distributions in net value at
and futures investment futures in to asset end of Total
transactions income transactions capital shareholders value period return(k)
- -----------------------------------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- ------------
1997-
Institutional
Shares.......... -- -- -- -- $(0.6408) $ 0.2300 $10.08 9.19%
1997-
Administration
Shares.......... -- -- -- -- (0.6157) 0.2300 10.07 8.92
1997-Service
Shares.......... -- -- -- -- (0.5919) 0.2300 10.09 8.65
1997-Class A
Shares(o)....... -- -- -- -- (0.3048) 0.3599 10.06 6.94(f)
1997-Class B
Shares(o)....... -- -- -- -- (0.2673) 0.3700 10.09 6.63(f)
1997-Class C
Shares(p)....... -- -- -- -- (0.1107) 0.1599 10.09 2.74(f)
1996-
Institutional
Shares.......... (0.0806) -- -- -- (0.7244) (0.1500) 9.85 5.98
1996-
Administrative
Shares(/1/)..... -- -- -- -- (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 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(d) (in 000s) net assets net assets
- -------------------------------------------------------------------------------------------------
CORE FIXED INCOME FUND
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
- ------------
1997-
Institutional
Shares.......... 0.45% 6.53% 361.27% $79,230 0.83% 6.15%
1997-
Administration
Shares.......... 0.70 6.27 361.27 6,176 1.08 5.89
1997-Service
Shares.......... 0.95 6.00 361.27 1,868 1.33 5.62
1997-Class A
Shares(o)....... 0.70(b) 6.13(b) 361.27(f) 9,336 1.33(b) 5.50(b)
1997-Class B
Shares(o)....... 1.45(b) 5.28(b) 361.27(f) 621 1.83(b) 4.90(b)
1997-Class C
Shares(p)....... 1.45(b) 4.84(b) 361.27(f) 272 1.83(b) 4.46(b)
1996-
Institutional
Shares.......... 0.45 6.51 414.20 72,061 0.83 6.13
1996-
Administrative
Shares(/1/)..... 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 6.56 382.26 55,502 0.96 6.05
FOR THE PERIOD JANUARY 5, 1994(G)
- --------------------
1994-
Institutional
Shares.......... 0.45(b) 6.48(b) 285.25 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. Total return would be reduced if a sales charge for Class A
shares or a contingent deferred sales charge for Class B and Class C
shares 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.
(o) Class A and Class B share activity commenced on May 1, 1997.
(p) Class C share activity commenced on August 15, 1997.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
52
<PAGE>
Goldman Sachs Trust--Fixed Income Funds
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------- ---------------------------------------
To the Shareholders and Board of Trustees of the Goldman Sachs Adjustable Rate
Government Fund, Goldman Sachs Short Duration Government Fund, Goldman Sachs
Short Duration Tax-Free Fund and Goldman Sachs Core Fixed Income Fund:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Adjustable Rate Government Fund, Goldman Sachs Short Duration
Government Fund, Goldman Sachs Short Duration Tax-Free Fund and Goldman Sachs
Core Fixed Income Fund (portfolios of Goldman Sachs Trust, a Delaware Business
Trust) including the statements of investments, as of October 31, 1997, 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, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of
the Goldman Sachs Adjustable Rate Government Fund, Goldman Sachs Short Duration
Government Fund, Goldman Sachs Short Duration Tax-Free Fund and Goldman Sachs
Core Fixed Income Fund as of October 31, 1997, 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, 1997
- --------------------------------------- ---------------------------------------
53
<PAGE>
VOTING RESULTS OF SPECIAL MEETING OF SHAREHOLDERS
The proposals described below were submitted to a vote of shareholders of
Goldman Sachs Trust (the "Company") at a Special Meeting of Shareholders held
on April 1, 1997 (the "Meeting"):
- --------------------------------------------------------------------------------
PROPOSAL NO. 1--ELECTION OF NINE TRUSTEES:
- --------------------------------------------------------------------------------
At the Meeting, Ashok Bakhru, David B. Ford, Douglas Grip, John McNulty, Mary
McPherson, Richard Strubel, Alan Shuch, Jackson Smart and William Springer were
elected to the Company's Board of Trustees. In electing the Trustees, the
Company's shareholders voted as follows:
<TABLE>
<CAPTION>
TRUSTEE FOR AGAINST ABSTAIN BROKER NON-VOTES
------- --------------- ------- -------------- ----------------
<S> <C> <C> <C> <C>
Ashok Bakhru............ 59,699,988.0890 0 993,484.8850 0
David B. Ford........... 59,362,764.7000 0 1,330,708.2740 0
Douglas Grip............ 59,477,956.3930 0 1,215,516.5810 0
John McNulty............ 59,362,764.7000 0 1,330,708.2740 0
Mary McPherson.......... 59,705,150.0290 0 988,322.9450 0
Richard Strubel......... 59,727,715.4610 0 965,757.5130 0
Alan Shuch.............. 59,362,764.7000 0 1,330,708.2740 0
Jackson Smart........... 59,706,199.9810 0 987,272.9930 0
William Springer........ 59,729,198.2540 0 964,274.7200 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 2--RATIFICATION OF THE SELECTION OF ARTHUR ANDERSEN LLP AS THE
INDEPENDENT ACCOUNTANTS OF THE TRUST OR THE CORPORATION FOR THE
FISCAL YEARS ENDING OCTOBER 31, 1997 AND JANUARY 31, 1998,
RESPECTIVELY:
- --------------------------------------------------------------------------------
At the Meeting, the Company's shareholders approved Proposal No. 2 as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
- --------------- -------------- -------------- ----------------
<S> <C> <C> <C>
55,747,113.1630 37,028.3220 4,909,331.4890 0
- --------------------------------------------------------------------------------
PROPOSAL NO. 4(B)--APPROVAL OF AN AMENDMENT TO THE TRUST'S DECLARATION OF TRUST
TO PERMIT INVESTMENT OF EACH FUND'S ASSETS IN ANOTHER OPEN-END
INVESTMENT COMPANY:
- --------------------------------------------------------------------------------
At the Meeting, the Company's shareholders approved Proposal No. 4(B) as
follows:
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
- --------------- -------------- -------------- ----------------
<S> <C> <C> <C>
52,375,742.4380 1,978,971.9450 6,267,663.5910 71,095.0000
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 3--APPROVAL OF AN AGREEMENT AND PLAN OF REORGANIZATION:
- --------------------------------------------------------------------------------
At the Meeting, the shareholders of each of the Company's portfolios (each, a
"Fund" and collectively, the "Funds") approved Proposal No. 3 as follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,256,266.2380 249,187.0120 0 0
G.S. Adjustable Rate
Government............. 30,840,046.7270 205,007.3510 4,029,816.1740 64,115.0000
G.S. Short Duration Tax
Free................... 2,017,550.0780 16,321.0250 527.7150 0
G.S. Core Fixed Income.. 4,761,964.9270 1,055.6280 0 0
G.S. Global Income...... 7,475,140.0900 216,569.4820 1,108,286.2630 0
G.S. Government Income.. 1,419,426.1060 19,927.7870 2,736.8010 6,980.0000
G.S. Municipal Income... 1,871,247.5330 13,820.1290 117,480.9080 0
</TABLE>
54
<PAGE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 4(A)--APPROVAL OF AN AMENDMENT TO THE FUND'S INVESTMENT
RESTRICTIONS TO PERMIT EACH FUND TO INVEST ALL ITS ASSETS IN
ANOTHER OPEN-END INVESTMENT COMPANY:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 4(A) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1230 255,529.1270 0 0
G.S. Adjustable Rate
Government............. 29,300,183.4090 738,971.8930 5,035,714.9500 64,115.0000
G.S. Short Duration Tax
Free................... 1,707,256.5030 326,614.6000 527.7150 0
G.S. Core Fixed Income.. 4,761,964.9270 1,055.6280 0 0
G.S. Global Income...... 7,338,642.1730 350,819.2200 1,110,534.4420 0
G.S. Government Income.. 1,409,107.5260 30,246.3670 2,736.8010 6,980.0000
G.S. Municipal Income... 1,850,690.6070 29,828.2390 122,029.7240 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(A)--INVESTMENT POLICY ON ISSUER DIVERSIFICATION:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(A) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1230 249,187.0120 6,342.1150 0
G.S. Adjustable Rate
Government............. 29,997,087.3250 43,548.7280 5,034,234.1990 64,115.0000
G.S. Short Duration Tax
Free................... 2,023,592.0760 1,190.2710 9,616.4710 0
G.S. Core Fixed Income.. 4,763,020.5550 0 0 0
G.S. Global Income...... 7,302,111.2200 337,094.6510 1,160,789.9640 0
G.S. Government Income.. 1,432,220.1140 3,231.1630 6,639.4170 6,980.0000
G.S. Municipal Income... 1,872,473.5900 16,237.5860 113,837.3940 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(B)--INVESTMENT POLICY ON INDUSTRY CONCENTRATION:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(B) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1230 249,187.0120 6,342.1150 0
G.S. Adjustable Rate
Government............. 29,717,448.6200 48,100.0560 5,309,321.5760 64,115.0000
G.S. Short Duration Tax
Free................... 2,023,592.0760 1,190.2710 9,616.4710 0
G.S. Core Fixed Income.. 4,763,020.5550 0 0 0
G.S. Global Income...... 7,308,203.5950 364,153.7540 1,127,638.4860 0
G.S. Government Income.. 1,435,859.2330 3,462.0620 2,769.3990 6,980.0000
G.S. Municipal Income... 1,869,373.6660 12,600.7210 120,574.1830 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(C)--INVESTMENT POLICIES ON BORROWING, MARGIN PURCHASES AND
PLEDGING ASSETS:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(C) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1230 249,187.0120 6,342.1150 0
G.S. Adjustable Rate
Government............. 29,536,226.5180 496,829.5350 5,041,814.1990 64,115.0000
G.S. Short Duration Tax
Free................... 2,024,782.3470 0 9,616.4710 0
G.S. Core Fixed Income.. 4,761,964.9270 1,055.6280 0 0
G.S. Global Income...... 7,216,046.8580 429,048.0000 1,154,900.9770 0
G.S. Government Income.. 1,382,429.7560 55,980.6910 3,680.2470 6,980.0000
G.S. Municipal Income... 1,852,339.5570 25,565.3640 124,643.6490 0
</TABLE>
55
<PAGE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(D)--INVESTMENT POLICY ON LOANS:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(D) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1230 249,187.0120 6,342.1150 0
G.S. Adjustable Rate
Government............. 29,791,225.9940 241,830.0590 5,041,814.1990 64,115.0000
G.S. Short Duration Tax
Free................... 2,024,782.3470 0 9,616.4710 0
G.S. Core Fixed Income.. 4,761,964.9270 1,055.6280 0 0
G.S. Global Income...... 7,246,088.4970 387,925.7060 1,165,981.6320 0
G.S. Government Income.. 1,418,199.0540 16,793.6490 7,097.9910 6,980.0000
G.S. Municipal Income... 1,855,997.7160 18,603.7770 127,947.0770 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(E)--INVESTMENT POLICY ON UNDERWRITING:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(E) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,499,008.6670 102.4680 6,342.1150 0
G.S. Adjustable Rate
Government............. 24,563,621.2260 203,940.9210 10,307,308.1050 64,115.0000
G.S. Short Duration Tax
Free................... 2,024,782.3470 0 9,616.4710 0
G.S. Core Fixed Income.. 4,763,020.5550 0 0 0
G.S. Global Income...... 7,277,794.5270 358,843.4350 1,163,357.8730 0
G.S. Government Income.. 1,430,965.7480 7,444.6990 3,680.2470 6,980.0000
G.S. Municipal Income... 1,848,511.9770 12,976.0140 141,060.5790 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(F)--INVESTMENT POLICY ON REAL ESTATE AND OIL AND GAS:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(F) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1230 249,187.0120 6,342.1150 0
G.S. Adjustable Rate
Government............. 24,526,695.5880 240,866.5590 10,307,308.1050 64,115.0000
G.S. Short Duration Tax
Free................... 1,990,762.3590 34,019.9880 9,616.4710 0
G.S. Core Fixed Income.. 1,125,872.4290 0 3,637,148.1260 0
G.S. Global Income...... 7,327,402.6000 291,544.8020 1,181,048.4330 0
G.S. Government Income.. 1,432,561.1600 5,849.2870 3,680.2470 6,980.0000
G.S. Municipal Income... 1,867,044.1890 15,154.4890 120,349.8920 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(G)--INVESTMENT POLICY ON COMMODITIES:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(G) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,256,266.2380 102.4680 249,084.5440 0
G.S. Adjustable Rate
Government............. 24,259,310.5330 258,550.2170 10,557,009.5020 64,115.0000
G.S. Short Duration Tax
Free................... 1,999,851.1150 34,019.9880 527.7150 0
G.S. Core Fixed Income.. 4,761,964.9270 0 1,055.6280 0
G.S. Global Income...... 7,242,067.7760 391,426.1320 1,166,501.9270 0
G.S. Government Income.. 1,402,158.5440 35,125.1420 4,807.0080 6,980.0000
G.S. Municipal Income... 1,864,355.0900 15,677.0190 122,516.4610 0
</TABLE>
56
<PAGE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(H)--INVESTMENT POLICY ON SENIOR SECURITIES:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(H) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,296.2850 7,072.4210 249,084.5440 0
G.S. Adjustable Rate
Government............. 24,588,889.6270 204,058.5000 10,281,922.1250 64,115.0000
G.S. Short Duration Tax
Free................... 2,032,680.8320 1,190.2710 527.7150 0
G.S. Core Fixed Income.. 4,763,020.5550 0 0 0
G.S. Global Income...... 7,317,507.8520 317,794.9290 1,164,693.0540 0
G.S. Government Income.. 1,369,235.2830 67,017.8840 5,837.5270 6,980.0000
G.S. Municipal Income... 1,861,721.6030 14,498.0260 126,328.9410 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(I)--INVESTMENT POLICY CONCERNING SHORT SALES OF SECURITIES:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 5(I) as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,243,445.2950 12,923.4110 249,084.5440 0
G.S. Adjustable Rate
Government............. 29,554,106.4250 236,098.2310 5,284,665.5960 64,115.0000
G.S. Short Duration Tax
Free................... 1,994,403.9380 39,467.1650 527.7150 0
G.S. Core Fixed Income.. 4,761,964.9270 0 1,055.6280 0
G.S. Global Income...... 7,221,712.5330 412,993.5060 1,165,289.7960 0
G.S. Government Income.. 1,365,080.4460 68,785.4960 8,224.7520 6,980.0000
G.S. Municipal Income... 1,839,955.6770 27,482.8450 135,110.0480 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(J)--GS SHORT DURATION GOVERNMENT FUND'S POLICY ON OPTIONS:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of GS Short Duration Government approved
Proposal No. 5(J) as follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- -------------- -------- ------------ ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1230 102.4680 255,426.6590 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 5(K)--GS SHORT DURATION GOVERNMENT FUND'S POLICY ON INVESTMENTS TO
EXERCISE CONTROL:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of GS Short Duration Fund approved Proposal
No. 5(K) as follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- -------------- ---------- ------------ ----------------
<S> <C> <C> <C> <C>
G.S. Short Duration Gov-
ernment................ 6,249,924.1030 6,444.5830 249,084.5440 0
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 6--APPROVAL OF AMENDED AND RESTATED MANAGEMENT AGREEMENTS:
- --------------------------------------------------------------------------------
At the Meeting, the Shareholders of each Fund approved Proposal No. 6 as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN BROKER NON-VOTES
---- -------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C>
G.S. Global Income...... 7,767,511.0190 285,099.7120 747,385.1040 0
G.S. Government Income.. 1,417,140.3790 20,595.5810 4,354.7340 6,980.0000
G.S. Municipal Income... 1,868,303.5900 12,832.0000 121,412.9800 0
</TABLE>
57
<PAGE>
This page is intentionally left blank
- --------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
- ------------------------------- ---------------------------------------------
- ------------------------------- ---------------------------------------------
THE GOLDMAN SACHS
FIXED INCOME FUNDS
- --------------------------------------------------------------------------------
ANNUAL REPORT
OCTOBER 31, 1997
GOLDMAN SACHS ADJUSTABLE RATEGOVERNMENT FUND
GOLDMAN SACHS SHORT DURATIONGOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS
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
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
FIA97/128K/1097
