<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
Class A Shares
Class B Shares
Class C Shares
Service Shares
Institutional Shares
Administration 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 prospectuses for the Class A, Class B, Class C, Service and
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, and the prospectus for the Administration Shares
of Goldman Sachs Adjustable Rate Government Fund, Goldman Sachs Short Duration
Government Fund, Goldman Sachs Short Duration Tax-Free Fund and Goldman Sachs
Core Fixed Income Fund, each dated March 1, 1999, as may be further amended
and/or supplemented from time to time (the "Prospectuses"). The Prospectuses may
be obtained without charge from Goldman, Sachs & Co. by calling the telephone
number, or writing to one of the addresses, listed below or from institutions
("Service Organizations") for the benefit of their customers. Goldman Sachs
Adjustable Rate Government Fund currently does not offer Class B or Class C
Shares.
The audited financial statements and related report of Arthur Andersen LLP,
independent public accountants, for each Fund contained in each Fund's 1998
annual report is incorporated herein by reference in the section "Financial
Statements." No other portions of the Fund's Annual Report are incorporated
herein by reference.
The date of this Additional Statement is March 1, 1999 (as revised May 14,
1999).
B-1
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN SACHS ASSET
Investment Adviser to Goldman Sachs MANAGEMENT INTERNATIONAL
Short Duration Tax-Free Fund, Global Income Fund
Goldman Sachs Government 133 Peterborough Court
Income Fund, Goldman Sachs London EC4A 2BB, England
Municipal Income Fund,
Goldman Sachs Core Fixed GOLDMAN, SACHS & CO.
Income Fund and Goldman Distributor
Sachs High Yield Fund 85 Broad Street
One New York Plaza New York, NY 10004
New York, New York 10004
GOLDMAN, SACHS & CO.
GOLDMAN SACHS FUNDS Transfer Agent
MANAGEMENT, L.P. 4900 Sears Tower
Investment Adviser to Goldman Sachs Chicago, Illinois 60606
Adjustable Rate Government 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
B-2
<PAGE>
TABLE OF CONTENTS
INTRODUCTION.............................................................. B-2
INVESTMENT OBJECTIVES AND POLICIES........................................ B-3
DESCRIPTION OF INVESTMENT SECURITIES AND PRACTICES........................B-10
INVESTMENT RESTRICTIONS...................................................B-56
MANAGEMENT................................................................B-59
PORTFOLIO TRANSACTIONS....................................................B-80
SHARES OF THE TRUST.......................................................B-85
NET ASSET VALUE...........................................................B-90
TAXATION..................................................................B-92
PERFORMANCE INFORMATION..................................................B-103
OTHER INFORMATION........................................................B-122
FINANCIAL STATEMENTS.....................................................B-123
OTHER INFORMATION REGARDING PURCHASES,
REDEMPTIONS, EXCHANGES AND DIVIDENDS...................................B-123
DISTRIBUTION AND SERVICE PLANS...........................................B-127
SERVICE PLAN.............................................................B-135
ADMINISTRATION PLAN......................................................B-138
APPENDIX A - (DESCRIPTION OF SECURITIES RATINGS)...........................1-A
APPENDIX B - (BUSINESS PRINCIPLES OF GOLDMAN SACHS & CO....................1-B
APPENDIX C - (STATEMENT OF INTENTION AND ESCROW AGREEMENT).................1-C
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") is an open-end management investment
company. The Trust is organized as a Delaware business trust, and is a
successor to a Massachusetts business trust that was combined with the Trust on
April 30, 1997. 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 Short Duration Government
Fund ("Short Duration Government Fund"), Goldman Sachs Short Duration Tax-Free
Fund ("Short Duration Tax-Free Fund"), Goldman Sachs Government Income Fund
("Government Income Fund"), Goldman Sachs Municipal Income Fund ("Municipal
Income Fund"), Goldman Sachs Core Fixed Income Fund ("Core Fixed Income Fund"),
Goldman Sachs Global Income Fund ("Global Income Fund") and Goldman Sachs High
Yield Fund ("High Yield Fund") (each referred to herein as a "Fund" and
collectively as the "Funds"). Each Fund other than the Global Income Fund is a
diversified, open-end management investment company. The Global Income Fund is
a non-diversified open-end management investment company. Short Duration
Government Fund, Short Duration Tax-Free Fund and Core Fixed Income Fund are
each authorized to issue six classes of shares: Class A Shares, Class B Shares,
Class C Shares, Service Shares, Institutional Shares and Administration Shares.
Government Income Fund, Municipal Income Fund, Global Income Fund and High Yield
Fund are authorized to issue five classes of shares: Class A Shares, Class B
Shares, Class C Shares, Service Shares and Institutional Shares. Adjustable
Rate Government Fund is authorized to issue four classes of shares: Class A
Shares, Service Shares, Institutional Shares and Administration 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
Short Duration Tax-Free Fund, Government Income Fund, Municipal Income Fund,
Core Fixed Income 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 "Investment Adviser" and
collectively herein as the "Investment Advisers." In addition, Goldman Sachs
serves as each Fund's distributor and transfer agent. Each Fund's custodian is
State Street Bank and Trust Company.
Because each Fund's shares may be redeemed upon request of a shareholder on
any business day at net asset value, the Funds offer greater liquidity than many
competing investments, such as certificates of deposit and direct investments in
certain securities in which the respective Fund may invest. However, 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 Prospectuses. See the
Prospectuses for a fuller description of
B-1
<PAGE>
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 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 is designed for investors who seek a high
level of current income, consistent with low volatility of principal. The Short
Duration Government Fund is designed for investors who seek a high level of
current income and secondarily, in seeking current income, may also wish to
consider the potential for capital appreciation. Both Funds are appropriate for
investors who seek the high credit quality of securities issued or guaranteed by
the U.S. government, its agencies, instrumentalities or sponsored enterprises
("U.S. Government Securities"), 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 other types of fixed-income 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 that offered by money market
funds or by bank certificates of deposit and money market accounts. However,
the Adjustable Rate and Short Duration Government Funds do not maintain a
constant net asset value per share and are subject to greater fluctuations in
the value of their shares than a money market fund. Unlike bank certificates of
deposit and money market accounts, investments in shares of the Funds are not
insured or guaranteed by any government agency. The Adjustable Rate and Short
Duration Government Funds each seek 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
B-2
<PAGE>
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 0.5
years. There is no assurance that these strategies for the Adjustable Rate
Government Fund and Short Duration Government Fund will 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 a high level of
current income, consistent with safety of principal and the high credit quality
of U.S. Government Securities, without incurring the administrative and account
burdens involved in direct investment.
Government Income Fund's overall returns are generally likely to move in
the opposite direction as interest rates. Therefore, when interest rates
decline, Government Income Fund's return is likely to increase. In exchange for
accepting a higher degree of share price fluctuation, investors have the
potential to achieve a higher return from the Government Income Fund than from
shorter-term investments.
High Current Income. Government Income Fund is designed to have a higher
-------------------
current yield than a money market fund, since it can invest in longer-term,
higher yielding securities, and may utilize certain investment techniques not
available to a money market fund. Similarly, Government Income Fund's yield is
expected to exceed that offered by bank certificates of deposit and money market
accounts. However, Government Income Fund does not maintain a constant net
asset value per share and is subject to greater fluctuation in the value of its
shares than a money market fund. Unlike bank certificates of deposit and money
market accounts, investments in shares of Government Income Fund are not insured
or guaranteed by any government agency. Government Income Fund seeks 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
B-3
<PAGE>
analyze yield spreads, implied volatility and the shape of the yield curve. In
planning the Government Income Fund's portfolio investment strategies, the
Investment Adviser is able to draw upon the economic and fixed-income research
resources of Goldman Sachs. The Investment 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 in making market timing decisions, the Investment
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 Securities 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. The Short Duration Tax-Free Fund is
designed for investors who seek a high level of current income, consistent with
relatively low volatility of principal, that is exempt from regular federal
income tax. The Municipal Income Fund is designed for investors who seek a high
level of current income that is exempt from regular federal income tax,
consistent with preservation of capital. Both Funds are appropriate for
investors who seek to invest in fixed-income securities issued by or on behalf
of states, territories and possessions of the United States (including the
District of Columbia) and the political subdivisions, agencies and
instrumentalities thereof ("Municipal Securities") and who are able to accept
greater risk with the possibility of higher returns than investors in municipal
money market funds. While municipal money market funds almost always maintain a
constant net asset value, they must meet stringent high quality credit
standards, their portfolios must be broadly diversified and their portfolio
securities must have remaining maturities of 397 days or less. An example of an
"eligible" investment for the Tax Exempt Funds is auction rate Municipal
Securities, which generally have higher yields than money market Municipal
Securities, but which typically are not eligible investments for municipal money
market funds.
In addition, unlike a municipal money market fund, the Tax Exempt Funds'
increased investment flexibility permits their portfolios to be more easily
adjusted to reflect the shape of the current yield curve as well as to respond
to anticipated developments that might affect the shape of the yield curve.
The Municipal Securities in which the Tax Exempt Funds invest will be
rated, at the time of investment, at least BBB or Baa by a nationally recognized
statistical rating organization ("NRSRO") or, if unrated, will be determined by
the Investment Adviser to be of comparable quality. The Municipal Income Fund
will have a weighted average credit quality equal to AA or Aa. Municipal
Securities rated BBB or Baa are considered medium-grade obligations with
speculative characteristics, and adverse economic conditions or changing
circumstances may weaken their issuers' capability to pay interest and repay
principal. The credit rating assigned to
B-4
<PAGE>
Municipal Securities may reflect the existence of guarantees, letters of credit
or other credit enhancement features available to the issuers or holders of such
Municipal Securities.
Investors who wish to invest in Municipal Securities may find that a mutual
fund structure offers some important advantages when compared to investing in
individual Municipal Securities, including:
. The ratings given to Municipal Securities by the rating
organizations are difficult to evaluate. For example, some
Municipal Securities with relatively low credit ratings have yields
comparable to Municipal Securities with much higher ratings. The
credit research professionals at Goldman Sachs closely follow
market events and are well positioned to judge current and expected
credit conditions of municipal issuers;
. Because of the relative inefficiency of the secondary market in
Municipal Securities, the value of an individual municipal security
is often difficult to determine. As such, investors may obtain a
wide range of different prices when asking for quotes from
different dealers. In addition, a dealer may have a large
inventory of a particular issue that it wants to reduce.
Obtaining the best overall prices can require extensive
negotiation, which is a function performed by the portfolio
manager;
. Market expertise is also an important consideration for municipal
investors, and because the Tax Exempt Funds take relatively large
positions in different securities, the Tax Exempt Funds may be able
to obtain more favorable prices in the Municipal Securities market
than investors with relatively small positions; and
. Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
designed to provide this diversification.
Core Fixed Income Fund
Core Fixed Income Fund is designed for investors seeking a total return
consisting of both income and capital appreciation that exceeds the total return
of the Lehman Brothers Aggregate Bond Index (the "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 Fund may be appropriate as part of a
balanced investment strategy consisting of stocks, bonds and cash or as a
complement to positions in other types of fixed-income investments.
The Index currently includes U.S. Government Securities and fixed-rate,
publicly issued, U.S. dollar-denominated fixed-income securities rated at least
BBB or Baa by a NRSRO. Securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions or
changing circumstances may weaken their issuers' capability to pay
B-5
<PAGE>
interest and repay principal. The securities currently included in the Index
have at least one year remaining to maturity; have an outstanding principal
amount of at least $100 million; and are issued by the following types of
issuers, with each category receiving a different weighting in the Index: U.S.
Treasury; agencies, authorities or instrumentalities of the U.S. government;
issuers of mortgage-backed securities; utilities; industrial issuers; financial
institutions; foreign issuers; and issuers of asset-backed securities. In
pursuing its investment objective, the Fund uses the Index as its performance
benchmark, but the Fund will not attempt to replicate the Index. The Fund may,
therefore, invest in securities that are not included in the Index. The Index is
a trademark of Lehman Brothers. Inclusion of a security in the Index does not
imply an opinion by Lehman Brothers as to its attractiveness or appropriateness
for investment. Although Lehman Brothers obtains factual information used in
connection with the Index from sources which it considers reliable, Lehman
Brothers claims no responsibility for the accuracy, completeness or timeliness
or such information and has no liability to any person for any loss arising from
results obtained from the use of the Index data.
Core Fixed Income Fund's overall returns are generally likely to move in
the opposite direction from interest rates. Therefore, when interest rates
decline, Core Fixed Income Fund's return is likely to increase. Conversely,
when interest rates increase, Core Fixed Income Fund's return is likely to
decline. However, the Investment Adviser believes that, given the flexibility
of managers to invest in a diversified portfolio of securities, Core Fixed
Income Fund's return is not likely to decline as quickly as that of other fixed-
income funds with a comparable average portfolio duration. In exchange for
accepting a higher degree of potential share price fluctuation, investors have
the opportunity to achieve a higher return from Core Fixed Income Fund than from
shorter-term investments.
A number of investment strategies will be used to achieve the Core Fixed
Income Fund's investment objective, including market sector selection,
determination of yield curve exposure, and issuer selection. In addition, the
Investment Adviser will attempt to take advantage of pricing inefficiencies in
the fixed-income markets. 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 Investment 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 Fund will attempt to
----------------------------------
control its exposure to interest rate risk, including overall market exposure
and the spread risk of particular sectors and securities, through active
portfolio management techniques. Core Fixed Income Fund's
B-6
<PAGE>
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 Fund's portfolio
investment strategies, the Investment Adviser is able to draw upon the economic
and fixed-income research resources of Goldman Sachs. The Investment 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 Fund's investment portfolio. In
determining Core Fixed Income Fund's investment strategy and making market
timing decisions, the Investment 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 high total return,
emphasizing current income and, to a lesser extent, opportunities for capital
appreciation. However, investing in the Fund involves certain risks, and there
is no assurance that the Fund will achieve its investment objective. The
securities in which the Fund invests will be rated, at the time of investment,
at least BBB or Baa by an NRSRO or, if unrated, will be determined by the
Investment Adviser to be of comparable quality. However, at least 50% of the
Fund's total assets will be invested in securities having a rating from an NRSRO
of AAA or Aaa at the time of investment. Securities rated BBB or Baa are
considered medium-grade obligations with speculative characteristics, and
adverse economic conditions or changing circumstances may weaken their issuers'
capability to pay interest and repay principal.
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 Investment 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 Investment 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
B-7
<PAGE>
affecting a country's currency as well as a country's fundamental economic
strength. However, there is a risk of capital depreciation as a result of
unanticipated interest rate and currency fluctuations.
Portfolio Management Flexibility. Global Income Fund is actively managed.
--------------------------------
The Fund's portfolio managers invest in countries that, in their judgment, meet
the Fund's investment guidelines and often have strong currencies and stable
economies and in securities that they believe offer favorable performance
prospects.
Relative Stability of Principal. Global Income Fund may be able to reduce
-------------------------------
principal fluctuation by investing in foreign countries with economic policies
or business cycles different from 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. The High Yield Fund is appropriate
-------------------------------------
for investors who seek a high level of current income and who also may wish to
consider the potential for capital appreciation. A number of investment
strategies are used to seek to achieve the Fund's investment objective,
including market sector selection, determination of yield curve exposure, and
issuer selection. In addition, the Investment Adviser will attempt to take
advantage of pricing inefficiencies in the fixed-income markets. 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
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
13 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 ("Standard & Poor's")
and Moody's Investors Services, Inc. ("Moody's"). 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
B-8
<PAGE>
competitive position, the strength of its balance sheet, its ability to
withstand economic downturns and its potential to generate ample cash flow to
service its debt. The ability to 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 ongoing 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. High yield bonds can deliver
---------------------------------------------
higher yields and total return 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 "Description of Investment
Securities and Practices." Different types of fixed income securities may react
differently to changes in the economy. High yield bonds, like stocks, tend to
perform best when the economy is strong, inflation is low and companies
experience healthy profits, which can lead to higher stock prices and higher
credit ratings. Government bonds are likely to appreciate more in a weaker
economy when interest rates are declining. In certain types of markets, adding
some diversification in the high yield asset class may help to increase returns
and decrease overall portfolio risk.
For high yield, non-investment grade securities, as for most investments,
there is a direct relationship between risk and return. Along with their
potential to deliver higher yields and greater capital appreciation than most
other types of fixed income securities, high yield securities are subject to
higher risk of loss, greater volatility and are considered speculative by
traditional investment standards. The most significant risk associated with
high yield securities is credit risk: the risk that the company issuing a high
yield security may have difficulty in meeting its principal and/or interest
payments on a timely basis. As a result, extensive credit research and
diversification are essential factors in managing risk in the high yield arena.
To a lesser extent, high yield bonds are also subject to interest rate risk:
when interest rates increase, the value of fixed income securities tends to
decline.
DESCRIPTION OF INVESTMENT SECURITIES AND PRACTICES
U. S. Government Securities
Each Fund may invest in U.S. Government Securities. Some U.S. Government
Securities (such as Treasury bills, notes and bonds, which differ only in their
interest rates, maturities and
B-9
<PAGE>
times of issuance) are supported by the full faith and credit of the United
States. Others, such as obligations issued or guaranteed by U.S. government
agencies, instrumentalities or sponsored enterprises, are supported either by
(a) the right of the issuer to borrow from the U.S. Treasury (such as securities
of the Student Loan Marketing Association), (b) the discretionary authority of
the U.S. government to purchase certain obligations of the issuer (such as
securities of Federal National Mortgage Association ("Fannie Mae") and Federal
Home Loan Mortgage Corporation ("Freddie Mac")) 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 suitable secondary market, such participations are regarded as illiquid.
Each Fund may also purchase U.S. Government Securities in private
placements and may invest in separately traded principal and interest components
of securities guaranteed or issued by the U.S. Treasury that 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 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.
B-10
<PAGE>
Mortgage Loans and Mortgage-Backed Securities
Adjustable Rate Government, Short Duration Government, Government Income,
Core Fixed Income, Global Income and High Yield 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").
Mortgage-Backed Securities (including CMOs, REMICs and SMBS described
below) are subject to both call risk and extension risk. Because of these
risks, these securities can have significantly greater price and yield
volatility than with traditional fixed-income 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 potential risks by investing in a
variety of Mortgage-Backed Securities and by using certain hedging techniques.
Adjustable Rate Mortgage Loans ("ARMs"). The Adjustable Rate Government
---------------------------------------
Fund will primarily, and the Short Duration Government, Government Income, Core
Fixed Income, Global Income and High Yield Funds may, invest in ARMs. 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. ARMs allow a Fund to participate in increases in
interest rates through periodic increases in the securities coupon rates.
During periods of declining interest rates, coupon rates may readjust downward
resulting in lower yields to a Fund.
B-11
<PAGE>
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.
ARMs also have the risk of prepayments. The rate of principal prepayments
with respect to ARMs has fluctuated in recent years. The value of Mortgage
Backed Securities that are structured as pass through mortgage securities that
are collateralized by ARMs are less likely to rise during periods of declining
interest rates to the same extent as fixed-rate securities. Accordingly, ARMs
may be subject to a greater rate of principal repayments in a declining interest
rate environment resulting in lower yields to a Fund. For example, if
prevailing interest rates fall significantly, ARMs could be subject to higher
prepayment rates (than if prevailing interest rates remain constant or increase)
because the availability of low fixed-rate mortgages may encourage mortgagors to
refinance their ARMs to "lock-in" a fixed-rate mortgage. On the other hand,
during periods of rising interest rates, the value of ARMs will lag behind
changes in the market rate. ARMs are also typically subject to maximum
increases and decreases in the interest rate adjustment which can be made on any
one adjustment date, in any one year, or during the life of the security. In
the event of dramatic increases or decreases in prevailing market interest
rates, the value of a Fund's investment in ARMs may fluctuate more substantially
since these limits may prevent the security from fully adjusting its interest
rate to the prevailing market rates. As with fixed-rate mortgages, ARM
prepayment rates vary in both stable and changing interest rate environments.
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
B-12
<PAGE>
bill rate, the 180-day Treasury bill rate, rates on longer-term Treasury
securities, the 11th District Federal Home Loan Bank Cost of Funds, the National
Median Cost of Funds, the one-month, three-month, six-month or one-year London
Interbank Offered Rate, the prime rate of a specific bank or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury rate,
closely mirror changes in market interest rate levels. Others, such as the 11th
District Federal Home Loan Bank Cost of Funds index, tend to lag behind changes
in market rate levels and tend to be somewhat less volatile. The degree of
volatility in the market value of each Taxable Fund's portfolio and, therefore,
in the net asset value of each Taxable Fund's shares will be a function of the
length of the interest rate reset periods and the degree of volatility in the
applicable indices.
Fixed-Rate Mortgage Loans. Generally, fixed-rate mortgage loans included
-------------------------
in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple interest
at fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed-Rate Mortgage Loans generally provide for monthly payments of
principal and interest in substantially equal installments for the term of the
mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain Fixed-Rate Mortgage Loans provide for a large final "balloon"
payment upon maturity.
Legal Considerations of Mortgage Loans. The following is a discussion of
--------------------------------------
certain legal and regulatory aspects of the mortgage loans in which the Taxable
Funds may invest. These regulations may impair the ability of a mortgage lender
to enforce its rights under the mortgage documents. These regulations may
adversely affect the Funds' investments in Mortgage-Backed Securities (including
those issued or guaranteed by the U.S. government, its agencies or
instrumentalities) by delaying the Funds' receipt of payments derived from
principal or interest on mortgage loans affected by such regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
-----------
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate proceeds of the sale of foreclosed property may not equal the
amounts owed on the Mortgage-Backed Securities.
Furthermore, courts in some cases have imposed general equitable principles
upon foreclosure generally designed to relieve the borrower from the legal
effect of default and have required lenders to undertake affirmative and
expensive actions to determine the causes for the default and the
likelihood of loan reinstatement.
2. Rights of Redemption. In some states, after foreclosure of a mortgage
--------------------
loan, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property, which right may diminish the
mortgagee's ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may also
reduce the monthly payments due under such mortgage loan, change the rate
of interest, reduce the principal balance of the loan to
B-13
<PAGE>
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.
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
U.S. Treasury in an unlimited amount.
Fannie Mae Certificates. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the U.S. Congress. Each Fannie Mae Certificate is
issued and guaranteed by Fannie Mae and represents an undivided interest in a
pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool consists of
residential mortgage loans ("Mortgage Loans") either previously owned by Fannie
Mae or purchased by it in connection with the formation of the Pool. The
Mortgage Loans may be either conventional Mortgage Loans (i.e., not insured or
guaranteed by any U.S. government agency) or Mortgage Loans that are either
insured by the FHA or guaranteed by the VA. However, the Mortgage Loans in
Fannie Mae Pools are primarily conventional Mortgage Loans. The lenders
B-14
<PAGE>
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. 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 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
B-15
<PAGE>
are a "pass-through" of the monthly interest and principal payments (including
any prepayments) made by the individual borrowers on the pooled mortgage loans,
net of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
Description of Certificates. Mortgage Pass-Throughs may be issued in one
---------------------------
or more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate.
Generally, each certificate will evidence the specified interest of the holder
thereof in the payments of principal or interest or both in respect of the
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be 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-16
<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 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.
B-17
<PAGE>
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. Government Income, Core Fixed Income, and Global Income
Funds 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 Investment 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. A Fund's
investment in SMBS may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements.
Privately Issued Mortgage-Backed Securities
The Government Income Fund, Core Fixed Income Fund, Global Income Fund and
High Yield Fund may invest in privately issued Mortgage-Backed Securities.
Privately issued Mortgage-Backed Securities are generally backed by pools of
conventional (i.e., non-government guaranteed or insured) mortgage loans.
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,
B-18
<PAGE>
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 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
B-19
<PAGE>
principal and interest due to them and will protect the senior certificate-
holders against certain losses; however, in certain circumstances the Reserve
Fund could be depleted and temporary shortfalls could result. In the event that
the Reserve Fund is depleted before the subordinated amount is reduced to zero,
senior certificate-holders will nevertheless have a preferential right to
receive current distributions from the mortgage pool to the extent of the then
outstanding subordinated amount. Unless otherwise specified, until the
subordinated amount is reduced to zero, on any distribution date any amount
otherwise distributable to the subordinate certificates or, to the extent
specified, in the Reserve Fund will generally be used to offset the amount of
any losses realized with respect to the mortgage loans ("Realized Losses").
Realized Losses remaining after application of such amounts will generally be
applied to reduce the ownership interest of the subordinate certificates in the
mortgage pool. If the subordinated amount has been reduced to zero, Realized
Losses generally will be allocated pro rata among all certificate-holders in
--- ----
proportion to their respective outstanding interests in the mortgage pool.
Alternative Credit Enhancement. As an alternative, or in addition to the
------------------------------
credit enhancement afforded by subordination, credit enhancement for Mortgage
Pass-Throughs may be provided by mortgage insurance, hazard insurance, by the
deposit of cash, certificates of deposit, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
Voluntary Advances. Generally, in the event of delinquencies in payments
------------------
on the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees
to make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
Optional Termination. Generally, the servicer may, at its option with
--------------------
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
B-20
<PAGE>
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 securitized 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.
Government Income, Core Fixed Income, Global Income and High Yield Funds
may invest in asset-backed securities. The Adjustable Rate Government Fund and
Short Duration Government Fund may only invest in asset-backed securities that
are issued or guaranteed by U.S. government agencies, instrumentalities or
sponsored enterprises. 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 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
B-21
<PAGE>
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 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
B-22
<PAGE>
securities rather than cash. Similar to zero coupon bonds and deferred interest
bonds, PIK securities are designed to give an issuer flexibility in managing
cash flow. PIK securities that are debt securities can either be senior or
subordinated debt and generally trade flat (i.e., without accrued interest). The
trading price of PIK debt securities generally reflects the market value of the
underlying debt plus an amount representing accrued interest since the last
interest payment.
Zero coupon, deferred interest, capital appreciation and PIK securities
involve the additional risk that, unlike securities that periodically pay
interest to maturity, a Fund will realize no cash until a specified future
payment date unless a portion of such securities is sold and, if the issuer of
such securities defaults, a Fund may obtain no return at all on its investment.
In addition, even though such securities do not provide for the payment of
current interest in cash, the Funds are nonetheless required to accrue income on
such investments for each taxable year and generally are required to distribute
such accrued amounts (net of deductible expenses, if any) to avoid being subject
to tax. Because no cash is generally received at the time of the accrual, a
Fund may be required to liquidate other portfolio securities to obtain
sufficient cash to satisfy federal tax distribution requirements applicable to
the Fund. A portion of the discount with respect to stripped tax-exempt
securities or their coupons may be taxable. 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.
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.
Preferred Stock, Warrants and Rights
The High Yield Fund may invest in preferred stock, warrants and rights.
Preferred stocks are securities that represent an ownership interest providing
the holder with claims on the issuer's earnings and assets before common stock
owners but after bond owners. Unlike debt securities, the obligations of an
issuer of preferred stock, including dividend and other payment obligations, may
not typically be accelerated by the holders of such preferred stock on the
occurrence of an event of default (such as a covenant default or filing of a
bankruptcy petition) or other non-compliance by
B-23
<PAGE>
the issuer with the terms of the preferred stock. Often, however, on the
occurrence of any such event of default or non-compliance by the issuer,
preferred stockholders will be entitled to gain representation on the issuer's
board of directors or increase their existing board representation. In addition,
preferred stockholders may be granted voting rights with respect to certain
issues on the occurrence of any event of default.
Warrants and other rights are options to buy a stated number of shares of
common stock at a specified price at any time during the life of the warrant.
The holders of warrants and rights have no voting rights, receive no dividends
and have no rights with respect to the assets of the issuer.
Corporate Debt Obligations
Government Income, Core Fixed Income, Global Income and High Yield Funds
may invest in corporate debt obligations, including obligations of industrial,
utility and financial issuers. Corporate debt obligations include bonds, notes,
debentures and other obligations of corporations to pay interest and repay
principal. 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. 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. High Yield Fund may invest in bonds rated BB or
---------------------
below by Standard & Poor's or Ba or below by Moody's (or comparable rated and
unrated securities). These bonds 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
B-24
<PAGE>
may be highly speculative, have poor prospects for reaching investment grade
standing and be in default. As a result, investment in such bonds will entail
greater risks than those associated with investment grade bonds (i.e., bonds
rated AAA, AA, A or BBB by Standard 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. ("Fitch IBCA") 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 are often highly
leveraged, and may not be able to make use of more traditional methods of
financing. 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 high yield,
fixed-income securities is the supply and demand for similarly rated securities.
In addition, the prices of fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in the 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
B-25
<PAGE>
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. In addition, the High Yield Fund may incur additional expenses to
the extent that it is required to seek recovery relating to the default in the
payment of principal or interest on such securities or otherwise protect its
interests. The High Yield Fund may be required to liquidate other portfolio
securities to satisfy the High Yield Fund's annual distribution obligations in
respect of accrued interest income on securities which are subsequently written
off, even though the High Yield Fund has not received any cash payments of such
interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace such
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if the High Yield Fund experiences net redemptions of
its 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.
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.
B-26
<PAGE>
Investments in non-investment grade and comparable unrated obligations will be
more dependent on the Investment Adviser's credit analysis than would be the
case with investments in investment-grade debt obligations. The Investment
Adviser employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Investment Adviser continually monitors the
investments in 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.
Because the market for high yield securities is still relatively new and
has not weathered a major economic recession, it is unknown what effects such a
recession might have on such securities. A widespread economic downturn could
result in increased defaults and losses.
Bank Obligations
Government Income, Core Fixed Income, Global Income and High Yield Funds
may each invest in obligations issued or guaranteed by U.S. and foreign banks
(Government Income Fund may only invest in U.S. dollar denominated securities).
Bank obligations, including without limitation time deposits, bankers'
acceptances and certificates of deposit, may be general obligations of the
parent bank or may be obligations only of the issuing branch pursuant to the
terms of the specific obligations or government regulation.
Banks are subject to extensive governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. Foreign banks are subject to different regulations and are
generally permitted to engage in a wider variety of activities than U.S. banks.
In addition, the profitability of the banking industry is largely dependent upon
the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic conditions
as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
B-27
<PAGE>
Municipal Securities
Short Duration Tax-Free, Government Income, Municipal Income, Core Fixed
Income and High Yield Funds may invest in Municipal Securities, the interest on
which is exempt from regular federal income tax (i.e., excluded from gross
income for federal income tax purposes 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 Investment Adviser, excluded from gross income for
federal income tax purposes. Short Duration Tax-Free, Government Income,
Municipal Income, Core Fixed Income and High Yield 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. The Short Duration Tax-Free,
Municipal Income, Core Fixed Income and High Yield Funds may also invest in
taxable Municipal Securities.
Municipal Securities are often issued to obtain funds for various public
purposes including refunding outstanding obligations, obtaining funds for
general operating expenses, and obtaining funds to lend to other public
institutions and facilities. Municipal Securities also include certain "private
activity bonds" or industrial development bonds, which are issued by or on
behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest, although the characteristics and enforcement of general obligations
may vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer, and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer of a
revenue obligation may be backed by a letter of credit, guarantee or insurance.
General obligations and revenue obligations may be issued in a variety of forms,
including commercial paper, fixed, variable and floating rate securities, tender
option bonds, auction rate bonds and zero coupon bonds, deferred interest bonds
and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a
variety of hybrid and special types of Municipal 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 Investment 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.
B-28
<PAGE>
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as Short Duration Tax-Free, Government
Income, Municipal Income, Core Fixed Income and High Yield 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 credit rating assigned to Municipal Securities may reflect the
existence of guarantees, letters of credit or other credit enhancement features
available to the issuers or holders of such Municipal Securities.
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.
While the Municipal Income Fund and Short Duration Tax-Free Fund, under
normal market conditions, invest substantially all of their assets in Municipal
Securities, the recognition of certain accrued market discount income (if the
Funds acquire Municipal Securities or other obligations at a market discount),
income from investments other than Municipal Securities and any capital gains
generated from the disposition of investments, will result in taxable income.
In addition to federal income tax, shareholders may be subject to state, local
or foreign taxes on distributions of such income received from the Funds.
Municipal Leases, Certificates of Participation and Other Participation
------------------------------------------------------------------------
Interests. Short Duration Tax-Free, Government Income, Municipal Income, Core
- ---------
Fixed Income and High Yield Funds may invest in municipal leases, certificates
of participation and other participation interests. A municipal lease is an
obligation in the form of a lease or installment purchase which is issued by a
state or local government to acquire equipment and facilities. Income from such
obligations is generally exempt from state and local taxes in the state of
issuance. Municipal leases frequently involve special risks not normally
associated with general obligations or revenue bonds. Leases and installment
purchase or conditional sale contracts (which normally provide for title to the
leased asset to pass eventually to the governmental issuer) have evolved as a
means for governmental issuers to acquire property and equipment without meeting
the constitutional and statutory requirements for the issuance of debt. The
debt issuance limitations are deemed to be inapplicable because of the inclusion
in many leases or contracts of "non-appropriation" clauses that relieve the
governmental issuer of any obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on a yearly or other periodic basis. In addition, such leases
or contracts may be subject to the temporary abatement of payments in the event
the issuer is prevented from maintaining occupancy of the leased premises or
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
B-29
<PAGE>
foreclosure might prove difficult, time consuming and costly, and result in a
delay in recovering or the failure to fully recover a Fund's original
investment. To the extent that a Fund invests in unrated municipal leases or
participates in such leases, the credit quality rating and risk of cancellation
of such unrated leases will be monitored on an ongoing basis.
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 Investment 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 Investment
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 Investment 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.
Short Duration Tax-Free, Municipal Income, Core Fixed Income and High Yield
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 Investment Adviser, the interest from such
participations is exempt from regular federal income tax.
Municipal Notes. Municipal Securities in the form of notes generally are
---------------
used to provide for short-term capital needs, in anticipation of an issuer's
receipt of other revenues or financing, and typically have maturities of up to
three years. Such instruments may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and revenue 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-
B-30
<PAGE>
term bonds then provide the funds needed for repayment of the notes. Tax and
revenue anticipation notes combine the funding sources of both tax anticipation
notes and revenue anticipation notes. Construction Loan Notes are sold to
provide construction financing. These notes are secured by mortgage notes
insured by the FHA; however, the proceeds from the insurance may be less than
the economic equivalent of the payment of principal and interest on the mortgage
note if there has been a default. The obligations of an issuer of municipal
notes are generally secured by the anticipated revenues from taxes, grants or
bond financing. An investment in such instruments, however, presents a risk that
the anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or that
refinancing will be otherwise unavailable.
Tax-Exempt Commercial Paper. Issues of commercial paper typically
---------------------------
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by state and local governments and their agencies to finance working
capital needs of municipalities or to provide interim construction financing and
are paid from general revenues of municipalities or are refinanced with long-
term debt. In most cases, tax-exempt commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
Pre-Refunded Municipal Securities. The principal of and interest on pre-
---------------------------------
refunded Municipal Securities are no longer paid from the original revenue
source for the securities. Instead, the source of such payments is typically an
escrow fund consisting of U.S. Government Securities. The assets in the escrow
fund are derived from the proceeds of refunding bonds issued by the same issuer
as the pre-refunded Municipal Securities. Issuers of Municipal Securities use
this advance refunding technique to obtain more favorable terms with respect to
securities that are not yet subject to call or redemption by the issuer. For
example, advance refunding enables an issuer to refinance debt at lower market
interest rates, restructure debt to improve cash flow or eliminate restrictive
covenants in the indenture or other governing instrument for the pre-refunded
Municipal Securities. However, except for a change in the revenue source from
which principal and interest payments are made, the pre-refunded Municipal
Securities remain outstanding on their original terms until they mature or are
redeemed by the issuer. Pre-refunded Municipal Securities are usually purchased
at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free, Municipal Income, Core
----------------------
Fixed Income and High Yield Funds may each invest in certain types of Municipal
Securities, generally referred to as industrial development bonds (and referred
to under current tax law as private activity bonds), which are issued by or on
behalf of public authorities to obtain funds to provide privately operated
housing facilities, airport, mass transit or port facilities, sewage disposal,
solid waste disposal or hazardous waste treatment or disposal facilities and
certain local facilities for water supply, gas or electricity. Other types of
industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such
issues. A Tax Exempt Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fixed Income Fund's distributions of any tax-exempt interest it
receives from any source will be taxable for regular federal income tax
purposes.
B-31
<PAGE>
Tender Option Bonds. A tender option bond is a Municipal Security
-------------------
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term, tax-exempt rates. The bond is typically issued with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, which grants the security holders the option, at periodic
intervals, to tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the securities,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults or a significant downgrade in the credit
rating assigned to the issuer of the bond. The liquidity of a tender option bond
is a function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Investment 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 Investment Adviser, be
exempt from regular federal income tax. However, because there can be no
assurance that the Internal Revenue Service (the "IRS") 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. Short Duration Tax-Free, Municipal Income, Core
-----------------------
Fixed Income and High Yield 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. A Fund will take the time remaining until the next
scheduled auction date into account for purpose of determining the securities'
duration.
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
B-32
<PAGE>
tax purposes and the closed-end fund complies with certain tests under the
Internal Revenue Code of 1986, as amended (the "Code").
A Fund's investments in auction rate securities of closed-end funds are
subject to the limitations prescribed by the Act and certain state securities
regulations. The Funds will indirectly bear their proportionate share of any
management and other fees paid by such closed-end funds in addition to the
advisory fees payable directly by the Funds.
Insurance. Short Duration Tax-Free, Government Income, Municipal Income,
---------
Core Fixed Income and High Yield 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 (non-
governmental) 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.
Short Duration Tax-Free, Municipal Income, Core Fixed Income and High Yield
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 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
B-33
<PAGE>
Fund's quality standards, the particular Tax Exempt Fund will look to the
creditworthiness of the party providing the Fund with the right to sell as well
as the quality of the security itself.
The Tax Exempt Funds value Municipal Securities which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining a Tax Exempt
Fund's net asset value. The cost of a standby commitment is carried as
unrealized depreciation from the time of purchase until it is exercised or
expires. Since the value of a standby commitment is dependent on the ability of
the standby commitment writer to meet its obligation to repurchase, a Tax Exempt
Fund's policy is to enter into standby commitment transactions only with banks,
brokers or dealers which present a minimal risk of default.
The Investment Adviser understands that the IRS 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 IRS 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.
B-34
<PAGE>
Foreign Investments
Core Fixed Income, Global Income and High Yield Funds may invest in
securities of foreign issuers and in fixed-income securities quoted or
denominated in a currency other than U.S. dollars. Investment in foreign
securities may offer potential benefits that are not available from investing
exclusively in U.S. dollar-denominated domestic issues. Foreign countries may
have economic policies or business cycles different from those of the U.S. and
markets for foreign fixed-income securities do not necessarily move in a manner
parallel to U.S. markets. Investing in the securities of foreign issuers also
involves, however, 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 Core Fixed Income, Global Income and High Yield 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. To the extent that a Fund is fully invested in
foreign securities while also maintaining currency positions, it may be exposed
to greater combined risk. A Fund also may be subject to currency exposure
independent of its securities positions. While the Global Income Fund will have
both long and short currency positions, its net long and short foreign currency
exposure will not exceed the value of the Fund's total assets.
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.
For example, there may be no comparable provisions under certain foreign laws to
insider trading and similar investor protection securities
B-35
<PAGE>
laws that apply with respect to securities transactions consummated in the
United States. Mail service between the United States and foreign countries may
be slower or less reliable than within the United States, thus increasing the
risk of delayed settlement of portfolio transactions or loss of certificates for
portfolio securities.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of Core Fixed Income, Global Income or High
Yield Fund is uninvested and no return is earned on such assets. The inability
of Core Fixed Income, Global Income or High Yield 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, Global
Income or High Yield Income Fund due to subsequent declines in value of the
portfolio securities, or, if Core Fixed Income, Global Income or High Yield 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. Of the Core Fixed Income, Global Income and High
----------------------
Yield Funds investments in foreign securities, 10%, 10% and 25% of their
respective total assets may be invested in emerging countries. Investment in
debt securities of emerging country issuers involve special risks. The
development of a market for such securities is a relatively recent phenomenon
and debt securities of most emerging country issuers are less liquid and are
generally subject to greater price volatility than securities of issuers in the
United States and other developed countries. In certain countries, there may be
few publicly traded securities, and the market may be dominated by a few issuers
or sectors. The markets for securities of emerging countries may have
substantially less volume than the market for similar securities in the United
States 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 a 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.
A Fund's purchase and sale of portfolio securities in certain emerging
countries may be constrained by limitations as to daily changes in the prices of
listed securities, periodic trading or settlement volume and/or limitations on
aggregate holdings of foreign investors. Such limitations
B-36
<PAGE>
may be computed based on the aggregate trading volume by or holdings of a Fund,
the Investment Adviser, its affiliates and their respective clients and other
service providers. A Fund may not be able to sell securities in circumstances
where price, trading or settlement volume limitations have been reached.
Securities markets of emerging countries may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and 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 a Fund due to subsequent
declines in value of the portfolio security or, if a Fund has entered into a
contract to sell the security, could result in possible liability of a Fund to
the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in
emerging countries may be higher than in the U.S. and other developed securities
markets. As legal systems in emerging countries 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.
With respect to investments in certain emerging countries, archaic legal
systems may have an adverse impact on a Fund. For example, while the potential
liability of a shareholder in a U.S. corporation with respect to acts of the
corporation is generally limited to the amount of the shareholder's investment,
the notion of limited liability is less clear in certain emerging countries.
Similarly, the rights of investors in emerging country companies may be more
limited than those of shareholders of U.S. corporation.
Economic, Political and Social Factors. Emerging countries may be subject
--------------------------------------
to a greater degree of economic, political and social instability than the
United States, Japan and most Western European countries, and unanticipated
political and social developments may affect the value of a Fund's investments
in emerging countries and the availability to the Fund of additional investments
in such countries. Moreover, political and economic structures in many emerging
countries may be undergoing significant evolution and rapid development.
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; (v) ethnic, religious and racial disaffection and
conflict; and (vi) the absence of developed legal structures governing foreign
private property. Many emerging countries 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
countries 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 countries 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
B-37
<PAGE>
payments position. To the extent a Fund invests in an issuer located (1) in a
country which was formerly part of Yugoslavia, (2) in a country that shares a
border with the former country of Yugoslavia, (3) in a country which is a member
of the North Atlantic Treaty Organization ("NATO"), or (4) in other countries in
Europe, such Fund could suffer investment losses as a result of the recent
conflict between Serbia and the members of NATO. The NATO bombing campaign and
proposed oil embargo (if implemented) could adversely affect a Fund's
investments. The extent to which this conflict may broaden and involve other
countries such as Russia is unpredictable, and the impact this conflict may have
on a Fund is uncertain.
Restrictions on Investment and Repatriation. Certain emerging countries
-------------------------------------------
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 countries is subject to certain governmental consents. Even
where there is no outright restriction on repatriation of capital, the mechanics
of repatriation may affect the operation of a Fund.
Sovereign Debt Obligations. Investments in sovereign debt obligations
--------------------------
involve 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 countries 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.
Brady Bonds. Certain foreign debt obligations, customarily referred to as
-----------
"Brady Bonds," are created through the exchange of existing commercial bank
loans to foreign entities for new obligations in connection with debt
restructuring under a plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the "Brady Plan"). Brady Bonds may be fully or partially
collateralized or uncollateralized and issued in various currencies (although
most are U.S. dollar denominated). In the event of a default on collateralized
Brady Bonds for which obligations are accelerated, the collateral for the
payment of principal will not be distributed to investors, nor will
B-38
<PAGE>
such obligations be sold and the proceeds distributed. The collateral will be
held by the collateral agent to the scheduled maturity of the defaulted Brady
Bonds, which will continue to be outstanding, at which time the face amount of
the collateral will equal the principal payments which would have then been due
on the Brady Bonds in the normal course. In light of the residual risk of the
Brady Bonds, and among other factors, the history of default with respect to
commercial bank loans by public and private entities of countries issuing Brady
Bonds, investments in Brady Bonds may be speculative.
Forward Foreign Currency Exchange Contracts. Core Fixed Income, Global
-------------------------------------------
Income and High Yield 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, Core Fixed Income, Global Income
Fund or High Yield Fund may either accept or make delivery of the currency
specified in the contract or, at or prior to maturity, enter into a closing
purchase transaction involving the purchase or sale of an offsetting contract.
Closing purchase transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract.
Core Fixed Income, Global Income or High Yield Fund may enter into forward
foreign currency exchange contracts in several circumstances. First, when a
Fund enters into a contract for the purchase or sale of a security quoted or
denominated in a foreign currency, or when a Fund anticipates the receipt in a
foreign currency of a dividend or interest payment on such a security which it
holds, a Fund may desire to "lock in" the U.S. dollar price of the security or
the U.S. dollar equivalent of such dividend or interest payment, as the case may
be. By entering into a forward contract for the purchase or sale, for a fixed
amount of U.S. dollars, of the amount of foreign currency involved in the
underlying transactions, a Fund may attempt to protect itself against an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date on which the security is purchased
or sold, or on which the dividend or interest payment is declared, and the date
on which such payments are made or received.
Additionally, when the Investment 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
B-39
<PAGE>
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.
Core Fixed Income, Global Income and High Yield Funds may engage in cross-
hedging by using forward contracts in one currency to hedge against fluctuations
in the value of securities denominated or quoted in a different currency if the
Investment Adviser determines that there is a pattern of correlation between the
two currencies.
Unless otherwise covered, cash or liquid assets will be segregated 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. The segregated assets will be marked-to-market. If the
value of the segregated assets declines, additional liquid assets will be
segregated so that the value will equal the amount of the Fund's commitments
with respect to such contracts. Although the contracts are not presently
regulated by the Commodity Futures Trading 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. 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 Core Fixed Income, Global 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 the 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 a Fund. Such imperfect
correlation may cause the Fund to sustain losses which will prevent the Fund
from achieving a complete hedge or expose the Fund to risk of foreign exchange
loss.
Markets for trading forward foreign currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. 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 forward foreign currency exchange contracts, unless
the credit quality of the unsecured senior debt or the claims-paying ability of
the counterparty is considered to be investment grade by the Investment Adviser.
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.
B-40
<PAGE>
Interest Rate Swaps, Mortgage Swaps, Credit Swaps, Currency Swaps and Interest
Rate Caps, Floors and Collars
Each Fund may enter into interest rate swaps, credit swaps, caps, floors
and collars. In addition, Adjustable Rate Government, Short Duration
Government, Government Income, Core Fixed Income, Global Income and High Yield
Funds may enter into mortgage swaps; and Core Fixed Income, High Yield and
Global Income Funds may 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. Credit swaps involve the receipt of floating or fixed
rate payments in exchange for assuming potential credit losses of an underlying
security. Credit swaps give one party to a transaction the right to dispose of
or acquire an asset (or group of assets), or the right to receive or make a
payment from the other party, upon the occurrence of specified credit events.
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, credit 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 a Fund's potential exposure in a transaction
involving a swap or an interest rate floor, cap or collar is covered by the
segregation of cash or liquid assets, the Funds and its Investment Adviser
believes 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.
B-41
<PAGE>
The Funds will not enter into any interest rate, mortgage or credit swap
transactions unless the unsecured commercial paper, senior debt or claims-paying
ability of the other party is rated either A or A-1 or better by Standard &
Poor's or A or P-1 or better by Moody's or their equivalent ratings. Core Fixed
Income, Global Income and High Yield Funds will not enter into any currency swap
transactions unless the unsecured commercial paper, senior debt or claims-paying
ability of the other party thereto is rated investment grade by Standard &
Poor's or Moody's, or, if unrated by such rating organization, determined to be
of comparable quality by the Investment Adviser. 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 Adviser, under the supervision of the
Board of Trustees, is responsible for determining and monitoring the liquidity
of the Funds' transactions in swaps, caps, floors and collars.
The use of interest rate, mortgage, credit and currency swaps, as well as
interest rate caps, floors and collars, is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Investment 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 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 will segregate cash or liquid
assets with a value at least equal to the exercise price of the put option or
will use the other methods described below. 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.
B-42
<PAGE>
All call and put options written by a Fund are covered. A written call
option or put option may be covered by (i) segregating cash or liquid assets, as
permitted by applicable law, either of which, in the case of Core Fixed Income,
Global Income Fund or High Yield Fund, may be quoted or denominated in any
currency, 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 that is
segregated) upon conversion or exchange of other securities in its portfolio.
The Funds may also cover call and put options on a securities index by
segregating cash or liquid assets, as permitted by applicable law, with a value
equal to the exercise price or by using the other methods described above.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The use of options to seek to
increase total return involves the risk of loss if the Investment Adviser is
incorrect in its expectation of fluctuations in securities prices or interest
rates. The successful use of options for hedging purposes also depends in part
on the ability of the Investment Adviser to predict future price fluctuations
and the degree of correlation between the options and securities markets. If
the Investment Adviser is incorrect in its expectation of changes in securities
prices or determination of the correlation between the securities indices on
which options are written and purchased and the securities in a Fund's
investment portfolio, the investment performance of the Fund will be less
favorable than it would have been in the absence of such options transactions.
The writing of options could increase a Fund's portfolio turnover rate and,
therefore, associated brokerage commissions or spreads.
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
B-43
<PAGE>
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 may 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.
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 U.S. dollar value of foreign portfolio securities and
against increases in the U.S. dollar cost of foreign 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. As with other kinds of option
transactions, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received. If
an option that a Fund has written is exercised, the Fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against exchange rate fluctuations; however, in the event of
exchange rate movements adverse to a Fund's position, the Fund may forfeit the
entire amount of the premium plus related transaction costs. In addition, Core
Fixed Income, Global Income and High Yield Funds may purchase call options on
currency to seek to increase total return.
A call option written by Core Fixed Income, Global Income or High Yield
Fund obligates the Fund to sell specified currency to the holder of the option
at a specified price if the option is exercised at
B-44
<PAGE>
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 may 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; 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 the
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. Core Fixed Income, Global Income and High Yield
Funds 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, Core Fixed Income, Global Income and High Yield Funds may forego the
opportunity to profit from an increase in the market value of the underlying
currency. Also, when writing put options, Core Fixed Income, Global Income and
High Yield 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.
Core Fixed Income, Global Income and High Yield Funds would normally
purchase call options to seek to increase total return in anticipation of an
increase in the market value of a currency. Core Fixed Income, Global Income
and High Yield Funds would ordinarily realize a gain
B-45
<PAGE>
if, during the option period, the value of such currency exceeded the sum of the
exercise price, the premium paid and transaction costs. Otherwise Core Fixed
Income, Global Income and High Yield Funds would realize either no gain or a
loss on the purchase of the call option. Put options may be purchased by the
Core Fixed Income, Global Income and High Yield Funds for the purpose of
benefiting from a decline in the value of currencies which it does not own. Core
Fixed Income, Global Income and High Yield 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, Core Fixed Income, Global Income and High Yield
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 Investment 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 segregates 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 the trading
markets for these options may not be as developed as the market for other types
of options.
Risks Associated with Options Transactions. There is no assurance that a
------------------------------------------
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
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
B-46
<PAGE>
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, but are not limited to, 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 a Fund in options will be subject to limitations
established by each of the exchanges, boards of trade or other trading
facilities on which such options are traded governing the maximum number of
options in each class which may be written or purchased by a single investor or
group of investors acting in concert regardless of whether the options are
written or purchased on the same or different exchanges, boards of trade or
other trading facilities or are held or written in one or more accounts or
through one 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 Adviser. 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.
Futures Contracts and Options on Futures Contracts
Each Fund (with the exception of the Municipal Income 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. Each 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. 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. Neither the CFTC, National Futures Association nor any
domestic exchange regulates activities of any foreign
B-47
<PAGE>
exchange or boards of trade, including the execution, delivery and clearing of
transactions, or has the power to compel enforcement of the rules of a foreign
exchange or board of trade or any applicable foreign law. This is true even if
the exchange is formally linked to a domestic market so that a position taken on
the market may be liquidated by a transaction on another market. Moreover, such
laws or regulations will vary depending on the foreign country in which the
foreign futures or foreign options transaction occurs. For these reasons,
persons who trade foreign futures or foreign options contracts may not be
afforded certain of the protective measures provided by the Commodity Exchange
Act, the CFTC's regulations and the rules of the National Futures Association
and any domestic exchange, including the right to use reparations proceedings
before the CFTC and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, a Fund's
investments in foreign futures or foreign options transactions may not be
provided the same protections in respect of transactions on United States
futures 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 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
B-48
<PAGE>
Fund's portfolio securities. Similarly, Core Fixed Income, Global Income and
High Yield Funds 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 Investment Adviser, 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 Investment Adviser 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, 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, 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.
B-49
<PAGE>
Other Considerations. A 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.
In addition to bona fide hedging, a CFTC regulation permits a Fund 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 Code for maintaining their qualifications as regulated
investment companies for federal income tax purposes.
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
segregate 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.
The profitability of a Fund's trading in futures depends upon the ability
of the Investment Adviser to analyze correctly the futures markets.
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
B-50
<PAGE>
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
Investment 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
The Core Fixed Income and High Yield Funds may invest in convertible
securities. Convertible securities include corporate notes or preferred stock
but are ordinarily long-term debt obligations of the issuer convertible at a
stated exchange rate into common stock of the issuer. As with all debt
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates decline.
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion price,
the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock.
Unlike debt securities, the obligations of an issuer of preferred stock,
including dividend and other payment obligations, may not typically be
accelerated by the holders of preferred stock on the occurrence of an event of
default (such as a covenant default or filing of a bankruptcy petition) or other
non-compliance by the issuer with the terms of the preferred stock. Often,
however, on the occurrence of any such event of default or non-compliance by the
issuer, preferred stockholders will
B-51
<PAGE>
be entitled to gain representation on the issuer's board of directors or
increase their existing board representation. In addition, preferred
stockholders may be granted voting rights with respect to certain issues on the
occurrence of any event of default.
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 Investment Adviser to
be of good standing, and when, in the judgment of the applicable Investment
Adviser, the consideration which can be earned currently from securities loans
of this type justifies the attendant risk. If an Investment 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
(including the loan collateral).
Restricted and Illiquid Securities
Each Fund may purchase securities that are not registered or that are
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 include repurchase agreements with a notice or
demand period of 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 Securities are liquid. Certain commercial paper issued in
reliance on Section 4(2) of the 1933 Act is treated like Rule 144A Securities.
The Trustees have adopted guidelines and delegated to the Investment 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
B-52
<PAGE>
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 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 segregate, 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.
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 Investment
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 Investment Adviser or any of
its affiliates acts as Investment Adviser, the management fees payable by the
Fund to the Investment 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
Investment Adviser or its affiliates.
Core Fixed Income, Global Income and High Yield 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. Core Fixed
Income, Global Income and High Yield Funds may invest in World Equity
B-53
<PAGE>
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. In the case of Core Fixed
Income, Global Income and High Yield Funds, these repurchase agreements may
involve foreign government securities. 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 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.
The applicable Investment 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 Investment 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.
B-54
<PAGE>
Reverse Repurchase Agreements
Each Fund may borrow money by entering into transactions called reverse
repurchase agreements. Under these arrangements, a Fund will sell portfolio
securities to dealers in U.S. Government Securities or members of the Federal
Reserve System, with an agreement to repurchase the security on an agreed date,
price and interest payment. In the case of Core Fixed Income, Global Income and
High Yield Funds, these reverse repurchase agreements may involve foreign
government securities. Reverse repurchase agreements involve the possible risk
that the value of portfolio securities a Fund relinquishes may decline below the
price a Fund must pay when the transaction closes. Borrowings may magnify the
potential for gain or loss on amounts invested resulting in an increase in the
speculative character of a Fund's outstanding shares.
When a Fund enters into a reverse repurchase agreement, it places in a
separate custodial account either liquid assets or other high grade debt
securities that have a value equal to or greater than the repurchase price. The
account is then continuously monitored by the Investment Adviser to make sure
that an appropriate value is maintained. Reverse repurchase agreements are
considered to be borrowings under the Act.
Non-Diversified Status
Since Global Income Fund is "non-diversified" under the Act, it is subject
only to certain federal tax diversification requirements. Under federal tax
laws, Global Income Fund may, with respect to 50% of its total assets, invest up
to 25% of its total assets in the securities of any issuer (except that this
limitation does not apply to U.S. Government Securities). With respect to the
remaining 50% of the Fund's total assets, (1) the Fund may not invest more than
5% of its total assets in the securities of any one issuer (other than the U.S.
Government), and (2) the Fund may not acquire more than 10% of the outstanding
voting securities of any one issuer. These tests apply at the end of each
quarter of its taxable year and are subject to certain conditions and
limitations under the Code.
Portfolio Turnover
Each Fund may engage in active short-term trading to benefit from yield
disparities among different issues of securities or among the markets for fixed-
income securities, or for other reasons. It is anticipated that the portfolio
turnover rate of each Fund will vary from year to year.
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 of the outstanding voting securities (as defined in the
Act) 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 their respective net assets in Municipal Securities, are
considered by the Trust not to be fundamental and accordingly may be changed
without shareholder approval. As defined in the Act,
B-55
<PAGE>
"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 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 Investment 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 Act. This restriction does not,
however, apply to any Fund classified as a non-diversified company
under the Act;
(2) Invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents.) This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in Municipal Securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other Municipal Securities. These Municipal Securities
include (a) Municipal Securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities; (b) Municipal Securities whose issuers are in the same
state; and (c) industrial development obligations;
(3) Borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% of its total assets (including the amount borrowed); (b)
the Fund may, to the extent
B-56
<PAGE>
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 Fund, purchase, hold or
deal in real estate, although a Fund may purchase and sell
securities that are secured by real estate or interests therein,
securities of real estate investment trusts and mortgage-related
securities and may hold and sell real estate acquired by a Fund as a
result of the ownership of securities;
(6)(b) In the case of Core Fixed Income Fund, purchase, hold or deal in
real estate (including real estate limited partnerships) or oil, gas
or mineral leases, although the Fund may purchase and sell
securities that are secured by real estate or interests therein, may
purchase mortgage-related securities and may hold and sell real
estate acquired by the Fund as a result of the ownership of
securities;
(7) Invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts that
are commodities or commodity contracts; 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 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.
B-57
<PAGE>
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 with a notice or demand
period of 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; or
(4) Make short sales of securities, except short sales against-the-box.
MANAGEMENT
The Trustees of the Trust are responsible for deciding matters of general
policy and reviewing the actions of the Investment Advisers, distributor and
transfer agent. The officers of the Trust conduct and supervise each Fund's
daily business operations.
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees and officers deemed to be "interested persons" of the
Trust for purposes of the Act are indicated by an asterisk.
B-58
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
Ashok N. Bakhru, 57 Chairman Chairman of the Board and Trustee -
P.O. Box 143 & Trustee Goldman Sachs Variable Insurance Trust
Lima, PA 19037 (registered investment company) (since
October 1997); President, ABN Associates
(July 1994 -March 1996 and November 1998
to present); Executive Vice President -
Finance and Administration and Chief
Financial Officer, Coty Inc.
(manufacturer of fragrances and
cosmetics) (April 1996-November 1998);
Senior Vice President of Scott Paper
Company (until June 1994); Director of
Arkwright Mutual Insurance Company
(1994-Present); Trustee of International
House of Philadelphia (1989-Present);
Member of Cornell University Council
(1992-Present); Trustee of the Walnut
Street Theater (1992-Present);Director,
Private Equity Investors - III (since
November 1998); Trustee, Citizens
Scholarship Foundation of America (since
1998).
</TABLE>
B-59
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
*David B. Ford, 53 Trustee Trustee-Goldman Sachs Variable Insurance
One New York Plaza Trust (registered investment company)
New York, NY 10004 (since October 1997); Director,
Commodities Corp. LLC (futures and
commodities traders) (since April 1997);
Managing Director, J. Aron & Company
(commodity dealer and risk management
adviser) (since November 1996); Managing
Director, Goldman Sachs & Co. Investment
Banking Division (since November 1996);
Chief Executive Officer and Director,
CIN Management (investment adviser)
(since August 1996); Chief Executive
Officer & Managing Director and
Director, Goldman Sachs Asset Management
International (since November 1995 and
December 1994, respectively); Co-Head,
Goldman Sachs Asset Management Division
(since November 1995); Co-Head and
Director, Goldman Sachs Funds Management
Inc. (since November 1995 and December
1994, respectively); and Chairman and
Director, Goldman Sachs Asset Management
Japan Limited (since November 1994).
*Douglas C. Grip, 37 Trustee Trustee and President--Goldman Sachs
One New York Plaza & President Variable Insurance Trust (registered
New York, NY 10004 investment company) (since October
1997); Managing Director, Goldman Sachs
Asset Management Division (since
November 1997); President, Goldman Sachs
Funds Group (since April 1996); and
President, MFS Retirement Services Inc.,
of Massachusetts Financial Services
(prior thereto).
</TABLE>
B-60
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
*John P. McNulty, 46 Trustee Trustee-Goldman Sachs Variable Insurance
One New York Plaza Trust (registered investment company)
New York, NY 10004 (since October 1997); Managing Director,
Goldman Sachs (since November 1996);
General Partner, J. Aron & Company
(since November 1995); Director and
Co-Head, Goldman Sachs Funds Management
Inc. (since November 1995); Director,
Goldman Sachs Asset Management
International (since January 1996);
Co-Head, GSAM (November 1995 to
present); Director, Global Capital
Reinsurance (insurance) (since 1989);
Director, Commodities Corp. LLC (since
April 1997); and Limited Partner of
Goldman Sachs (1994 - November 1995 and
Trustee, Trust for Credit Unions
(registered investment company) (since
January 1996).
</TABLE>
B-61
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
Mary P. McPherson, 63 Trustee Trustee-Goldman Sachs Variable Insurance
The Andrew W. Mellon Foundation Trust (registered investment company)
140 East 62nd Street (since October 1997); Vice President and
New York, NY 10021 Senior Program Officer, The Andrew W.
Mellon Foundation (provider of grants
for conservation, environmental and
educational purposes) (since October
1997); President of Bryn Mawr College
(1978-1997); Director, Smith College
(since 1998); Director of Josiah Macy,
Jr. Foundation (health educational
programs) (since 1977); Director of the
Philadelphia Contributionship
(insurance) (since 1985); Director of
Amherst College (1986-1998); Director of
Dayton Hudson Corporation (general
merchandising retailing) (1988-1997);
Director of The Spenser Foundation
(educational research) (since 1993); and
member of PNC Advisory Board (banking)
since 1993).
*Alan A. Shuch, 49 Trustee Trustee-Goldman Sachs Variable Insurance
One New York Plaza Trust (registered investment company)
New York, NY 10004 (since October 1997); Limited Partner,
Goldman Sachs (since December 1994);
Consultant to GSAM (since December
1994); Director, Chief Operating Officer
and Vice President of Goldman Sachs
Funds Management Inc. (from November
1993 - November 1994); Chairman and
Director, Goldman Sachs Asset Management
- Japan Limited (November 1993 -
November 1994); Director, Goldman Sachs
Asset Management International (November
1993 - November 1994); and General
Partner, Goldman Sachs & Co. Investment
Banking Division (December 1986 -
November 1994).
</TABLE>
B-62
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
Jackson W. Smart, Jr., 68 Trustee Trustee-Goldman Sachs Variable Insurance
One Northfield Plaza, Suite 218 Trust (registered investment company)
Northfield, IL 60093 (since October 1997); Chairman,
Executive Committee and Director, 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) (October
1988 - December 1997); Director, Federal
Express Corporation (NYSE) (since 1976);
and Director, Evanston Hospital
Corporation (since 1980).
William H. Springer, 69 Trustee Trustee-Goldman Sachs Variable Insurance
701 Morningside Drive Trust (registered investment company)
Lake Forest, IL 60045 (since October 1997); Director, The
Walgreen Co. (a retail drug store
business) (since April 1988); Director
of Baker, Fentress & Co. (a closed-end,
non-diversified management investment
company) (April 1992 - present); and
Chairman and Trustee, Northern
Institutional Funds (since April 1984).
Richard P. Strubel, 59 Trustee Trustee-Goldman Sachs Variable Insurance
737 N. Michigan Ave., Suite 1405 Trust (registered investment company)
Chicago, IL 60611 (since October 1997); Director, Gildan
Activewear Inc. (since February 1999);
Director of Kaynar Technologies Inc.
(since March 1997); Managing Director,
Tandem Partners, Inc. (since 1990);
President and Chief Executive Officer,
Microdot, Inc. (a diversified
manufacturer of fastening systems and
connectors) (January 1984 - October
1994); and Trustee, Northern
Institutional Funds (since December
1982).
</TABLE>
B-63
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
*Nancy L. Mucker, 49 Vice President Vice President-Goldman Sachs Variable
4900 Sears Tower Insurance Trust (registered investment
Chicago, IL 60606 company) (since 1997); Vice President,
Goldman Sachs (since April 1985); and
Co-Manager of Shareholder Servicing of
GSAM (since November 1989).
*John M. Perlowski, 34 Treasurer Treasurer-Goldman Sachs Variable
One New York Plaza Insurance Trust (registered investment
New York, NY 10004 company) (since 1997); Vice President,
Goldman Sachs (since July 1995); and
Banking Director, Investors Bank and
Trust (November 1993 - July 1995).
*James A. Fitzpatrick, 39 Vice President Vice President-Goldman Sachs Variable
4900 Sears Tower Insurance Trust (registered investment
Chicago, IL 60606 company) (since October 1997); Vice
President, Goldman Sachs (since 1998);
Vice President of GSAM (since April
1997); and Vice President and General
Manager, First Data Corporation -
Investor Services Group (1994 to 1997).
*Jesse Cole, 35 Vice President Vice President-Goldman Sachs Variable
4900 Sears Tower Insurance Trust (registered investment
Chicago, IL 60606 company) (since 1998); Vice President,
GSAM (June 1998 to Present); Vice
President, AIM Management Group, Inc.
(investment adviser) (April 1996-June
1998); and Assistant Vice President, The
Northern Trust Company (June 1987-April
1996).
*Philip V. Giuca , Jr., 37 Assistant Treasurer Assistant Treasurer-Goldman Sachs
One New York Plaza Variable Insurance Trust (registered
New York, NY 10004 investment company) (since 1997); Vice
President, Goldman Sachs (May
1992-Present).
</TABLE>
B-64
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
Dee Moran, 33 Assistant Assistant Treasurer, Goldman Sachs
One New York Plaza Treasurer Variable Insurance Trust (registered
New York, NY 10004 investment company)(since 1999); Vice
President, Mutual Fund Administration,
GSAM (since 1995).
*Adrien Deberghes, 31 Assistant Treasurer Assistant Treasurer-Goldman Sachs
One New York Plaza Variable Insurance Trust (registered
New York, NY 10004 investment company) (since 1999); Vice
President, Mutual Fund Administration
GSAM (since 1998); Senior Associate,
GSAM (1997-1998).
*Anne Marcel, 40 Vice President Vice President-Goldman Sachs Variable
4900 Sears Tower Insurance Trust (registered investment
Chicago, IL 60606 company) (since 1998); Vice President,
GSAM (June 1998-Present); and Vice
President, Stein Roe & Farnham, Inc.
(October 1992-June 1998).
*Michael J. Richman, 38 Secretary Secretary-Goldman Sachs Variable
85 Broad Street Insurance Trust (registered investment
New York, NY 10004 company) (since 1997); General Counsel
of the Funds Group of GSAM (since
December 1997); Associate General
Counsel of GSAM (February 1994 -
December 1997); Counsel to the Funds
Group, GSAM (June 1992 - December 1997);
Associate General Counsel, Goldman Sachs
(since December 1998); Vice President of
Goldman Sachs (since June 1992) and
Assistant General Counsel of Goldman
Sachs (June 1992 to December 1998).
</TABLE>
B-65
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
*Howard B. Surloff, 33 Assistant Secretary Assistant Secretary-Goldman Sachs
85 Broad Street Variable Insurance Trust (registered
New York, NY 10004 investment company) (since 1997);
Assistant General Counsel, GSAM and
Associate General Counsel to the Funds
Group (since December 1997); Assistant
General Counsel and Vice President,
Goldman Sachs (since November 1993 and
May 1994, respectively); Counsel to the
Funds Group, GSAM (November 1993 -
December 1997); and Associate of
Shereff, Friedman, Hoffman & Goodman
(October 1990 to November 1993).
*Valerie A. Zondorak, 33 Assistant Secretary Assistant Secretary-Goldman Sachs
85 Broad Street Variable Insurance Trust (registered
New York, NY 10004 investment company) (since 1997);
Assistant General Counsel, GSAM and
Assistant General Counsel to the Funds
Group (since December 1997); Vice
President and Counsel, Goldman Sachs
(since March 1997); Assistant General
Counsel, Goldman Sachs (since December
1997); Counsel to the Funds Group, GSAM
(March 1997 - December 1997); and
Associate of Shereff, Friedman, Hoffman
& Goodman (September 1990 to February
1997).
</TABLE>
B-66
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
and Address With Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
*Deborah A. Farrell, 27 Assistant Secretary Assistant Secretary-Goldman Sachs
85 Broad Street Variable Insurance Trust (registered
New York, NY 10004 investment company) (since 1997); Legal
Products Analyst, Goldman Sachs (since
December 1998); Legal Assistant, Goldman
Sachs (January 1996 - December 1998);
Assistant Secretary to the Funds Group
(1996 to present); Executive Secretary,
Goldman Sachs (January 1994 - January
1996); and Legal Secretary, Cleary,
Gottlieb, Steen and Hamilton (September
1990 - January 1994).
*Kaysie P. Uniacke, 38 Assistant Secretary Assistant Secretary-Goldman Sachs
One New York Plaza Variable Insurance Trust (registered
New York, NY 10004 investment company) (since 1997);
Managing Director, GSAM (since 1997);
Vice President and Senior Portfolio
Manager, GSAM (1988 to 1997).
*Elizabeth D. Anderson, 29 Assistant Secretary Assistant Secretary -Goldman Sachs
One New York Plaza Variable Insurance Trust (registered
New York, NY 10004 investment company) (since 1997);
Portfolio Manager, GSAM (since April
1996); Junior Portfolio Manager, GSAM
(1995 - April 1996); Funds Trading
Assistant, GSAM (1993 - 1995); and
Compliance Analyst, Prudential Insurance
(1991 - 1993).
*Amy E. Belanger, 29 Assistant Secretary Assistant Secretary - Goldman Sachs
85 Broad Street Variable Insurance Trust (registered
New York, NY 10004 investment company) (since 1999);
Counsel, Goldman Sachs (since 1998);
Associate, Dechert Price & Rhoads
(September 1996-1998).
</TABLE>
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, 1999,
the Trustees and officers as a group owned less than 1% of the outstanding
shares of beneficial interest of each Fund.
B-67
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended October
31, 1998:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From Goldman
Benefits Sachs Trust and the
Aggregate Accrued as Goldman Sachs
Compensation Part of Funds Complex
from the Trust's (including the
Funds/2/ Expenses Funds)/3/
-------- -------- ---------
<S> <C> <C> <C>
Ashok N. Bakhru/1/ $11,327 $0 $93,750
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
John P. McNulty 0 0 0
Mary P. McPherson 7,830 0 70,500
Alan A. Shuch 0 0 0
Jackson W. Smart 7,830 0 70,500
William H. Springer 7,830 0 70,500
Richard P. Strubel 7,830 0 70,500
</TABLE>
_________________________
/1/ Includes compensation as Chairman of the Board of Trustees.
/2/ Reflects amount paid by Goldman Sachs Trust during fiscal year ended
October 31, 1998.
/3/ The Goldman Sachs Funds complex consists of Goldman Sachs Trust and Goldman
Sachs Variable Insurance Trust. Goldman Sachs Trust consisted of 45 mutual
funds, including eight fixed-income funds, on October 31, 1998. Goldman
Sachs Variable Insurance Trust consisted of 8 mutual funds on October 31,
1998.
Class A Shares of the Fund may be sold at net asset value without payment
of any sales charge to Goldman Sachs, its affiliates or their respective
officers, partners, directors or employees (including retired employees and
former partners), any partnership of which Goldman Sachs is a general partner,
any trustee or officer of the Trust and designated family members of any of the
above individuals. The sales load waivers are due to the nature of the
investors and the reduced sales effort that is needed to obtain such
investments.
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 Short Duration
Tax-Free Fund, Government Income Fund, Municipal Income Fund, Core Fixed Income
and High Yield Fund pursuant to a
B-68
<PAGE>
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. GSAMI is also an affiliate of
Goldman Sachs. See "Service Providers" in the Funds' Prospectuses for a
description of the applicable Investment Adviser's duties as Investment Adviser.
Goldman Sachs has agreed to permit the Funds to use the name "Goldman Sachs" or
a derivative thereof as part of each Fund's name for as long as a Fund's
Management Agreement is in effect.
The Goldman Sachs Group, L.P., which controls the Investment Advisers, has
merged into The Goldman Sachs Group Inc. as the result of an initial public
offering.
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 Investment 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. The Goldman Sachs Global Investment Research
Department covers approximately 2,200 companies, including approximately 1,000
U.S. corporations in 60 industries. The in-depth information and analyses
generated by Goldman Sachs' research analysts are available to the Investment
Advisers. The Investment 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 United States and abroad. Goldman
Sachs is also among the leading investment firms using quantitative analytics
(now used by a growing number of investors) to structure and evaluate
portfolios. For example, Goldman Sachs' options evaluation model analyzes each
security's term, coupon and call option, providing an overall analysis of the
security's value relative to its interest risk.
B-69
<PAGE>
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 Investment 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 Investment 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 Investment Adviser, which
managed approximately $4.55 billion in tax-free securities in 1998, 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 Investment Adviser will
review the existing overall economic and mortgage market trends. The Investment
Adviser will then study yield spreads, the implied volatility and the shape of
the yield curve. The Investment 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 Adjustable Rate Government Fund, Short Duration Government
Fund, Government Income Fund, Core Fixed Income Fund and High Yield Fund, the
applicable Investment 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 Securities 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 Investment Adviser uses a
sophisticated option-adjusted spread (OAS) model to measure expected returns. A
security's OAS is a function of the level and shape of the yield curve,
volatility and the applicable Investment 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 Investment Adviser
considers it a better way to measure a security's expected return and absolute
and relative values than yield to maturity. In using OAS technology, the
Investment Adviser will first evaluate the absolute level of a security's OAS,
considering its liquidity and its interest rate, volatility and prepayment
sensitivity. The Investment Adviser will then analyze its value relative to
alternative investments and to its own investments. The Investment Adviser will
also measure a security's interest rate risk by computing an option adjusted
duration (OAD). The Investment Adviser believes a security's OAD is a better
measurement of its price sensitivity than cash flow duration, which
systematically misstates portfolio duration. The Investment Adviser also
evaluates returns for different mortgage market sectors and evaluates the credit
risk of individual securities. This sophisticated technical analysis allows the
Investment Adviser to develop portfolio and trading strategies using Mortgage-
Backed Securities that are believed to be superior investments on a
B-70
<PAGE>
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
Investment Adviser also expects to use OAS-based pricing methods to calculate
projected security returns under different, discrete interest rate scenarios,
and Goldman Sachs' proprietary prepayment model to generate yield estimates
under these scenarios. The OAS, scenario returns, expected returns, and yields
of securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The Investment Adviser will use OAS analytics to choose what they believe
is an appropriate portfolio of investments for Adjustable Rate Government Fund,
Short Duration Government Fund, Government Income Fund and Core Fixed Income
Fund from a universe of eligible investments. In connection with initial
portfolio selections, in addition to using OAS analytics as an aid to meeting
each Fund's particular composition and performance targets, the Investment
Adviser will also take into account important market criteria like the available
supply and relative liquidity of various mortgage securities in structuring the
portfolio.
The Investment Adviser also expects 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 Investment Adviser 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 Investment Adviser, on a non-
exclusive basis, use of its mortgage prepayment model, OAS model and any other
proprietary services which it now has or may develop, to the extent such
services are made available to other similar customers. Use of these services
by the Investment Advisers with respect to a Fund does not preclude Goldman
Sachs from providing these services to third parties or using such services as a
basis for trading for its own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
Investment 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.
B-71
<PAGE>
In addition to fixed-income research and credit research, the Investment
Adviser, in managing Global Income Fund, is supported by Goldman Sachs'
economics research. The Economics Research Department, based in London,
conducts economic, financial and currency markets research which analyzes
economic trends and interest and exchange rate movements worldwide. The
Economics Research Department tracks factors such as inflation and money supply
figures, balance of trade figures, economic growth, commodity prices, monetary
and fiscal policies, and political events that can influence interest rates and
currency trends. The success of Goldman Sachs' international research team has
brought wide recognition to its members. The team has earned top rankings in
various external surveys such as Extel, Institutional Investor and Reuters.
These rankings acknowledge the achievements of the firm's economists,
strategists and equity analysts.
In allocating assets in Global Income Fund's portfolio among currencies,
the Investment 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
Investment 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 Investment 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 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 27, 1999. 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 Fund on October 29, 1993, and the shareholders of each
other Fund on April 21, 1997. Each Management Agreement will remain in effect
until June 30, 2000 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 Investment Adviser or by the Investment Adviser on 60 days' written
notice to the Trust.
B-72
<PAGE>
Pursuant to the Management Agreements, the Investment Advisers are entitled
to receive the fees set forth below, payable monthly based on such Fund's
average daily net assets. In addition, as of the date of this Additional
Statement the Investment Advisers are voluntarily limiting their management fees
for certain Funds to the annual rates also listed below:
<TABLE>
<CAPTION>
Management Fee Management Fee without
Fund with Limitations Limitations
---- ---------------- -----------
<S> <C> <C>
GSAM
Short Duration Tax-Free .35% .40%
Government Income .54% .65%
Municipal Income .50% .55%
Core Fixed Income .40% .40%
High Yield .70% .70%
GSFM
Adjustable Rate Government .40% .40%
Short Duration Government .50% .50%
GSAMI
Global Income .65% .90%
</TABLE>
With respect to 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 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 years ended October 31, 1998, 1997, and 1996, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
- ---- ---- ---- ----
<S> <C> <C> <C>
Adjustable Rate Government $1,980,544 $2,293,118 $2,535,709
Short Duration Government(1) 765,667 422,632 411,360
Short Duration Tax-Free(2) 186,598 144,157 169,796
Government Income(3)(4) 595,582 134,628 74,060
Municipal Income(3)(5) 463,144 320,868 211,283
Core Fixed Income 750,536 334,580 246,568
Global Income(3)(6) 1,752,130 1,415,050 1,117,226
High Yield(7) 3,005,936 407,474 N/A
</TABLE>
B-73
<PAGE>
- ---------------
(1) Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $807,888, $528,290, and $514,200
respectively, for such years.
(2) Had expense limitations not been in effect, the Short Duration Tax-Free
Fund would have paid advisory fees of $189,646 for the year ended October
31, 1998.
(3) Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective April 30, 1997.
(4) Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $747,673, $350,034, and $148,120 respectively,
for such years.
(5) Had expense limitations not been in effect, the Municipal Income Fund would
have paid advisory fees of $467,578 for the year ended October 31, 1998.
(6) For the same periods, Global Income Fund paid GSAMI subadvisory fees of $0,
$0, and $837,920, respectively. If expense limitations had not been in
effect, Global Income Fund would have paid advisory and subadvisory fees of
$2,613,060 and $0, for the year ended October 31, 1998, $2,158,925 and $0
for the year ended October 31, 1997 and $1,474,204 and $491,401,
respectively, for the year ended October 31, 1996, respectively.
(7) High Yield Fund commenced operations on August 1, 1997. Had expense
limitations not been in effect, High Yield Fund would have paid $3,075,443
and $438,819 for the year ended October 31, 1998 and the period ended
October 31, 1997, respectively.
Each Investment 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 Investment Adviser and Goldman Sachs
- ----------------
and their affiliates, in the management of, or their interest in, other accounts
and other activities of Goldman Sachs may present conflicts of interest with
respect to the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Investment 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)
B-74
<PAGE>
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 for the accounts of customers. As
such, Goldman Sachs and its affiliates are actively engaged in transactions in
the same securities, currencies, and instruments in which the Funds invest. Such
activities could affect the prices and availability of the securities,
currencies, and instruments in which the Funds invest, which could have an
adverse impact on each Fund's performance. Such transactions, particularly in
respect of proprietary accounts or customer accounts other than those included
in the Investment Advisers' and their advisory affiliates' asset management
activities, will be executed independently of the Funds' transactions and thus
at prices or rates that may be more or less favorable. When the Investment
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 Investment Advisers, and/or their
affiliates, will not initiate or recommend certain types of transactions in
certain securities or instruments with respect to which the Investment Advisers
and/or their affiliates are performing services or when position limits have
been reached.
In connection with their management of the Funds, the Investment Advisers
may have access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Investment 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
Investment 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 Investment Advisers in managing the
Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Investment 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.
B-75
<PAGE>
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 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 employees of the Investment
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 Investment Advisers may enter into transactions and invest in
instruments and, in the case of Core Fixed Income, Global Income and High Yield
Funds, currencies on behalf of the applicable Funds in which customers of
Goldman Sachs serve as the counterparty, principal or issuer. In such cases,
such party's interests in the transaction will be adverse to the interests of
the Funds, and such party may have no incentive to assure that the Funds obtain
the best possible prices or terms in connection with the transactions. Goldman
Sachs and its affiliates may also create, write or issue derivative instruments
for customers of Goldman Sachs or its affiliates, the underlying securities
currencies or instruments of which may be those in which the Funds invest or
which may be based on the performance of a Fund. The Funds may, subject to
applicable law, purchase investments which are the subject of an underwriting or
other distribution by Goldman Sachs or its affiliates and may also enter into
transactions with other clients of Goldman Sachs or its affiliates where such
other clients have interests adverse to those of the Funds. At times, these
activities may cause departments of 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 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
B-76
<PAGE>
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.
It is possible that a Fund's holding will include securities of entities
for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to
time, Goldman Sachs' activities may limit the Funds' flexibility in purchases
and sales of securities. When Goldman Sachs is engaged in and underwriting or
other distribution of securities of an entity, the Funds' investment advisers
may be prohibited from purchasing or recommending the purchase of certain
securities of that entity for the Funds.
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. Shares of the Funds are offered and sold on a continuous basis
by Goldman Sachs, acting as agent. 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 C Shares were outstanding during the fiscal year ended 1996.
Goldman Sachs retained approximately the following combined commissions on sales
of Class A, B and C Shares during the following periods:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Adjustable Rate Government(1) $ 28,000 $ 156,000 $79,000
Short Duration Government(2) 157,000 63,000 N/A
Short Duration Tax-Free(2) 55,000 6,000 N/A
Government Income(3) 212,000 193,000 17,300
Municipal Income(3) 126,000 57,000 24,900
Core Fixed Income(2) 82,000 14,000 N/A
Global Income(3) 133,000 176,000 52,600
High Yield(2) 1,419,000 3,194,000 N/A
</TABLE>
- ---------------
(1) Adjustable Rate Government Fund does not offer Class B and C Shares.
(2) Prior to May 1, 1996 and August 15, 1997, Short Duration Government, Short
Duration Tax-Free and Core Fixed Income Funds did not offer Class A and B
and C Shares,
B-77
<PAGE>
respectively. High Yield Fund commenced operations on August 1, 1997 with
the exception of Class C Shares which commenced August 15, 1997.
(3) Prior to May 1, 1996 and August 15, 1997, Government Income, Municipal
Income and Global Income Funds did not offer Class B and Class C Shares,
respectively.
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.
For its transfer agency services, Goldman Sachs is entitled to receive a
transfer agency fee equal, on an annual basis, to 0.04% of average daily net
assets with respect to each Fund's Institutional, Administration and Service
Shares and 0.19% of average daily net assets with respect to each Fund's Class
A, Class B and Class C Shares.
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, 1998, 1997, and 1996 from each Fund then in existence as
follows under the fee schedules then in effect:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
- ---- ---- ---- ----
<S> <C> <C> <C>
Adjustable Rate Government $229,368 $272,449 $278,337
Short Duration Government 191,462 77,989 0
Short Duration Tax-Free 129,376 61,185 16,980
Government Income Fund 189,925 163,181 72,237
Municipal Income 176,709 152,152 90,284
Core Fixed Income 211,200 85,882 24,657
Global Income 378,171 106,886 121,212
High Yield Fund(1) 298,491 27,280 N/A
</TABLE>
- ---------------
(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.
Expenses
- --------
The Trust, on behalf of each Fund, is responsible for the payment of each
Fund's respective expenses. The expenses include, without limitation, the fees
payable to the
B-78
<PAGE>
Investment Adviser, service fees paid to Service Organizations, the fees and
expenses of the Trust's custodian and subcustodians, 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 and 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 and 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 imposition of the Investment Advisers' fee, as well as other operating
expenses, will have the effect of reducing the total return to investors. From
time to time, the Investment Advisers may waive receipt of fees and/or
voluntarily assume certain expenses of a Fund, which would have the effect of
lowering that Fund's overall expense ratio and increasing total return to
investors at the time such amounts are waived or assumed, as the case may be.
As of the date of this Additional Statement, the Investment Advisers were
voluntarily reducing or otherwise limiting certain "Other Expenses" (excluding
management fees, fees payable under administration, distribution and service
plans, transfer agency fees, taxes, interest, brokerage fees and litigation,
indemnification and other extraordinary expenses) to the following percentage of
each Fund's average daily net assets:
Fund
- ----
Adjustable Rate Government 0.05%
Short Duration Government 0.00%
Short Duration Tax-Free 0.00%
Government Income 0.00%
Municipal Income 0.00%
Core Fixed Income 0.10%
Global Income 0.00%
High Yield 0.02%
Such reductions or limits are calculated monthly on a cumulative basis.
The Investment Advisers may modify or discontinue such expense limitations or
the limitations on the management fees, described above under "Management --
Investment Advisers," in the future at their discretion. For the fiscal years
ended October 31, 1998, October 31, 1997, and October 31, 1996, "Other
B-79
<PAGE>
Expenses" of each Fund were reduced by the Investment Advisers in the following
amounts under fee expense limitations that were then in effect:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
- ---- ---- ---- ----
<S> <C> <C> <C>
Adjustable Rate Government $ 22,059 $191,739 $386,863
Short Duration Government 460,255 285,329 169,069
Short Duration Tax-Free 377,665 282,291 238,097
Government Income 472,433 364,989 219,091
Municipal Income 447,257 299,884 238,203
Core Fixed Income 485,499 311,343 233,065
Global Income 325,544 223,969 337,079
High Yield(1) 92,497 200,097 N/A
</TABLE>
- ---------------
(1) 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
Investment 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 Core Fixed Income, Global 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 Investment Advisers shall
B-80
<PAGE>
attempt to obtain the most favorable execution and net price available. The
Management Agreement provides that, on occasions when an Investment 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 Investment 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 Investment 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 Investment
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 Funds
effect their securities transactions may be used by the Investment Adviser in
servicing other accounts and not all of these services may be used by the
Investment Advisers in connection with the specific Fund generating the
brokerage credits. Such research or other services may include research reports
on companies, industries, and securities; economic and financial data; financial
publications; computer data bases; quotation equipment and services; and
research-oriented computer hardware, software and other services. The fees
received under the Management Agreement are not reduced by reason of the
Investment Adviser receiving such brokerage and research services.
Such services are used by the Investment Adviser in connection with all of
its investment activities, and some of such services obtained in connection with
the execution of transactions of a Fund may be used in managing other investment
accounts. Conversely, brokers furnishing such services may be selected for the
execution of transactions of such other accounts, whose aggregate assets are far
larger than those of a Fund, and the services furnished by such brokers may be
used by the Investment Adviser in providing management services for the Trust.
In circumstances where two or more broker-dealers offer comparable prices
and execution capability, preference may be given to a broker-dealer which has
sold shares of a Fund as well as shares of other investment companies or
accounts managed by the Investment Adviser. This policy does not imply a
commitment to execute all portfolio transactions through all broker-dealers that
sell shares of the Fund.
Subject to the above considerations, the Investment Adviser may use Goldman
Sachs as a broker for a Fund. In order for Goldman Sachs to effect any
portfolio transactions for a Fund, the commissions, fees or other remuneration
received by Goldman Sachs must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar instruments being purchased or sold on
an exchange during a comparable period of time. This standard would allow
Goldman Sachs to receive no more than the remuneration which would be expected
to be received by an unaffiliated broker in a commensurate arm's-length
transaction. Furthermore, the Trustees, including a majority of the Trustees
who are not "interested" Trustees, have adopted procedures which are reasonably
designed
B-81
<PAGE>
to provide that any commissions, fees, or other remuneration paid to Goldman
Sachs are consistent with the foregoing standard. Brokerage transactions with
Goldman Sachs are also subject to such fiduciary standards as may be imposed
upon Goldman Sachs by applicable law.
B-82
<PAGE>
For the fiscal year ended October 31, 1998, the Funds then in existence paid
approximate 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, 1998:
Adjustable Rate Government Fund $54,000 $54,000 (100%)/1/ $1,510,000,000 (100%)/2/ N/A
Short Duration Government Fund 26,000 26,000 (100%)/1/ 662,000,000 (100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000 (100%)/1/ 16,000,000 (100%)/2/ N/A
Government Income Fund 8,000 8,000 (100%)/1/ 171,000,000 (100%)/2/ N/A
Municipal Income Fund 3,000 3,000 (100%)/1/ 62,000,000 (100%)/2/ N/A
Core Fixed Income Fund 9,000 9,000 (100%)/1/ 193,000,000 (100%)/2/ N/A
Global Income Fund 8,000 8,000 (100%)/1/ 128,000,000 (100%)/2/ N/A
High Yield Fund --- --- --- ---
</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
approximate 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 Government 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
Short Duration Tax-Free Fund 0 0 0 $0
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
Core Fixed Income Fund 3,000 3,000(100%)/1/ 8,429,994(100%)/2/ N/A
Global Income Fund --- --- --- ---
High Yield Fund --- --- --- ---
</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>
For the fiscal year ended October 31, 1996, the Funds then in existence paid
approximate 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 Government Fund $108,000 $108,000(100%)/1/ $2,121,317,579(100%)/2/ N/A
Short Duration Government Fund 24,000 24,000(100%)/1/ 447,205,928(100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000(100%)/1/ 8,559,280(100%)/2/ N/A
Government Income Fund 1,200 1,200(100%)/1/ 24,437,288(100%)/2/ N/A
Municipal Income Fund 2,750 2,750(100%)/1/ 51,101,625(100%)/2/ N/A
Core Fixed Income Fund 4,000 4,000(100%)/1/ 43,548,299(100%)/2/ N/A
Global Income Fund --- --- --- ---
- ---------------------------------------------------------------------------------------------------
</TABLE>
/1/ Percentage of total commissions paid.
/2/ Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
/3/ Refers to Market Value of Futures Contracts.
B-85
<PAGE>
During the fiscal year ended October 31, 1998, the Funds acquired and sold
securities of their regular broker-dealers: NationsBank Corp., Salomon Smith
Barney Holdings, Lehman Brothers Holdings, J.P. Morgan & Co., Nomura Securities
International, Bear Stearns & Co., Donaldson Lufkin & Jenrette, Credit Suisse
First Boston, Canadian Imperial Bank of Commerce, Merrill Lynch & Co.
At October 31, 1998, Short Duration Tax-Free Fund and Municipal Income Fund
held no securities of their regular broker-dealers. As of the same date,
Adjustable Rate Government Fund, Short Duration Government Fund, Government
Income Fund, Core Fixed Income Fund, Global Income Fund, and High Yield Fund
held the following amounts of securities of their regular broker-dealers, as
defined in Rule 10b-1 under the Act, or their parents ($ in thousands):
Adjustable Rate Government Fund: Credit Suisse First Boston ($767) and
NationsBank Corp. ($24,553); Short Duration Government Fund: Credit Suisse
First Boston ($112) and NationsBank Corp. ($3,593); Government Income Fund:
Salomon Smith Barney Holdings ($1,360), Merrill Lynch & Co. ($1,476), Lehman
Brothers Holdings ($1,246), Credit Suisse First Boston ($256) and NationsBank
Corp. ($8,196); Core Fixed Income Fund: Merrill Lynch & Co. ($3,949),
Donaldson, Lufkin & Jenrette ($5,121), Lehman Brothers Holdings ($1,665), Credit
Suisse First Boston ($391) and NationsBank Corp. ($12,519); Global Income Fund:
Salomon Smith Barney Holdings ($671) and Merrill Lynch & Co. ($803); High Yield
Fund: Credit Suisse First Boston ($793) and NationsBank Corp. ($25,375).
SHARES OF THE TRUST
Each Fund is a series of Goldman Sachs Trust, a Delaware business trust
established by an Agreement and Declaration of Trust dated January 28, 1997.
The Funds were previously series of Goldman Sachs Trust, a Massachusetts
business trust, and were reorganized into the Trust as of April 30, 1997.
The Trustees have authority under the Trust's Agreement and Declaration of
Trust to create and classify shares of beneficial interest in separate series,
without further action by shareholders. The Trustees also have authority to
classify and reclassify any series of shares into one or more classes of shares.
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. 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 Fund: Institutional Shares, Administration Shares,
Service Shares, Class A Shares, Class B Shares and Class C Shares; the issuance
of five classes of shares of Government Income Fund, Municipal Income Fund,
Global Income Fund and High Yield Fund: Institutional Shares, Service Shares,
Class A Shares, Class B Shares and Class C Shares; and (ii) the issuance of four
classes of shares of Adjustable Rate Government Fund: Institutional Shares,
Administration Shares, Service Shares and Class A Shares. Additional series may
be added in the future. As of October 31, 1998, no Class B or C Shares of the
Adjustable Rate Government Fund were outstanding.
B-86
<PAGE>
Each Institutional Share, Administration Share, Service Share, Class A
Share, Class B Share and Class C Share of a Fund represents a proportionate
interest in the assets belonging to the applicable class of the Fund. All
expenses of a Fund are borne at the same rate by each class of shares, except
that fees under Administration and Service Plans are borne exclusively by
Administration and Service Shares, fees under Distribution and 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 IRS. Each class of shares may have different minimum
investment requirements and be entitled to different shareholder services. With
limited exceptions, shares of a class may only be exchanged for shares of the
same or an equivalent class of another series. See "Shareholder Guide" 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.
("NASD") 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. With respect to Class A Shares, the Distributor
at its discretion may use compensation for distribution services paid under the
Distribution and Services Plan for personal and account maintenance services and
expenses so long as such total compensation under the Plan does not exceed the
maximum cap on "service fees" imposed by the NASD.
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 NASD
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
B-87
<PAGE>
net assets attributed to Class B and Class C Shares. Class A (Global Income Fund
only), Class B and Class C Shares also bear the cost of service fees at an
annual rate of up to 0.25% of the average daily net assets attributed to such
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 and distribution and service 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.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Funds' shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Funds are reflected in
account statements from the Transfer Agent.
As of November 30, 1998, the following entities and persons owned of record
5% or more of the outstanding shares of the following Funds: Adjustable Rate
Government Fund (Institutional Class) -- First Trust of New York, 100 Wall
Street, Suite 1600, New York, NY (13%); Regents of the University of Minnesota,
100 Church Street SE, Room 311A, Minneapolis, MN 55455 (6%); Meadows Foundation
Inc., 3003 Swiss Avenue, Dallas, TX 75204 (5%), and Quintiles Transnational
Corp., P.O. Box 13979, RTP, NC 27709 (5%); Short Duration Government Fund
(Institutional Class) -- Goldman Sachs Asset Allocation, 4900 Sears Tower,
Chicago, IL 60606 (15%); Short Duration Tax-Free Fund (Institutional Class)
Lowenthal Accounts, Goldman Sachs Asset Management, Attn: Anita Kerr, 1 New
York Plaza, Floor 40, New York, NY 10004 (32%); and Donald R. Gant, Partner,
Goldman, Sachs & Co., 85 Broad Street, 22nd Floor, New York, NY 10004 (7%); Core
Fixed Income Fund (Institutional Class) -- Goldman Sachs Asset Allocation, 4900
Sears Tower, Chicago, IL 60606 (25%); C-PO2-EB Employee Benefits, Methodist
Medical Center of Illinois, NCIL Trust Company, 301 SW Adams Street, P.O. Box
749, Peoria, IL 61652 (7%) and Mellon Bank, Three Mellon Bank Center, 34th
Floor, Pittsburgh, PA 15258 (6%); Core Fixed Income Fund (Class A Shares) --
Resources Trust Company, FBO Various Customers, 8051 E. Maplewood Avenue,
Englewood, CO 80111 (5%); Global Income Fund (Institutional Class) -- Goldman
Sachs Asset Allocation, 4900 Sears Tower, Chicago IL 60606 (14%); and State
Street Bank and Trust, GS Profit Sharing Master Trust, P.O. Box 1992, Boston, MA
02105-1992 (15%);
B-88
<PAGE>
High Yield Fund (Institutional Class) -- Goldman Sachs Asset Allocation, 4900
Sears Tower, Chicago IL 60606 (7%); and Municipal Income Fund (Institutional
Class) -- Lowenthal Account, Goldman Sachs Asset Management, Attn: Anita Kerr, 1
New York Plaza, Floor 40, New York, NY 10004 (5%).
As of November 30, 1998, the following entities beneficially owned 5% or
more of the outstanding shares of the following Funds: Adjustable Rate
Government Fund (Institutional Class) - First Security Bank of Idaho, Idaho
Housing Agency, c/o First Security Bank of Idaho, P.O. Box 30007, Salt Lake
City, UT 84130 (6%); Short Duration Government Fund (Institutional Class) -
State Street Bank & Trust, P.O. Box 1992, Boston, MA 02105 (20%); and Core Fixed
Income Fund (Institutional Class) - Goldman Sachs Asset Management, Attn: Doris
Caramello, 1 New York Plaza, Floor 42, New York, NY 10004 (15%).
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 Trustees will call a special
meeting of shareholders for the purpose of electing Trustees, if, at any time,
less than a majority of Trustees holding office at the time were elected by
shareholders. The shareholders of the Trust will have voting rights only with
respect to the limited number of matters specified in the Agreement and
Declaration of Trust and such other matters as the Trustees may determine or may
be required by law.
The Agreement and 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 Agreement and
Declaration of Trust provides that, if any shareholder or former shareholder of
any series is held personally liable solely
B-89
<PAGE>
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 Agreement and 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 Agreement and 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 Agreement and Declaration of Trust permits the Trustees to amend the
Declaration of Trust without a shareholder vote. However, shareholders of the
Trust have the right to vote on any amendment (i) that would affect the voting
rights of shareholders; (ii) that is required by law to be approved by
shareholders; (iii) that would amend the voting provisions of the Declaration of
Trust; or (iv) that the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of the Trust, all the powers and authorities of Trustees
under the Agreement and Declaration of Trust 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
B-90
<PAGE>
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 Agreement and 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 Agreement
and 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 Agreement and 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 a Delaware business
trust is remote.
In addition to the requirement under Delaware law, the Agreement and
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.
The Agreement and 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 Agreement and 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. The term "Business Day" means any day
the New York Stock Exchange is open for trading, which is Monday through Friday
except for holidays. The New York Stock Exchange is closed on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day
(observed), Good Friday, Memorial Day (observed), Independence Day (observed),
Labor Day, Thanksgiving Day and Christmas Day (observed).
In the event that the New York Stock Exchange or the national securities
exchange on which stock options are traded adopt different trading hours on
either a permanent or temporary basis, the Trustees will reconsider the time at
which net asset value is computed. In addition, each
B-91
<PAGE>
Fund may compute its net asset value as of any time permitted pursuant to any
exemption, order or statement of the SEC or its staff.
For the purpose of calculating the net asset value of the Funds,
investments are valued under valuation procedures established by the Trustees.
Portfolio securities, for which accurate market quotations are readily
available, other than money market instruments, are valued via electronic feeds
to the custodian bank containing dealer-supplied bid quotations or bid
quotations from a recognized pricing service. Securities for which a pricing
service either does not supply a quotation or supplies a quotation that is
believed by the Investment Adviser to be in accurate, will be valued based on
bid-side broker quotations. Securities for which the custodian bank is unable
to obtain an external price as provided above or with respect to which the
Investment Adviser believes an external price does not reflect accurate market
values, will be valued by the Investment Adviser in good faith based on
valuation models that take into account spread and daily yield changes on
government securities (i.e., matrix pricing). Other Securities are valued as
follows: (a) overnight repurchase agreements will be valued at cost; (b) term
repurchase agreements (i.e., those whose maturity exceeds seven days) and swaps,
caps, collars and floors will be valued at the average of the bid quotations
obtained daily from at least one dealer; (c) debt securities with a remaining
maturity of 60 days or less are valued at amortized cost, which the Trustees
have determined to approximate fair value; (d) 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
Investment 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); (e) 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 if
accurate quotations are readily available; and (f) over-the-counter options will
be valued by a broker identified by the portfolio manager/trader.
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.
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 securities on European and Far Eastern securities
exchanges and on over-the-counter markets is substantially completed at various
times prior to the close of business on each Business Day in New York (i.e., a
day on which the New York Stock Exchange is open for trading). In addition,
European or Far Eastern securities trading generally or in a particular country
or countries may not take place on all Business Days in New York. Furthermore,
trading takes place in various foreign markets on days which are not Business
Days in New York and days on which the Funds' net asset values are not
calculated. Such calculation does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities
B-92
<PAGE>
used in such calculation. The impact of events that occur after the publication
of market quotations used by a Fund to price its securities but before the close
of regular trading on the New York Stock Exchange will normally not be reflected
in a Fund's next determined net asset value unless the Trust, in its discretion,
makes an adjustment in light of the nature and materiality of the event, its
effect on Fund operations and other relevant factors.
The proceeds received by each Fund and each other series of the Trust from
the issue or sale of its shares, and all net investment income, realized and
unrealized gain and proceeds thereof, subject only to the rights of creditors,
will be specifically allocated to such Fund and constitute the underlying assets
of that Fund or series. The underlying assets of each Fund will be segregated
on the books of account, and will be charged with the liabilities in respect of
such Fund and with a share of the general liabilities of the Trust. Expenses of
the Trust with respect to the Funds and the other series of the Trust are
generally allocated in proportion to the net asset values of the respective
Funds of series except where allocations of direct expenses can otherwise be
fairly made.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies and financial institutions. Each prospective
shareholder is urged to consult his or her 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 Fund is treated as a separate entity for tax purposes, has elected to
be treated as a regulated investment company and intends to qualify for such
treatment for each taxable year under Subchapter M of the Code. To qualify as
such, a Fund must satisfy certain requirements relating to the sources of its
income, diversification of its assets and distribution of its income to
shareholders. As a regulated investment company, a Fund will not be subject to
federal income or excise tax on any net investment income and net realized
capital gains that are distributed to its shareholders in accordance with
certain timing requirements of the Code.
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,
U.S. Government Securities, securities of other regulated investment companies
and other securities limited in respect of any one issuer to an amount not
greater in value than 5% of the value of the Fund's total assets and to not
B-93
<PAGE>
more than 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total (gross) assets is invested in the
securities of any one issuer (other than U.S. Government Securities and
securities of other regulated investment companies) or two or more issuers
controlled by 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, Global Income or High Yield
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, Global Income or High Yield Fund's portfolio or anticipated to be
acquired may not qualify as "directly related" under these tests.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on the portion of its income and capital gains that it
distributes to its shareholders in any taxable year for which it distributes, in
compliance with the Code's timing and other requirements, at least 90% of its
"investment company taxable income" (which includes dividends, taxable interest,
taxable original issue discount income, market discount income, income from
securities lending, net short-term capital gain in excess of net long-term
capital loss, certain net realized foreign exchange gains, and any other taxable
income other than "net capital gain" as defined below and is reduced by
deductible expenses) and at least 90% of the excess of its gross tax-exempt
interest income, 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 Core Fixed Income or Global Income Fund and may therefore make
it more difficult for Core Fixed Income or Global Income Fund to satisfy the
distribution requirements described above, as well as the excise tax
distribution requirements described below. However, Core Fixed Income Fund and
Global Income Fund generally expect to be able to obtain sufficient cash to
satisfy such requirements from new investors, the sale of securities or other
sources. If for any taxable year a Fund does not qualify as a regulated
investment company, it will be taxed on all of its investment company taxable
income and net capital gain at corporate rates, its net tax-exempt interest (if
any) may be subject to the alternative minimum tax, and its distributions to
shareholders
B-94
<PAGE>
will be taxable as ordinary dividends to the extent of its current and
accumulated earnings and profits.
For federal income tax purposes, each Fund is permitted to carry forward a
net capital loss in any year to offset its own capital gains, if any, during the
eight years following the year of the loss. At October 31, 1998, the Funds had
approximately the following amounts of capital loss carry forwards:
<TABLE>
<CAPTION>
Years of
Amount Expiration
------ ----------
<S> <C> <C>
Adjustable Rate Government Fund $47,858,866 2000-2004
Short Duration Government Fund 14,280,994 2002-2005
Short Duration Tax-Free Fund 3,868,000 2002-2003
High Yield Fund 5,746,000 2006
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by the Code and applicable tax regulations.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year) and 100% of any taxable
ordinary income and the excess of capital gains over capital losses for the
prior year that were not distributed during such year and on which the Fund did
not pay federal income tax. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month 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 IRS 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 IRS has also issued
private letter rulings to certain taxpayers (which do
B-95
<PAGE>
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 IRS 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 IRS 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 Investment 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 affect the amount, timing
and character of income, gain or loss recognized by Core Fixed Income Fund,
Global Income Fund and High Yield Fund. Under these rules, foreign exchange
gain or loss realized by these Funds 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
B-96
<PAGE>
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 Fund's, Global Income Fund's or High Yield 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 or her 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 United
States 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 IRS 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 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 or her 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.
B-97
<PAGE>
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 ("passive
foreign investment companies") 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, the Fund could be subject to federal income tax and additional
interest charges on "excess distributions" received from such companies or gain
from the sale of such stock in such companies, even if all income or gain
actually received by the Fund is timely distributed to its shareholders. The
Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. Certain elections may, if available, ameliorate these
adverse tax consequences, but any such election would require the Fund to
recognize taxable income or gain without the concurrent receipt of cash. Core
Fixed Income, Global Income and High Yield Funds may limit and/or manage their
holdings in passive foreign investment companies to minimize their tax liability
or maximize their 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.
Investment in lower-rated securities may present special tax issues for a
Fund to the extent actual or anticipated defaults may be more likely with
respect to such securities. Tax rules are not entirely clear about issues such
as when a Fund may cease to accrue interest, original issue discount, or market
discount; when and to what extent deductions may be taken for bad debts or
worthless securities; how payment received on obligations in default should be
allocated between principal and income; and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by a Fund, in the event it invests in such securities, in order to
seek to eliminate or minimize any adverse tax consequences.
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.
B-98
<PAGE>
Taxable U.S. Shareholders - Distributions
Tax Exempt Funds. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations concerning the tax-exempt status of such obligations, nor does it
guarantee or represent that bond counsels' opinions are correct. Bond counsels'
opinions will generally be based in part upon covenants by the issuers and
related parties regarding continuing compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex requirements
that must be satisfied on a continuing basis in order for bonds to be and remain
tax-exempt. If the issuer of a bond or a user of a bond-financed facility fails
to comply with such requirements at any time, interest on the bond could become
taxable, retroactive to the date the obligation was issued. In that event, a
portion of a Tax Exempt Fund's distributions attributable to interest the Fund
received on such bond for the current year and for prior years could be
characterized or recharacterized as taxable income. The availability of tax-
exempt obligations and the value of a Tax Exempt Fund's portfolio may be
affected by restrictive federal income tax legislation enacted in recent years
or by similar, future legislation. If a Tax Exempt Fund satisfies the
applicable requirements, dividends paid by the Fund which are attributable to
tax exempt interest on Municipal Securities and designated by the Fund as
exempt-interest dividends in a written notice mailed to its shareholders within
60 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 or her federal income tax return. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of a
Tax Exempt Fund is not deductible to the extent attributable to exempt-interest
dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
B-99
<PAGE>
The Tax Exempt Funds are not intended to constitute a balanced investment
program and are not designed for investors seeking capital appreciation or
maximum tax-exempt income irrespective of fluctuations in principal. Shares of
the Tax Exempt Funds would not be suitable for tax-exempt institutions and may
not be suitable for retirement plans qualified under Section 401 of the Code,
H.R. 10 plans and individual retirement accounts since such plans and accounts
are generally tax-exempt and, therefore, would not gain any additional benefit
from the Funds' dividends being tax-exempt. In addition, the Tax Exempt Funds
may not be an appropriate investment for persons or entities that are
"substantial users" of facilities financed by private activity bonds or "related
persons" thereof. "Substantial user" is defined under U.S. Treasury Regulations
to include a non-exempt person which regularly uses a part of such facilities in
its trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, which occupies more than 5% of
the usable area of such facilities or for which such facilities or a part
thereof were specifically constructed, reconstructed or acquired. "Related
persons" include certain related natural persons, affiliated corporations,
partnerships and its partners and an S corporation and its shareholders. A
shareholder is advised to consult his or her 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.
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 the Short Duration
Tax-Free Fund and the Municipal Income Fund, that are attributable to (i)
taxable income, including but not limited to dividends, taxable bond interest,
recognized market discount income, original issue discount income accrued with
respect to taxable bonds, income from repurchase agreements, income from
securities lending, income from dollar rolls, income from interest rate or
currency swaps, caps, floors and collars, and a portion of the discount from
certain stripped tax-exempt obligations or their coupons; or (ii) capital gains
from the sale of securities or other investments (including from the disposition
of rights to when-issued securities prior to issuance) or from options, futures
or certain forward contracts. Any portion of such taxable distributions that is
attributable to a Fund's net capital gain, as defined above, may be designated
by the Fund as a "capital gain dividend," taxable to shareholders as long-term
capital gain whether received in cash or additional shares and regardless of the
length of time their shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less than a
minimum period, generally 46 days. Receipt of certain distributions qualifying
for the deduction may result in reduction of the tax basis of the corporate
shareholder's shares and may give rise to or increase its liability for federal
corporate alternative minimum tax.
B-100
<PAGE>
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 or her shares and, after the shareholder's basis is
reduced to zero, will generally constitute capital gains to a shareholder who
holds his or her 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 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,
B-101
<PAGE>
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 a Fund
cannot be taken into account for purposes of determining gain or loss on the
redemption or exchange of such shares within 90 days after their purchase to the
extent shares of that Fund or another fund are subsequently acquired without
payment of a sales charge pursuant to the reinvestment or exchange privilege.
Any disregarded portion of such charge will result in an increase in the
shareholder's tax basis in the shares subsequently acquired. If a shareholder
received a capital gain dividend with respect to shares and such shares have a
tax holding period of six months or less at the time of the sale or redemption,
then any loss the shareholder realizes on the sale or redemption will be treated
as a long-term capital loss to the extent of such capital gain dividend. Also,
any losses realized by shareholders who dispose of shares of Short Duration Tax-
Free or Municipal Income Funds with a tax holding period of six months or less
are disallowed to the extent of any exempt-interest dividends received with
respect to such shares. Additionally, any loss realized on a sale or redemption
of shares of a Fund may be disallowed under "wash sale" rules to the extent the
shares disposed of are replaced with other shares of the same Fund within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to a dividend reinvestment in shares of the
Fund. If disallowed, the loss will be reflected in an adjustment to the basis of
the shares acquired.
Backup Withholding
Each Fund will be required to report to the IRS 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 ("TIN") and with certain required
certifications or if the IRS 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. If you do not have a TIN, you should apply for one immediately
by contacting your local office of the Social Security Administration or the
Internal revenue (IRS). Backup withholding could apply to payments relating to
your account while you are waiting receipt of a TIN. Special rules apply for
certain entities. For example, for an account established under a Uniform Gifts
or Transfers to
B-102
<PAGE>
Minors Act, the TIN of the minor should be furnished. Investors should consult
their tax advisers about the applicability of the backup withholding provisions.
Non-U.S. Shareholders
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment company taxable income distributed by a Fund
to a shareholder who is not a U.S. person will be subject to U.S. withholding
tax at the rate of 30% (or a lower rate provided by an applicable tax treaty)
unless the dividends are effectively connected with a U.S. trade or business of
the shareholder, in which case the dividends will be subject to tax on a net
income basis at the graduated rates applicable to U.S. individuals or domestic
corporations. Distributions of net capital gain, including amounts retained by a
Fund which are designated as undistributed capital gains, to a shareholder who
is not a U.S. person will not be subject to U.S. federal income or withholding
tax unless the distributions are effectively connected with the shareholder's
trade or business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met. Non-U.S. shareholders may also be subject to U.S. withholding tax on deemed
income resulting from any election by Global Income Fund to treat qualified
foreign taxes it pays as passed through to shareholders (as described above),
but they may not be able to claim a U.S. tax credit or deduction with respect to
such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the 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. A state income (and possibly
local income and/or intangible property) tax exemption is generally available to
the extent (if any) a Fund's distributions are derived from interest on (or, in
the case of intangible property taxes, the value of its assets is attributable
to) certain U.S. Government obligations and/or tax-exempt municipal obligations
issued by or on behalf of the particular state or a political subdivision
thereof, provided in some states that certain thresholds for holdings of such
obligations and/or reporting requirements are satisfied. In addition, in those
states or localities which have income tax laws, the treatment of a Fund and its
B-103
<PAGE>
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Thirty-day yield and average annual total return values are computed pursuant to
formulas specified by the SEC. Each Fund may also from time to time quote
distribution rates in reports to shareholders and in sales literature.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price per share on the
last day of such period. Yield is then annualized by assuming that yield is
realized each month for 12 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 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.
Total return calculations for Class A Shares reflect the effect of paying
the maximum initial sales charge. Investment at a lower sales charge would
result in higher performance figures. Total return calculations for Class B and
Class C Shares reflect deduction of the applicable CDSC imposed upon redemption
of Class B and Class C Shares held for the applicable period. Each Fund
B-104
<PAGE>
may also from time to time advertise total return on a cumulative, average,
year-by-year or other basis for various specified periods by means of
quotations, charts, graphs or schedules. In addition, each Fund may furnish
total return calculations based on investments at various sales charge levels or
at NAV. Any performance information which is based on a Fund's NAV per Share
would be reduced if any applicable sales charge were taken into account. In
addition to the above, each Fund may from time to time advertise its performance
relative to certain averages, performance rankings, indices, other information
prepared by recognized mutual fund statistical services and investments for
which reliable performance information is available. The Fund's performance
quotations do not reflect any fees charged by an Authorized Dealer, Service
Organization or other financial intermediary to its customer accounts in
connection with investments in the Funds.
The following table presents 30-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
Thirty-day yield, tax equivalent yield (Short Duration Tax- Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class
A, Class B or Class C Shares which is based upon a Fund's net asset value per
share would be reduced if a sales charge were taken into account.
The average annual total return calculation reflects a maximum initial
sales charge of 1.5% for Class A Shares of Adjustable Rate Government Fund; 2.0%
for Class A Shares of Short Duration Government and Short Duration Tax-Free
Funds; and 4.5% for Class A Shares of Government Income, Municipal Income, Core
Fixed Income, Global Income and High Yield Funds; the assumed deferred sales
charge for Class B Shares (2% maximum declining to 0% after three years for the
Short Duration Government and Short Duration Tax-Free Funds and 5% maximum
declining to 0% after six years for the Government Income, Municipal Income,
Core Fixed Income, Global Income and High Yield Funds); and the assumed deferred
sales charge for Class C Shares (1% if redeemed within 12 months of purchase).
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's 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 service plans) imposed and other operating expenses. Total
return quotations are calculated pursuant to SEC-approved methodology.
B-105
<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment Period
30-Days Ended 10/31/98
-------------------------
SEC 30-Day Pro-Forma
Fund Yield Yield(1)
- ---- ---------- ---------
<S> <C> <C>
Adjustable Rate Government Fund
Institutional Shares 5.59% 5.55%
Administration Shares 5.33% 5.25%
Service Shares 5.06% 4.95%
Class A Shares
(assumes 1.5% sales charge) 5.05% 4.96%
Short Duration Government Fund
Institutional Shares 5.12% 4.84%
Administration Shares 4.87% 4.46%
Service Shares 4.61% 4.08%
Class A Shares
(assumes 2.0% sales charge) 4.61% 4.14%
Class B Shares 4.11% 3.17%
Class C Shares N/A N/A
Short Duration Tax-Free Fund
Institutional Shares 3.86% 2.94%
Administration Shares 3.58% 2.10%
Service Shares 3.34% 1.33%
Class A Shares
(assumes 2.0% sales charge) 3.38% 1.62%
Class B Shares 2.88% (0.22)%
Class C Shares N/A N/A
Government Income Fund
Institutional Shares N/A N/A
Service Shares N/A N/A
Class A Shares 4.70% 4.28%
(assumes 4.5% sales charge)
Class B Shares 4.21% 3.54%
Class C Shares 4.16% 3.48%
</TABLE>
B-106
<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment Period
30-Days Ended 10/31/98
-------------------------
SEC 30-Day Pro-Forma
Fund Yield Yield(1)
- ---- ---------- ---------
<S> <C> <C>
Municipal Income Fund
Institutional Shares 4.32% 3.68%
Service Shares N/A N/A
Class A Shares
(assumes 4.5% sales charge) 3.72% 2.70%
Class B Shares 3.14% 1.27%
Class C Shares 3.15% 1.27%
Core Fixed Income
Institutional Shares 5.57% 5.21%
Administration Shares 5.34% 4.82%
Service Shares 5.05% 4.35%
Class A Shares
(assumes 4.5% sales charge) 4.94% 4.34%
Class B Shares 4.43% 3.30%
Class C Shares 4.37% 3.21%
Global Income Fund
Institutional Shares 4.23% 3.75%
Service Shares 3.71% 3.06%
Class A Shares
(assumes 4.5% sales charge) 3.42% 2.76%
Class B Shares 3.07% 2.22%
Class C Shares 3.07% 2.22%
High Yield Fund
Institutional Shares N/A N/A
Service Shares N/A N/A
Class A Shares
(assumes 4.5% sales charge) 10.11% 9.89%
Class B Shares 9.88% 9.54%
Class C Shares 9.88% 9.53%
</TABLE>
B-107
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
Investment Period
30-Days Ended 10/31/98
----------------------------------
30-Day Pro-Forma
Fund Distribution Rate Distribution Rate
- ---- ----------------- -----------------
<S> <C> <C>
Adjustable Rate Government Fund
Class A Shares 5.38% 4.35%
assumes no sales charge
Institutional Shares 5.77% 5.24%
Administration Shares 5.52% 4.74%
Service Shares 5.28% 4.24%
Short Duration Government Fund
Class A Shares 5.61% 4.29%
assumes no sales charge
Class B Shares 5.02% 3.14%
Class C Shares 4.86% 2.99%
Institutional Shares 6.01% 5.17%
Administration Shares 5.77% 4.67%
Service Shares 5.51% 4.17%
Short Duration Tax-Free Fund
Class A Shares 3.60% 1.86%
assumes no sales charge
Class B Shares 3.00% 0.73%
Class C Shares 2.85% 0.58%
Institutional Shares 4.00% 2.74%
Administration Shares 3.75% 2.24%
Service Shares 3.50% 1.74%
Government Income Fund
Institutional Shares 6.03% 4.98%
Service Shares 5.52% 3.96%
Class A Shares
assumes no sales charge 5.63% 4.09%
Class B Shares 4.88% 2.82%
Class C Shares 4.88% 2.82%
</TABLE>
B-108
<PAGE>
<TABLE>
<CAPTION>
Investment Period
30-Days Ended 10/31/98
------------------------------------
30-Day Pro-Forma
Fund Distribution Rate Distribution Rate
- ---- ----------------- -----------------
<S> <C> <C>
Municipal Income Fund
Institutional Shares 4.52% 3.40%
Service Shares 4.00% 2.38%
Class A Shares
assumes no sales charge 4.12% 2.47%
Class B Shares 3.37% 1.20%
Class C Shares 3.37% 1.20%
Core Fixed Income
Class A Shares 5.63% 4.41%
assumes no sales charge
Class B Shares 4.87% 3.12%
Class C Shares 4.87% 3.12%
Institutional Shares 6.03% 5.30%
Administration Shares 5.78% 4.80%
Service Shares 5.53% 4.30%
Global Income Fund
Institutional Shares 4.95% 3.87%
Service Shares 4.40% 2.82%
Class A Shares
assumes no sales charge 4.28% 2.52%
Class B Shares 3.78% 1.53%
Class C Shares 3.81% 1.57%
High Yield Fund
Institutional Shares 8.10% 7.23%
Service Shares 7.61% 6.24%
Class A Shares
assumes no sales charge 7.71% 6.36%
Class B Shares 6.96% 5.09%
Class C Shares 6.96% 5.09%
</TABLE>
B-109
<PAGE>
TAX-EQUIVALENT YIELD(2)
<TABLE>
<CAPTION>
Investment Period
30-Days Ended 10/31/98
----------------------------
Pro-Forma
Tax-Equivalent Tax-Equivalent
Fund Yield Yield(1)
- ---- -------------- --------------
<S> <C> <C>
Short Duration Tax-Free Fund(2)
Institutional Shares 6.52% 4.97%
Administration Shares 6.05% 3.55%
Service Shares 5.64% 2.25%
Class A Shares
assumes no sales charge 5.71% 2.74%
Class B Shares 4.86% (0.37)%
Class C Shares N/A N/A
Municipal Income Fund(2)
Institutional Shares 7.30% 6.22%
Service Shares N/A N/A
Class A Shares
assumes no sales charge 6.28% 4.56%
Class B Shares 5.30% 2.15%
Class C Shares 5.32% 2.15%
</TABLE>
_______________________________
(1) Yield, distribution rate and tax equivalent yield if the applicable
Investment Adviser had not voluntarily agreed to limit its advisory fees
and to maintain expenses at a specified level.
(2) 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.
The above tables should not be considered a representation of future
performance.
B-110
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-----------------------------------------------------------------
Investment Investment With Fee Without Fee
Fund Date Period Reductions Reductions
---- and/or and/or
Expense Expense
Limitations Limitations
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustable Rate Government Fund
Institutional Shares 7/17/91(1a) ended 10/31/98 5.34% 5.23%
one year ended
11/1/97 10/31/98 4.09% 4.09%
five years
11/1/93 ended 10/31/98 5.24% 5.17%
Administration Shares 4/15/93(1b) ended 10/31/98 4.85% 4.80%
one year ended
11/1/97 10/31/98 3.83% 3.83%
11/1/93 five years
ended 10/31/98 4.98% 4.93%
Service Shares 3/27/97(1c) ended 10/31/98 4.63% 4.62%
11/1/97 one year ended 3.57% 3.57%
10/31/98
Class A Shares 5/12/95(1d) ended 10/31/98
assumes 1.5% sales charge 5.16% 4.88%
assumes no sales charge 5.63% 5.34%
11/1/97 one year ended
10/31/98
assumes 1.5% sales charge 2.16% 1.93%
assumes no sales charge 3.71% 3.48%
</TABLE>
B-111
<PAGE>
<TABLE>
Short Duration Government Fund
<S> <C> <C> <C> <C>
Institutional Shares 8/15/88(2a) ended 10/31/98 7.18% 6.78%
one year ended
11/1/97 10/31/98 6.75% 6.41%
five years ended
11/1/93 10/31/98 6.07% 5.78%
11/1/88 ten years
ended 10/31/98 7.03% 6.65%
Administration Shares 2/28/96(2b) ended 10/31/98 6.43% 6.11%
11/1/97 one year ended
10/31/98 6.27% 5.93%
Service Shares 4/10/96(2b) ended 10/31/98 6.70% 6.40%
11/1/97 one year ended 6.12% 5.78%
10/31/98
Class A Shares 5/1/97(2c) ended 10/31/98
assumes 2.0% sales charge 5.61% 5.01%
assumes no sales charge 7.04% 6.43%
11/1/97 one year ended
10/31/98
assumes 2.0% sales charge 4.25% 3.69%
assumes no sales charge 6.36% 5.79%
Class B Shares 5/1/97(2c) ended 10/31/98 6.40% 5.86%
11/1/97 one year ended 5.62% 5.10%
10/31/98
Class C Shares 8/15/97(2d) ended 10/31/98 5.72% 5.34%
11/1/97 one year ended 5.46% 5.09%
10/31/98
</TABLE>
B-112
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Short Duration Tax-Free Fund
Institutional Shares 10/1/92(3a) ended 10/31/98 4.57% 3.98%
11/1/97 one year ended 5.25% 4.41%
10/31/98
11/1/93 five years ended 4.24% 3.71%
10/31/98
Administration Shares 5/20/93(3b) ended 10/31/98 4.08% 3.58%
11/1/97 one year ended 4.99% 4.16%
10/31/98
11/1/93 five years 3.98% 3.47%
ended 10/31/98
Service Shares 9/20/94(3c) ended 10/31/98 4.55% 3.97%
11/1/97 one year ended 4.73% 3.89%
10/31/98
Class A Shares 5/1/97(3d) ended 10/31/98
assumes 2.0% sales charge 4.20% 3.16%
assumes no sales charge 5.59% 4.54%
11/1/97 one year ended
10/31/98
assumes 2.0% sales charge 2.83% 1.81%
assumes no sales charge 4.97% 3.93%
Class B Shares 5/1/97(3d) ended 10/31/98 4.89% 3.92%
11/1/97 one year ended 4.25% 3.28%
10/31/98
Class C Shares 8/15/97(3e) ended 10/31/98 4.26% 3.43%
11/1/97 one year ended 4.19% 3.35%
10/31/98
</TABLE>
B-113
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Government Income Fund
Class A Shares 2/10/93(4a) ended 10/31/98
assume 4.5% sales charge 6.60% 4.62%
assumes no sales charge 7.46% 5.47%
11/1/97 one year ended
10/31/98
assumes 4.5% sales charge 4.05% 3.27%
assumes no sales charge 8.98% 8.16%
11/1/93 5 years ended
10/31/98
assumes 4.5% sales charge 5.94% 4.29%
assumes no sales charge 6.92% 5.25%
Class B Shares 5/1/96(4b) ended 10/31/98 8.39% 7.57%
11/1/97 one year ended 8.09% 7.52%
10/31/98
Class C Shares 8/15/97(4c) ended 10/31/98 9.01% 8.03%
11/1/97 one year ended 8.09% 7.52%
10/31/98
Institutional Shares 8/15/97(4c) ended 10/31/98 10.11% 9.43%
11/1/97 one year ended 9.19% 8.60%
10/31/98
Service Shares 7/20/93(4c) ended 10/31/98 7.37% 5.43%
11/1/97 one year ended 8.53% 7.93%
10/31/98
11/1/93(4c) 5 years ended
10/31/98 6.82% 5.21%
Municipal Income Fund
Class A Shares 7/20/93(5a) ended 10/31/98
assumes 4.5% sales charge 5.56% 4.64%
assumes no sales charge 6.48% 5.55%
</TABLE>
B-114
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
11/1/97 one year ended
10/31/98
assumes 4.5% sales charge 2.92% 2.13%
assumes no sales charge 7.79% 6.97%
11/1/93 five years
ended 10/31/98
assumes 4.5% sales charge 5.11% 4.29%
assumes no sales charge 6.09% 5.25%
Class B Shares 5/1/96(5b) ended 10/31/98 7.94% 7.47%
11/1/97 one year ended
10/31/98 6.91% 6.34%
Class C Shares 8/15/97(5c) ended 10/31/98 7.24% 6.63%
Institutional Shares 8/15/97(5c) ended 10/31/98 8.39% 7.83%
Service 2/10/93(5c) ended 10/31/98 6.45% 5.57%
11/1/93 5 years ended 6.05% 5.27%
10/31/98
11/1/97 one year ended 7.68% 7.04%
10/31/98
Core Fixed Income
Institutional Shares 1/15/94(6a) 10/31/98 7.51% 6.98%
11/1/97 one year ended
10/31/98 9.15% 8.87%
Administration Shares 2/28/96(6b) ended 10/31/98 7.98% 7.64%
11/1/97 one year ended
10/31/98 8.88% 8.60%
Service Shares 3/13/96(6b) ended 10/31/98 8.38% 8.08%
11/1/97 one year ended 8.50% 8.22%
10/31/98
</TABLE>
B-115
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Class A Shares 5/1/97(6c) ended 10/31/98
assumes 4.5% sales charge 7.22% 6.64%
assumes no sales charge 10.57% 9.98%
11/1/97 one year ended
10/31/98
assumes 4.5% sales charge 3.91% 3.40%
assumes no sales charge 8.76% 8.23%
Class B Shares 5/1/97(6c) ended 10/31/98 9.80% 9.45%
11/1/97 one year ended 7.94% 7.63%
1/31/98
Class C Shares 8/15/97(6d) ended 10/31/98 8.89% 8.56%
11/1/97 one year ended 7.94% 7.64%
10/31/98
Global Income Fund(7a)
Class A Shares 8/2/91(7b) ended 10/31/98
assumes 4.5% sales charge 7.99% 7.66%
assumes no sales charge 8.68% 8.35%
11/1/97 one year ended
10/31/98
assumes 4.5% sales charge 6.22% 5.76%
assumes no sales charge 11.21% 10.73%
11/1/93 five years ended
10/31/98
assumes 4.5% sales charge 7.29% 6.93%
assumes no sales charge 8.28% 7.92%
Class B Shares 5/1/96(7c) ended 10/31/98 10.43% 10.13%
11/1/97 one year ended 10.66% 10.24%
10/31/98
Institutional Shares 8/1/95(7d) ended 10/31/98 11.81% 11.36%
11/1/97 one year ended 11.95% 11.50%
10/31/98
</TABLE>
B-116
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Service Shares 8/2/91(7e) ended 10/31/98 8.71% 8.38%
11/1/97 one year ended 11.43% 10.98%
10/31/98
11/1/93 five years 8.32% 7.97%
ended 10/31/98
Class C Shares 8/15/97(7f) ended 10/31/98 11.40% 10.99%
11/1/97 one year ended 10.65% 10.24%
10/31/98
High Yield Fund
Class A Shares 8/1/97(8a) ended 10/31/98
assumes 4.5% sales charge (2.99)% (3.32)%
assumes no sales charge .63% .30%
11/1/97 one year ended
10/31/98
assumes 4.5% sales charge (5.17)% (5.42)%
assumes no sales charge (.70)% (.96)%
Class B Shares 8/1/97(8a) ended 10/31/98 (.11)% (.23)%
11/1/97 one year ended (1.43)% (1.47)%
10/31/98
Class C Shares 8/15/97(8b) ended 10/31/98 0.00% (.10)%
11/1/97 one year ended (1.43)% (1.48)%
10/31/98
Institutional Shares 8/1/97(8a) ended 10/31/98 1.00% .87%
11/1/97 one year ended (.32)% (.38)%
10/31/98
Service Shares 8/1/97(8a) ended 10/31/98 .52% .32%
11/1/97 one year ended (.79)% (.95)%
10/31/98
</TABLE>
_____________________________
B-117
<PAGE>
1a Institutional Shares of Adjustable Rate Government Fund commenced
operations on July 17, 1991.
1b Administration Shares of Adjustable Rate Government Fund commenced
operations on April 15, 1993.
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.
2d Class C Shares of Short Duration Government Fund commenced operations on
August 15, 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.
3e Class C Shares of Short Duration Tax-Free Fund commenced operations on
August 15, 1997.
4a Class A Shares of Government Income Fund commenced operations on
February 10, 1993.
4b Class B Shares of Government Income Fund commenced operations on May 1,
1996.
4c Class C, Institutional and Service Shares of Government Income Fund
commenced operations on August 15, 1997. Performance data for Service Shares
prior to August 15, 1997 is that of Class A Shares (excluding the impact of
front-end sales charges applicable to Class A Shares since Service Shares
are not subject to any sales charges). Performance of Class A Shares
reflects the expenses applicable to the Fund's Class A Shares. The fees
applicable to Service Shares are different from those applicable to Class A
Shares which impact performance ratings and rankings for a class of shares.
5a Class A Shares of Municipal Income Fund commenced operations on July 20,
1993.
5b Class B Shares of Municipal Income Fund commenced operations on May 1, 1996.
B-118
<PAGE>
5c Class C, Institutional and Service Shares of the Municipal Income Fund
commenced operations on August 15, 1997. Performance data for Service Shares
prior to August 15, 1997 is that of Class A Shares (excluding the impact of
front-end sales charges applicable to Class A Shares since Service Shares
are not subject to any sales charges). Performance of Class A Shares
reflects the expenses applicable to the Fund's Class A Shares. The fees
applicable to Service Shares are different from those applicable to Class A
Shares which impact performance ratings and rankings for a class of shares.
6a Institutional Shares of Core Fixed Income Fund commenced operations on
January 5, 1994.
6b Administration Shares of Core Fixed Income Fund commenced operations on
February 28, 1996. Service Shares of Core Fixed Income Fund commenced
operations on March 13, 1996.
6c Class A and Class B Shares of Core Fixed Income Fund commenced operations on
May 1, 1997.
6d Class C Shares of Core Fixed Income Fund commenced operations on August 15,
1997.
7a 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.
7b Class A Shares of Global Income Fund commenced operations on August 2, 1991.
7c Class B Shares of Global Income Fund commenced operations on May 1, 1996.
7d Institutional Shares of Global Income Fund commenced operations on August 1,
1995.
7e Service Shares of Global Income Fund commenced operations on March 12, 1997.
Performance data for Service Shares prior to March 12, 1997 is that of Class
A Shares (excluding the impact of front-end sales charges applicable to
Class A Shares since Service Shares are not subject to any sales charges.)
Performance of Class A Shares reflects the expenses applicable to the Fund's
Class A Shares. The fees applicable to Service Shares are different from
those applicable to Class A Shares which impact performance ratings and
rankings for a class of shares.
7f Class C Shares of Global Income Fund commenced operations August 15, 1997.
8a Class A, Class B, Institutional and Service Shares of High Yield Fund
commenced operations on August 1, 1997.
8b Class C Shares of High Yield Fund commenced operations on August 15, 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
B-119
<PAGE>
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., Donaghue's Money Fund Report, Barron's, The Wall
- ------------------------- ---------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- ----------------- -------------------------------- -----
In addition, Adjustable Rate, Government Income and Short Duration
Government Funds may from time to time advertise their performance relative to
certain indices and benchmark investments, including: (a) the Shearson Lehman
Government/Corporate (Total) Index; (b) Shearson Lehman Government Index; (c)
Merrill Lynch 1-3 Year Treasury Index; (d) Merrill Lynch 2-Year Treasury Curve
Index; (e) the Salomon Brothers Treasury Yield Curve Rate of Return Index; (f)
the Payden & Rygel 2-Year Treasury Note Index; (g) 1 through 3 year U.S.
Treasury Notes; (h) constant maturity U.S. Treasury yield indices; (i) the
Consumer Price Index; (j) the London Interbank Offered Rate; (k) other taxable
investments such as certificates of deposit, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds, repurchase
agreements, commercial paper; and (l) historical data concerning the performance
of adjustable and fixed-rate mortgage loans.
Short Duration Tax-Free and Municipal Income Funds may from time to time
advertise their performance relative to certain indices, any components of such
indices and benchmark investments, including but not limited to: (a) the Lipper
Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed Income
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
Lehman Brothers Municipal Bond Indices; (c) the Merrill Lynch Municipal Bond
Institutional Total Rate of Return Indices; (d) Bond Buyer Indices; (e)
IBC/Donoghue's Money Fund Averages/Institutional Only Tax Free; and constant
maturity U.S. Treasury yield indices.
Core 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.
B-120
<PAGE>
Morgan Global Government Bond Index; (i) other taxable investments including
certificates of deposit (CDs), money market deposit accounts (MMDAs), checking
accounts, savings accounts, money market mutual funds and repurchase agreements;
(j) historical investment data supplied by the research departments of Goldman
Sachs, Lehman Brothers Inc., First Boston Corporation, Morgan Stanley & Co.
Incorporated, Salomon Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Donaldson Lufkin and Jenrette Securities Corporation; and (k)
Donoghue's Money Fund Report (which provides industry averages for 7-day
annualized and compounded yields of taxable, tax-free and U.S. government money
funds).
The composition of the investments in the above-referenced indices and the
characteristics of a Fund's benchmark investments are not identical to, and in
some cases may be very different from, those of a Fund's portfolio. These
indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by the a Fund to calculate its performance figures.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Goldman Sachs as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
regulated matters believed to be of relevance to a Fund.
Information used in advertisement and materials furnished to present and
prospective investors may include statements or illustrations relating to the
appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
. cost associated with aging parents;
. funding a college education (including its actual and estimated cost);
. health care expenses (including actual and projected expenses);
. long-term disabilities (including the availability of, and coverage
provided by, disability insurance):
. retirement (including the availability of social security benefits, the tax
treatment of such benefits and statistics and other information relating to
maintaining a particular standard of living and outliving existing assets);
. asset allocation strategies and the benefits of diversifying among
asset classes;
. the benefits of international and emerging market investments;
. the effects of inflation on investing and saving;
B-121
<PAGE>
. the benefits of establishing and maintaining a regular pattern of
investing and the benefits of dollar-cost averaging; and
. measures of portfolio risk, including but not limited to, alpha, beta
and standard deviation.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. The performance of various types of securities (taxable money market funds,
U.S. Treasury securities, adjustable rate mortgage securities, government
securities, municipal bonds) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
. Volatility of total return of various market indices (i.e., Lehman
Government Bond Index, Standard and Poor's 500, IBC/Donoghue's Money Fund
Average/All Taxable Index) over varying periods of time;
. Credit ratings of domestic government bonds in various countries;
. Price volatility comparisons of types of securities over different periods
of time; or
. 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' research department by publications such as the Institutional Investor
and the Wall Street Journal in advertisements.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other material
which highlight or summarize the services provided in support of an asset
allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein.
Performance data is based on historical results and is not intended to
indicate future performance. Total return, 30-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
B-122
<PAGE>
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
As stated in the Prospectuses, the Trust may authorize Service
Organizations and other institutions that provide recordkeeping, reporting and
processing services to their customers to accept on the Trust's behalf purchase,
redemption and exchange orders placed by or on behalf of their customers and, if
approved by the Trust, to designate other intermediaries to accept such orders.
These institutions may receive payments from the Trust or Goldman Sachs for
their services. Certain Service Organizations or institutions may enter into
sub-transfer agency agreements with the Trust or Goldman Sachs with respect to
their services.
The Investment Adviser, Distributor and/or their affiliates may pay, out of
their own assets, compensation to Authorized Dealers, Service Organizations and
other financial intermediaries ("Intermediaries") in connection with the sale
and distribution of shares of the Funds and/or servicing of these shares. These
payments ("Additional Payments") would be in addition to the payments by the
Funds described in the Funds' Prospectuses and this Additional Statement for
distribution and shareholder servicing and processing, and would also be in
addition to the sales commissions payable to Intermediaries as set forth in the
Prospectus. These Additional Payments may take the form of "due diligence"
payments for an Intermediary'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; "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 Investment
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 Investment Adviser, Distributor and their
affiliates may be a fixed dollar amount, may be based on the number of customer
accounts maintained by an Intermediary, or may be based on a percentage of the
value of shares sold to, or held by, customers of the Intermediary involved, and
may be different for different Intermediaries. Furthermore, the Investment
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. The
Investment Adviser, Distributor and their affiliates may also pay for the travel
expenses, meals, lodging and entertainment of Intermediaries 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.
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
B-123
<PAGE>
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.
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 accountants, for each Fund contained in each Fund's 1998
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 Funds' Annual Reports are incorporated herein by
reference.
OTHER INFORMATION REGARDING PURCHASES,
REDEMPTIONS, EXCHANGES AND DIVIDENDS
(Class A Shares, Class B Shares and Class C Shares Only)
The following information supplements the information in the Prospectus
under the captions "Shareholder Guide" and "Dividends." Please see the
Prospectus for more complete information.
B-124
<PAGE>
Other Purchase Information
- --------------------------
The sales load waivers on the Funds' shares are due to the nature of the
investors involved and/or the reduced sales effort that is needed to obtain such
investments.
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.
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 total the requisite
amount for receiving a discount. For example, if a shareholder owns shares with
a current market value of $65,000 and purchases additional Class A Shares of the
Government Income Fund with a purchase price of $45,000, the sales charge for
the $45,000 purchase would be 3.0% (the rate applicable to a single purchase of
more than $100,000). Class A Shares purchased without the imposition of a sales
charge and shares of another class of the Funds may not be aggregated with Class
A Shares purchased subject to a sales charge. Class A Shares of the Funds and
any other Goldman Sachs Fund purchased (i) by an individual, his spouse and his
children; and (ii) by a trustee, guardian or other fiduciary of a single trust
estate or a single fiduciary account, will be 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
B-125
<PAGE>
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 Prospectuses.
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), not counting
reinvestments of dividends and distributions, 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 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.
The provisions applicable to the Statement, and the terms of the related
escrow agreement, are set forth in Appendix C to this Additional Statement.
Cross-Reinvestment of Dividends and Distributions
- -------------------------------------------------
Shareholders may receive dividends and distributions in additional shares
of the same class of the Fund in which they have invested or they may elect to
receive them in cash or shares of the same class of other mutual funds sponsored
by Goldman Sachs (the "Goldman Sachs Funds") or ILA Service Units of the Prime
Obligations Portfolio or the Tax-Exempt Diversified Portfolio, if they hold
Class A Shares of a Fund, or ILA Class B or Class C Units of the Prime
Obligations Portfolio, if they hold Class B or Class C Shares of a Fund (the
"ILA Portfolios"). A Portfolio shareholder should obtain and read the
prospectus relating to any other Goldman Sachs Fund or ILA Fund and its shares
or units and consider its investment objective, policies and applicable fees
before electing cross-reinvestment into that Fund. 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 ILA Portfolios is available only in states where such reinvestment may
legally be made.
Automatic Exchange Program
- --------------------------
A shareholder may elect to exchange automatically a specified dollar amount
of shares of a Fund into an identical account of another Fund or an account
registered in a different name or with a
B-126
<PAGE>
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 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 contingent
deferred sales charge ("CDSC") on redemptions of Class A, Class B and Class C
Shares. The CDSC applicable to Class B and Class C Shares redeemed under a
systematic withdrawal plan may be waived. See "Shareholder Guide" 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, 1998,
the maximum offering price of the Class A shares of each Fund's Shares then in
existence would be as follows:
B-127
<PAGE>
Net Asset Maximum Offering Price
Fund Value Sales Charge to Public
---- --------- ------------ ---------------
Adjustable Rate Government $ 9.69 1.5% $ 9.84
Short Duration Government 9.91 2.0% 10.11
Short Duration Tax-Free 10.19 2.0% 10.40
Government Income 14.91 4.5% 15.61
Municipal Income 15.47 4.5% 16.20
Core Fixed Income 10.25 4.5% 10.73
Global Income 15.65 4.5% 16.39
High Yield 9.16 4.5% 9.59
DISTRIBUTION AND SERVICE PLANS
(Class A Shares, Class B Shares and Class C Shares Only)
Distribution and Service Plans. As described in the Prospectus, the Trust
------------------------------
has adopted, on behalf of Class A, Class B and Class C Shares of each Fund,
distribution and service plans (each a "Plan") pursuant to Rule 12b-1 under the
Act.
The Plans for each Fund were most recently approved on April 27, 1999 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 Plans, cast in person at a meeting called for the purpose of
approving the Plans.
The compensation for distribution services payable under a Plan may not
exceed 0.25%, 0.75% and 0.75% per annum of a Fund's average daily net assets
attributable to Class A, Class B and Class C Shares, respectively, of such Fund.
Currently, Goldman Sachs has voluntarily agreed to limit such fees to 0.60% of
the average daily net assets attributable to Class B Shares of the Short
Duration Government and Short Duration Tax-Free Funds. Goldman Sachs may modify
or discontinue such limitation in the future at its discretion.
Under the Plans for Class A (Global Income Fund only), Class B and Class C
Shares, Goldman Sachs is also entitled to received a separate fee for personal
and account maintenance services equal to an annual basis of 0.25% of each
Fund's average daily net assets attributable to Class B or Class C Shares. With
respect to Class A Shares, the Distributor at its discretion may use
compensation for distribution services paid under the Plan for personal and
account maintenance services and expenses so long as such total compensation
under the Plan does not exceed the maximum cap on "service fees" imposed by the
NASD.
Each Plan is a compensation plan which provides for the payment of a
specified fee without regard to the expenses actually incurred by Goldman Sachs.
If such fee exceeds Goldman Sachs' expenses, Goldman Sachs may realize a profit
from these arrangements. The distribution fees received by Goldman Sachs under
the Plans and CDSC on Class A, Class B and Class C Shares may be sold by Goldman
Sachs as distributor to entities which provide financing for payments to
B-128
<PAGE>
Authorized Dealers in respect of sales of Class A, Class B and Class C Shares.
To the extent such fees are not paid to such dealers, Goldman Sachs may retain
such fee as compensation for its services and expenses of distributing the
Funds' Class A, Class B and Class C Shares.
Under each Plan, Goldman Sachs, as distributor of each Fund's Class A,
Class B and Class C 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 Plans will remain in effect until May 1, 2000 and from year to year
thereafter, provided that 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
Plans. The Plans may not be amended to increase materially the amount of
distribution compensation described therein without approval of a majority of
the outstanding Class A, Class B or Class C Shares of the affected Fund and
share class. All material amendments of a Plan must also be approved by the
Trustees of the Trust in the manner described above. A Plan may be terminated
at any time as to any Fund 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, Class B or Class C Shares, respectively, of the applicable Fund and
share class. If a Plan was terminated by the Trustees of the Trust and no
successor plan was adopted, the Fund would cease to make payments to Goldman
Sachs under the Plan and Goldman Sachs would be unable to recover the amount of
any of its unreimbursed expenditures. So long as a Plan is in effect, the
selection and nomination of non-interested Trustees of the Trust may 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,
Class B and Class C shareholders.
B-129
<PAGE>
For the fiscal years ended October 31, 1998, 1997, and 1996, each Fund paid
Goldman Sachs the following distribution fees under the Class A Plans:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Adjustable Rate Government
With fee waivers $ 0 $ 0 $ 0
Without fee waivers 102,876 81,928 30,905
Short Duration Government(1)
with fee waivers 0 0 N/A
without fee waivers 49,769 3,709 N/A
Short Duration Tax-Free(1)
with fee waivers 0 0 N/A
without fee waivers 24,902 2,364 N/A
Government Income
with fee waivers 0 0 0
without fee waivers 219,354 125,705 73,949
Municipal Income
with fee waivers 0 0 0
without fee waivers 178,683 143,712 131,925
Core Fixed Income(1)
with fee waivers 0 0 N/A
without fee waivers 70,419 4,437 N/A
Global Income
with fee waivers 393,655 382,046 493,170
without fee waivers 452,049 454,906 549,164
High Yield(2)
with fee waivers 0 0 N/A
882,122 152,945 N/A
</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.
B-130
<PAGE>
During the fiscal year ended October 31, 1998, Goldman Sachs incurred the
following distribution expenses under the Class A Plan on behalf of
Adjustable Rate Government, Short Duration Government, Short Duration Tax-
Free, Government Income, Municipal Income, Core Fixed Income, Global Income
and High Yield Funds (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 Preparation
Mailing of and
Allocable Prospectuses to Distribution
Overhead, Other than of Sales
Fiscal Year ended Compensation to Compensation to Telephone and Current Literature and
October 31, 1998 Dealers(1) Sales Personnel Travel Expenses Shareholders Advertising
----------------- --------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Adjustable Rate
Government Fund $ 25,578 $ 238,764 $184,124 $15,224 $ 51,353
Short Duration 246,645 237,193 288,099 23,820 80,352
Government Fund
Short Duration 91,975 153,263 184,649 15,267 51,500
Tax-Free Fund
Government Income Fund 444,811 432,389 398,847 32,977 111,240
Municipal Income Fund 226,401 201,640 206,720 17,092 57,655
Core Fixed Income Fund 94,650 209,228 237,426 19,631 66,219
Global Income Fund $ 321,527 $ 614,389 $412,530 $34,109 $115,057
High Yield Fund 3,204,199 1,555,894 821,682 67,938 229,171
</TABLE>
- -------------------------
1 Advance commissions paid to dealers of 1% on Class A 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.
B-131
<PAGE>
For the fiscal years ended October 31, 1998, October 31, 1997 and October 31,
1996, each Fund paid Goldman Sachs the following distribution fees under the
Class B Plans:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
- ---- ---- ---- ----
<S> <C> <C> <C>
Short Duration Government(1)
with fee waivers 14,333 1,363 N/A
without fee waivers 17,917 1,704 N/A
Short Duration Tax-Free(1)
with fee waivers 1,766 149 N/A
without fee waivers 2,208 186 N/A
Government Income
with fee waivers 89,893 25,662 332
without fee waivers 89,893 25,662 332
Municipal Income
with fee waivers 27,987 $ 6,660 $ 378
without fee waivers 27,987 6,660 378
Core Fixed Income(1)
with fee waivers 23,390 1,016 N/A
without fee waivers 23,390 1,016 N/A
Global Income
with fee waivers 41,095 10,696 374
without fee waivers 41,095 10,696 374
High Yield(2)
with fee waivers 62,013 10,016 N/A
without fee waivers 62,013 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.
B-132
<PAGE>
During the fiscal year ended October 31, 1998, 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>
Preparation
Printing and and
Allocable Mailing of Distribution
Overhead, Prospectuses of Sales
Compensation Telephone to Other than Literature
Fiscal Year ended Compensation to its Sales and Travel Current and
October 31, 1998 To Dealers(1) Personnel Expenses Shareholders Advertising
- ------------------ ---------------- ---------------- -------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Adjustable Rate
Government Fund N/A N/A N/A N/A N/A
Short Duration $ 9,410 24,044 29,256 2,419 8,160
Government Fund
Short Duration
Tax-Free Fund $ 493 3,789 4,611 381 1,286
Government Income $115,099 37,494 45,621 3,772 12,724
Fund
Municipal Income $ 35,850 7,398 9,002 744 2,511
Fund
Core Fixed Income $ 26,724 17,494 21,286 1,760 5,937
Fund
Global Income Fund $ 50,644 8,440 10,269 849 2,864
High Yield Fund $184,528 26,444 32,176 2,660 8,974
</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.
B-133
<PAGE>
For the fiscal year ended October 31, 1998 and October 31, 1997, each Fund
paid Goldman Sachs the following amounts under the Class C Plans:
<TABLE>
<CAPTION>
Fund 1998 1997(1)
- --- ---- -------
<S> <C> <C>
Short Duration Government
with fee waivers $13,865 $ 83
without fee waivers 13,865 83
Short Duration Tax-Free
with fee waivers 9,254 12
without fee waivers 9,254 12
Government Income
with fee waivers 28,296 827
without fee waivers 28,296 827
Municipal Income 9,431 40
with fee waivers 9,431 40
without fee waivers
Core Fixed Income
with fee waivers 22,989 145
without fee waivers 22,989 145
Global Income
with fee waivers 16,605 285
without fee waivers 16,605 285
High Yield
with fee waivers 47,698 1,296
without fee waivers 47,698 1,296
</TABLE>
________________________
(1) Class C Shares of each Fund commenced operations on August 15, 1997.
B-134
<PAGE>
During the fiscal year ended October 31, 1998, 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
Overhead, Prospectuses to Preparation and
Telephone Other than Distribution of
Fiscal Year ended Compensation to Compensation to and Travel Current Sales Literature
October 31, 1998 Dealer(1) Sales Personnel Expenses Shareholders and Advertising
----------------- --------------- --------------- ---------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Short Duration
Government Fund $32,786 19,276 23,455 1,939 6,542
Short Duration
Tax-Free Fund 12,432 15,842 19,276 1,594 5,376
Government Income
Fund 34,298 10,525 12,806 1,059 3,572
Municipal Income
Fund 13,628 2,502 3,045 252 849
Core Fixed Income
Fund 27,934 16,856 20,510 1,696 5,720
Global Income Fund
24,373 3,549 4,318 357 1,204
High Yield Fund 61,671 7,721 9,395 777 2,620
</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.
B-135
<PAGE>
For the fiscal years ended October 31, 1998, October 31, 1997 and October
31, 1996 Goldman Sachs received service fees from the Funds pursuant to the
service plans then in existence at the rate of 0.25% of each Fund's average
daily net assets attributable to Class A, Class B, or Class C Shares which
totaled:
<TABLE>
<CAPTION>
Class A Class B Class C (3)
---------------------------- --------------------------- ------------------
1998 1997 1996 1998 1997 1996 1998 1997
-------- -------- -------- -------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fund
- ----
Adjustable $114,701 $ 81,982 $ 30,905 N/A N/A N/A N/A N/A
Rate Government
Short Duration 61,613 3,709 N/A 5,995 568 N/A 4,622 36
Government(1)
Short Duration 28,662 2,364 N/A 736 62 N/A 3,084 4
Tax-Free(1)
Government Income 242,829 125,744 74,060 29,964 8,546 111 9,431 273
Municipal Income 198,110 143,714 131,925 $ 9,329 $2,222 $ 126 $ 3,143 $ 13
Core 82,043 4,437 N/A 7,797 346 N/A 7,662 49
Fixed Income(1)
Global Income 450,664 454,817 549,164 13,698 3,565 125 5,518 95
High Yield(2) 962,496 152,941 N/A 54,004 3,342 N/A 15,600 432
</TABLE>
_______________________
1 Class A and Class B Shares commenced operations on May 1, 1997.
2 High Yield Fund commenced operations on August 1, 1997.
3 Class C Shares of each Fund (except Adjustable Rate Government Fund)
commenced operations on August 15, 1997.
SERVICE PLAN
(Service Shares Only)
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
B-136
<PAGE>
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, 1998, October 31, 1997, and October 31, 1996 service
fees were paid by the Funds as follows:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- -------------- -------------- -------------
<S> <C> <C> <C>
Adjustable Rate Government(1) $ 2,702 $ 292 N/A
Short Duration Government 23,540 12,087 $1,222
Short Duration Tax-Free 2,142 6,435 2,322
Government Income(2) N/A 2 N/A
Municipal Income(3) N/A 2 N/A
Core Fixed Income 39,455 6,207 422
Global Income(4) 885 523 N/A
High Yield(5) 624 8 N/A
</TABLE>
_________________________
(1) No Service Shares of Adjustable Rate Government Fund were outstanding at
October 31, 1996.
(2) No Service Shares of Government Income Fund were outstanding at October 31,
1996.
(3) No Service Shares of Municipal Income Fund were outstanding at October 31,
1996.
(4) No Service Shares of Global Income Fund were outstanding at October 31,
1996.
(5) High Yield Fund commenced operations on August 1, 1997.
Each Fund has adopted its Plan pursuant to Rule 12b-1 under the Act in
order to avoid any possibility that payments to the Service Organizations
pursuant to the Service Agreements might violate the Act. Rule 12b-1, which was
adopted by the SEC under the Act, regulates the circumstances under which an
investment company or series thereof may bear expenses associated with the
distribution of its shares. In particular, such an investment company or series
thereof cannot engage directly or indirectly in financing any activity which is
primarily intended to result in the sale of shares issued by the company unless
it has adopted a plan pursuant to, and complies with the other requirements of,
such Rule. The Trust believes that fees paid for the services provided in the
Plan and described above are not expenses incurred primarily for effecting the
distribution of Service Shares. However, should such payments be deemed by a
court or the SEC to be distribution expenses, such payments would be duly
authorized by the Plan.
B-137
<PAGE>
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling or
distributing securities, although institutions such as national banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. In addition, under some state securities laws, banks and other
financial institutions purchasing Service Shares on behalf of their customers
may be required to register as dealers. Should future legislative or
administrative action or judicial or administrative decisions or interpretations
prohibit or restrict the activities of one or more of the Service Organizations
in connection with the Funds, such Service Organizations might be required to
alter materially or discontinue the services performed under their Service
Agreements. If one or more of the Service Organizations were restricted from
effecting purchases or sales of Service Shares automatically pursuant to pre-
authorized instructions, for example, effecting such transactions on a manual
basis might affect the size and/or growth of a Fund. Any such alteration or
discontinuance of services could require the Board of Trustees to consider
changing a Fund's method of operations or providing alternative means of
offering Service Shares of a Fund to customers of such Service Organizations, in
which case the operation of such Fund, its size and/or its growth might be
significantly altered. It is not anticipated, however, that any alternation of
a Fund's operations would have any effect on the net asset value per share or
result in financial losses to any shareholder.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974, as amended) 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 their 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 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 Plan and Service Agreements on April 27, 1999.
The Plan and Service Agreements will remain in effect until May 1, 2000 will
continue in effect thereafter only if such continuance is specifically approved
annually by a vote of the Board of Trustees in the manner described above. The
Plan may not be amended to increase materially the amount to be spent for the
services described therein without approval of the shareholders of the affected
Fund, and all material amendments of each Plan must also be approved by the
Board of Trustees in the manner described above. The Plan may be terminated at
any time by a majority of the Board of Trustees as described above or by vote of
a majority of the outstanding Service Shares of the affected 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
B-138
<PAGE>
majority of the outstanding Service Shares of the affected Fund on not more than
60 days' written notice to any other party to the Service Agreements.
The Service Agreements will terminate automatically if assigned. So long
as the Plan is in effect, the selection and nomination of those Trustees who are
not interested persons will be committed to the discretion of the Trust's
Nominating Committee, which consists of all of the non-interested members of the
Board of Trustees. The Board of Trustees has determined that, in its judgment,
there is a reasonable likelihood that a Fund's Plan will benefit such Fund and
its holders of Service Shares.
ADMINISTRATION PLAN
(Administration Shares Only)
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, 1998,
1997, and 1996, administration fees accrued by the Funds were as follows:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
- ---- ------------ ----------- ------------
<S> <C> <C> <C>
Adjustable Rate Government $10,895 $ 9,699 $9,833
Short Duration Government 10,828 3,203 107
Short Duration Tax-Free 221 222 129
Core Fixed Income 5,460 14,647 741
</TABLE>
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974, as amended) 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 their legal advisers
before investing fiduciary assets in
B-139
<PAGE>
Administration Shares of a Fund. In addition, under some state securities laws,
banks and other financial institutions purchasing Administration Shares on
behalf of their customers may be required to register as dealers.
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 Fund's Plan and Service Agreements at a meeting
called for the purpose of voting on such Plan and Service Agreements on April
27, 1999. The Plan and Service Agreements will remain in effect until May 1,
2000 and will continue in effect thereafter only if such continuance is
specifically approved annually by a vote of the Board of Trustees in the manner
described above. The Plan may not be amended to increase materially the amount
to be spent for the services described therein without approval of the
shareholders of the affected Fund and all material amendments of the Plans must
also be approved by the Board of Trustees in the manner described above. The
Plan may be terminated at any time by a majority of the Board of Trustees as
described above or by vote of a majority of the outstanding Administration
Shares of the affected 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 affected Fund on not more than 60 days' written
notice to any other party to the Service Agreements. The Service Agreements
will terminate automatically if assigned. So long as the Plan is in effect, the
selection and nomination of those Trustees who are not interested persons will
be committed to the discretion of the Trust's Nominating Committee, which
consists of all of the non-interested members of the Board of Trustees. The
Board of Trustees has determined that, in its judgment, there is a reasonable
likelihood that each Fund's Plan will benefit such Fund and the holders of its
Administration Shares.
[End of Page]
B-140
<PAGE>
APPENDIX A
Commercial Paper Ratings
- ------------------------
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. The following summarizes the rating categories used by Standard &
Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated with a plus sign (+).
This indicates that the obligor's capacity to meet its financial commitment on
these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"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 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
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the 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 and Poor's believes
that such payments will be made during such grace period. The "D" rating will
be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the
rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (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
1-A
<PAGE>
industries; high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and well-established access to a range of financial markets and
assured sources of alternate liquidity.
"Prime-2" - Issuers (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 (or supporting institutions) have an acceptable ability
for repayment of senior short-term debt 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.
"Not Prime" - Issuers do not fall within any of the Prime rating categories.
The three rating categories of Duff & Phelps for investment grade commercial
paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps employs
three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small.
"D-2" - Debt possesses 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" - Debt possesses satisfactory liquidity and other protection factors
qualify issues as to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
2-A
<PAGE>
"D-4" - Debt possesses 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 has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA 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. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation indicates a
satisfactory capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation indicates
that the 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
default is a real possibility and that the capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and economic
environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
payment of principal and interest of debt instruments with original maturities
of one year or less. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest category and
indicates a very high likelihood that principal and interest will be paid on a
timely basis.
"TBW-2" - This designation represents Thomson BankWatch's second-highest
category and indicates that while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
3-A
<PAGE>
"TBW-3" - This designation represents Thomson BankWatch's lowest investment-
grade category and indicates that while the obligation is more susceptible to
adverse developments (both internal and external) than those with higher
ratings, the capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest rating
category and indicates that the obligation is regarded as non-investment grade
and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for corporate and
municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits 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.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the
4-A
<PAGE>
obligation. Adverse business, financial or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to nonpayment.
"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 payments on this
obligation are being continued.
"D" - An obligation rated "D" is 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 and 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 or the taking of a similar
action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
"r" - This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and municipal
long-term debt:
"Aaa" - Bonds 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 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
5-A
<PAGE>
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risk appear somewhat larger than
the "Aaa" securities.
"A" - Bonds 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 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," "B," "Caa," "Ca," and "C" - Bonds that possess one of these ratings
provide questionable protection of interest and principal ("Ba" indicates
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction; (b) earnings of
projects unseasoned in operating experience; (c) rentals which begin when
facilities are completed; or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff & Phelps for
corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable in periods of greater economic stress.
6-A
<PAGE>
"BBB" - Debt possesses below-average protection factors but such protection
factors are still considered sufficient for prudent investment. Considerable
variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these ratings is
considered to be below investment grade. Although below investment grade, debt
rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A," "BBB,"
"BB" and "B" ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of credit risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity.
"BB" - Bonds 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.
7-A
<PAGE>
"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", "CC", "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not meeting
obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved and "D"
represents the lowest potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA ratings
from and including "AA" to "B" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation indicates that the ability to repay principal and
interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal and
interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade category and
indicates an acceptable capacity to repay principal and interest. Issues rated
"BBB" are more vulnerable to adverse developments (both internal and external)
than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment of
principal and interest. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation.
8-A
<PAGE>
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a plus
or minus sign designation which indicates where within the respective category
the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and market access
risks unique to notes due in three years or less. The following summarizes the
ratings used by Standard & Poor's Ratings Group for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity to pay
principal and interest. Those issues determined to possess very strong
characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity to
pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity to
pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans are
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.
The following summarizes the ratings by Moody's Investors Service, Inc. for
short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins of
protection that are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but 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.
9-A
<PAGE>
"MIG-4"/"VMIG-4" - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
"SG" - This designation denotes speculative quality. Debt instruments in this
category lack of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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 is ever
diminished, the last 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 make an unusual effort to identify and recruit the very best person for
every job. Although our activities are measured in billions of dollars, we
select our people one by one. In a service business, we know that without the
best people, we cannot be the best firm.
We offer our people the opportunity to move ahead more rapidly than is
possible at most other places. We have yet to find limits to the responsibility
that our best people are able to assume. Advancement depends solely on ability,
performance and contribution to the Firm's success, without regard to race,
color, religion, sex, age, national origin, disability, sexual orientation, or
any other impermissible criterion or circumstance.
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.
The dedication of our people to the Firm and the intense effort they give
their jobs are greater than one finds in most other organizations. We think
that this is an important part of our success.
1-B
<PAGE>
Our profits are a key to our success. They replenish our capital and
attract and keep our best people. It is our practice to share our profits
generously with all who help create them. Profitability is crucial to our
future.
We consider our size an asset that we try hard to preserve. We want to be
big enough to undertake the largest project that any of our clients could
contemplate, yet small enough to maintain the loyalty, the intimacy and the
esprit de corps that we all treasure and that contribute greatly to our success.
We constantly strive to anticipate the rapidly changing needs of our
clients and to develop new services to meet those needs. We know that the world
of finance will not stand still and that complacency can lead to extinction.
We regularly receive confidential information as part of our normal client
relationships. To breach a confidence or to use confidential information
improperly or carelessly would be unthinkable.
Our business is highly competitive, and we aggressively seek to expand our
client relationships. However, we must always be fair competitors and must
never denigrate other firms.
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.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING
AND SECURITIES ACTIVITIES
Goldman Sachs is a leading financial services firm traditionally known on Wall
Street and around the world for its institutional and private client service.
* With thirty-seven offices worldwide Goldman Sachs employs over 11,000
professionals focused on opportunities in major markets.
* The number one underwriter of all international equity issues from 1989-
1997.
* The number one lead manager of U.S. common stock offerings for the past
nine years (1989-1997).*
* The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1997).
* Source: Securities Data Corporation. Common stock ranking excludes REITS,
-----------------------------------
Investment Trusts and Rights.
3-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman, Sachs & Co. joins New York Stock Exchange
1906 Goldman, Sachs & Co. takes Sears Roebuck & Co. public (at 93 years,
the firm's longest-standing client relationship)
Dow Jones Industrial Average tops 100
1925 Goldman, Sachs & Co. finances Warner Brothers, producer of the first
talking film
1956 Goldman, Sachs & Co. co-manages Ford's public offering, the largest to
date
1970 Goldman, Sachs & Co. opens London office
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman, Sachs & Co. takes Microsoft public
1988 Goldman Sachs Asset Management is formally established
1991 Goldman, Sachs & Co. provides advisory services for the largest
privatization in the region of the sale of Telefonos de Mexico
1995 Goldman Sachs Asset Management introduces Global Tactical Asset
Allocation Program
Dow Jones Industrial Average breaks 5000
1996 Goldman, Sachs & Co. takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
Goldman Sachs Asset Management increases assets under management by
100% over 1996
4-B
<PAGE>
1998 Goldman Sachs Asset Management reaches $195.5 billion in assets under
management
Dow Jones Industrial Average breaks 9000
1999 Goldman Sachs becomes a public company
5-B
<PAGE>
APPENDIX C
Statement of Intention
(applicable only to Class A Shares)
If a shareholder anticipates purchasing within a 13-month period Class A
Shares of a Fund alone or in combination with Class A Shares of another Goldman
Sachs Fund in the amount of $100,000 or more in the case of the Government
Income, Municipal Income, Core Fixed Income, Global Income and High Yield Funds;
$250,000 or more in the case of the Short Duration Government and Short-Duration
Tax-Free Funds; and $500,000 or more in the case of the Adjustable Rate
Government Fund, the shareholder may obtain shares of the Fund at the same
reduced sales charge as though the total quantity were invested in one lump sum
by checking and filing the Statement of Intention in the Account Application.
Income dividends and capital gain distributions taken in additional shares will
not apply toward the completion of the Statement of Intention.
To ensure that the reduced price will be received on future purchases, the
investor must inform Goldman Sachs that the Statement of Intention is in effect
each time shares are purchased. Subject to the conditions mentioned below, each
purchase will be made at the public offering price applicable to a single
transaction of the dollar amount specified on the Account Application. The
investor makes no commitment to purchase additional shares, but if the
investor's purchases within 13 months plus the value of shares credited toward
completion do not total the sum specified, the investor will pay the increased
amount of the sales charge prescribed in the Escrow Agreement.
Escrow Agreement
Out of the initial purchase (or subsequent purchases if necessary), 5% of
the dollar amount specified on the Account Application will be held in escrow by
the Transfer Agent in the form of shares registered in the investor's name. All
income dividends and capital gains distributions on escrowed shares will be paid
to the investor or to his or her order. When the minimum investment so
specified is completed (either prior to or by the end of the 13th month), the
investor will be notified and the escrowed shares will be released.
If the intended investment is not completed, the investor will be asked to
remit to Goldman Sachs any difference between the sales charge on the amount
specified and on the amount actually attained. If the investor does not within
20 days after written request by Goldman Sachs pay such difference in the sales
charge, the Transfer Agent will redeem, pursuant to the authority given by the
investor in the Account Application, an appropriate number of the escrowed
shares in order to realize such difference. Shares remaining after any such
redemption will be released by the Transfer Agent.
1-C
